**U.S.
      Securities and Exchange Commission**


Washington,
      DC 20549





**Form
      10-KSB**





QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED


**December
      31** **,
      2006**




Commission
      File Number 000-30017




Sinoenergy
      Corporation


(Name
      of
      small business issuer as specified in its charter)





Nevada
            
            84-1491682(State
                or other jurisdiction of incorporation)
            
            (I.R.S.
                Employer Identification No.)





234-5149
                Country Hills Blvd. NW; Suite 429, Calgary, Alberta, Canada T3A
                5K8(Address
                of principal executive offices)




Issuer’s
        telephone number: (832) 274-3766




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in the definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o




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




State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days. $17,765,000 based on the average closing
      bid and asked prices on March28, 2007.




State
      issuer’s revenue for its most recent fiscal year. $12,393,000




As
      of
      March 26, 2007, there were 21,376,015 shares of the
      common stock, par value $.001 per share, outstanding.




Documents
      incorporated by reference: None




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











FORM
      10-KSB





FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2006





INDEX





PagePART
                I
            3ITEM
                1. DESCRIPTION OF BUSINESS
            3ITEM
                2. DESCRIPTION OF PROPERTY
            23ITEM
                3. LEGAL PROCEEDINGS
            23ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            23PART
                II
            24ITEM
                5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS
            24ITEM
                6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            25ITEM
                7 FINANCIAL STATEMENTS
            36ITEM
                8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            36ITEM
                8A CONTROLS AND PROCEDURES
            36ITEM
                8B. OTHER INFORMATION
            37PART
                III
            37ITEM
                9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND
                CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                ACT
            37ITEM
                10. EXECUTIVE COMPENSATION
            39ITEM
                11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                AND
                RELATED STOCKHOLDER MATTERS
            40ITEM
                12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
                INDEPENDENCE
            41ITEM
                13. EXHIBITS
            43ITEM
                14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
            44





2


**FORWARD-LOOKING
      STATEMENTS**





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





PART
      I




ITEM
      1.   DESCRIPTION OF BUSINESS.




**Our
      Business**





We
      design, manufacture and market a range of pressurized containers for compressed
      natural gas, known as CNG. Compressed natural gas is gas, principally methane, in
      its
      gaseous state that has been compressed. Natural gas is compressed during
      transportation and storage and, thus, requires pressurized
      containers. Our license permits us to operate CNG stations, CNG equipments
      and
      services, as well as non-standard chemical and refinery equipment.





Our CNG
      vehicle and gas station equipment business, which is operated by Qingdao Sinogas
      General Machinery Company Limited (“Sinogas”), our wholly-owned subsidiary,
      consists of two divisions, the manufacture of CNG vehicle and gas station
      equipment, and the design of construction plans for CNG gas stations, the
      construction of the CNG stations, and the installation of CNG station equipment
      and related systems at the gas station.





In
      addition to our CNG related products, we manufacture a wide variety of pressure
      containers for use in different industries, which is operated by Qingdao Sinogas
      Yuhan Chemical Equipment Co., Ltd. (“Yuhan”), our majority-owned subsidiary,
      including the design and manufacture of various types of pressure containers
      in
      the petroleum and chemical industries, the metallurgy and electricity generation
      industries and the food and brewery industries. In addition, we can design
      and
      manufacture various types of non-standard equipment.





The
      government of People’s
      Republic of China (“PRC”) is now encouraging the use of CNG as a method of
      combating air pollution, which is increasingly viewed as a major problem
      throughout the PRC. We believe that this need will create a market for CNG
      powered vehicles, and w e
      are
      developing CNG wholesale and retail business to meet this perceived need. In
      August and December 2006, we established subsidiaries to operate the CNG retail
      business in Wuhan City and Pingdingshan City. At December 31, 2006, these two
      subsidiaries were in the process of constructing the CNG stations.





3


**Organization**





We
      are a
      Nevada corporation organized in 1999 under the name Franklyn Resources III,
      Inc.
      On September 28, 2006, our corporate name was changed to Sinoenergy Corporation.
      On June 2, 2006, we acquired the stock of Sinoenergy Holding Limited, a British
      Virgin Island corporation (“Sinoenergy Holding”). Sinoenergy Holding is the sole
      stockholder of Sinogas. Prior to September 2004, Sinogas’ business was conducted
      as a state-owned equipment manufacturer under the name Qingdao General Machinery
      Plant. In July 2004, Sinogas was privatized, and its equity was owned by three
      Chinese companies. In November 2005, Sinoenergy Holding, which was then owned
      by
      Wentao Yang, acquired, subject to government approval, the equity in Sinogas.
      On
      November 29, 2005, the local government agency approved the purchase by
      Sinoenergy Holding of all the shares of Sinogas, and Sinogas became wholly
      foreign owned enterprise, which is referred to as a WFOE. Sinogas’ organization
      is similar to that of a limited liability company under United States law.
      Sinogas’ term of existence is for a period of 15 years, ending on October 29,
      2019.





The
      transaction by which we acquired Sinoenergy Holding is characterized as a
      reverse acquisition, and the transaction is referred to in this Form 10-KSB
      as
      the “reverse acquisition.” The accounting rules for reverse acquisitions require
      that beginning June 2, 2006, the date of the reverse acquisition, our balance
      sheet includes the consolidated assets and liabilities of Sinoenergy Holding
      and
      its wholly-owned subsidiary, Sinogas, and our equity accounts were recapitalized
      to reflect the net equity of Sinoenergy. The financial condition and results
      of
      operations for periods prior to June 2, 2006 reflect the financial condition
      and
      operating results of Sinogas.





In
      connection with the acquisition of Sinoenergy Holding, we entered
      into:





·
            A
                securities purchase agreement, as amended on July 6, 2006 (the “Purchase
                Agreement”) with Barron Partners LP, JCAR Funds Ltd.,Ray
                Rivers, Steve Mazur and IRA f/b/o John P. O’Sheapursuant
                to which the investors purchased 6% convertible notes in the principal
                amount of $3,700,000, 390,087 shares of common stock, and warrants
                to
                purchase 6,342,858 shares of common stock at $.85 per share, 6,342,858
                shares of common stock at $1.20 per share and 6,342,858 shares of
                common
                stock at $1.75 per share. The $1.75 warrants expired unexercised
                on
                December 31, 2006. The conversion price of the notes and the exercise
                price of the warrants is subject to adjustment as described under
“Selling
                Stockholders - June 2006 Private
                Placement.”





·
            A
                stock redemption agreement with our then principal stockholders,
                who were
                the principal stockholders of Franklyn before the reverse acquisition.
                We
                purchased a total of 3,305,000 shares of common stock for a purchase
                price
                of $213,525, which was paid from the proceeds of the notes, stock
                and
                warrants.





·
            On
                September 28, 2006, our articles of incorporation were amended and
                we
                filed a certificate of designation setting forth the rights, preferences
                and privileges of the holders of the series A preferred stock. As
                a result
                of the filing of the restated articles of incorporation and the
                certificate of designation, our authorized capital stock was increased
                to
                110,000,000 shares, of which 10,000,000 are shares of preferred stock
                and
                100,000,000 are shares of common stock, and the convertible notes
                in the
                principal amount of $3,700,000 were automatically converted into
                5,692,307
                shares of series A preferred stock.





References
      to “we,” “us,” “our” and similar words refer to Sinoenergy Corporation and its
      subsidiaries unless the context indicates otherwise, and, prior to the
      effectiveness of the reverse acquisition, these terms refer to Sinogas.
      References to Franklyn relate to Franklyn Resources III, Inc. prior to the
      reverse acquisition.





4





**Risk
      Factors**





**Risks
      Associated with Companies Conducting Business in the PRC**





**Because
      the scope of our business license is limited, we may need government approval
      to
      expand our business.**





We
      are a
      wholly foreign-owned enterprise, commonly known as a WFOE. The scope of business
      is narrowly defined for all businesses in China, and a WFOE can only conduct
      business within its approved business scope, which appears on the business
      license. Our license permits us to manufacture pressure containers for petroleum
      refinery equipment, compressed natural gas storage and transportation equipment,
      to design and install compressed natural gas station equipment, and to operate
      CNG stations, CNG equipment and services as well as non-standard chemical and
      refinery equipment. Any amendment to the scope of our business requires further
      application and government approval. Inevitably, there is a negotiation with
      the
      authorities to approve as broad a business scope as is permitted, and we cannot
      assure you that we will be able to obtain the necessary government approval
      for
      any change or expansion of our business.





**If
      the PRC enacts regulations which forbid or restrict foreign investment, our
      ability to grow may be severely impaired.**





We
      intend
      to expand our business both by increasing our product range, operating CNG
      stations and making acquisitions of companies in related industries. Many of
      the
      rules and regulations that we would face are not explicitly communicated, and
      we
      may be subject to rules that would affect our ability to grow, either internally
      or through acquisition of other Chinese or foreign companies. There are also
      substantial uncertainties regarding the proper interpretation of current laws
      and regulations of the PRC. New laws or regulations that forbid foreign
      investment could severely impair our businesses and prospects. Additionally,
      if
      the relevant authorities find us in violation of PRC laws or regulations, they
      would have broad discretion in dealing with such a violation, including, without
      limitation:





•
            levying
                fines;





•
            revoking
                our business and other licenses;





•
            requiring
                that we restructure our ownership or operations;
                and





•
            to
                the extent that we use the Internet for marketing and providing
                information on our products and services, requiring that we discontinue
                any portion or all of our Internet related
                business.





**We
      may be subject to penalties under the tax laws of the PRC.**





Under
      the
      commercial practice of the PRC **,** we
      paid
      value added taxes (“VAT”) and business tax based on tax invoices issued. We
      generally issue our tax invoice subsequent to the date on which revenue is
      recognized, and there may be a considerable delay between the date on which
      the
      revenue is recognized and the date on which the tax invoice is issued. In the
      event that the PRC tax authorities dispute the date of which revenue is
      recognized for tax purposes, the PRC tax office has the right to assess a
      penalty which can range from zero to five times of tax which is determined
      to
      have been improperly deferred. Although we believe that we are paying VAT and
      business taxes in accordance with the common practice in PRC, we cannot assure
      you that the PRC tax authorities would not reach a different conclusion and
      determine that common practice is not in accordance with the tax laws of the
      PRC.. If a penalty is ultimately assessed against us, the penalty could
      represent a material amount. The maximum penalty, based on five times the
      estimated amount of the taxes, would be in excess of $3.3 million.





5


**Any
      deterioration of political relations between the United States and the PRC
      could
      impair our operations.**





The
      relationship between the United States and the PRC is subject to sudden
      fluctuation and periodic tension. Changes in political conditions in the PRC
      and
      changes in the state of Sino-U.S. relations are difficult to predict and could
      adversely affect our operations or cause potential acquisition candidates or
      their goods and services to become less attractive. Such a change could lead
      to
      a decline in our profitability. Any weakening of relations between the United
      States and the PRC could have a material adverse effect on our operations,
      particularly in our efforts to raise capital to expand our CNG station and
      other
      business activities.





**Our
      operations and assets in the PRC are subject to significant political and
      economic uncertainties.**





Government
      policies are subject to rapid change and the government of the PRC may adopt
      policies which have the effect of hindering private economic activity and
      greater economic decentralization. There is no assurance that the government
      of
      the PRC will not significantly alter its policies from time to time without
      notice in a manner with reduces or eliminates any benefits from its present
      policies of economic reform. In addition, a substantial portion of productive
      assets in the PRC remains government-owned. For instance, all lands are state
      owned and leased to business entities or individuals through governmental
      granting of state-owned land use rights. The granting process is typically
      based
      on government policies at the time of granting, which could be lengthy and
      complex. This process may adversely affect our future expansion, especially
      as
      we are seeking both to expand manufacturing operations and to develop our CNG
      station business. The government of the PRC also exercises significant control
      over China’s economic growth through the allocation of resources, controlling
      payment of foreign currency and providing preferential treatment to particular
      industries or companies. Uncertainties may arise with changing of governmental
      policies and measures. In addition, changes in laws and regulations, or their
      interpretation, or the imposition of confiscatory taxation, restrictions on
      currency conversion, imports and sources of supply, devaluations of currency,
      the nationalization or other expropriation of private enterprises, as well
      as
      adverse changes in the political, economic or social conditions in the PRC,
      could have a material adverse effect on our business, results of operations
      and
      financial condition.





**Price
      controls may affect both our revenues and net income.**





The
      laws
      of the PRC provide for the government to fix and adjust prices. In connection
      with our proposed operation of CNS stations, the price at which we both purchase
      and sell CNG is subject to government price controls. It is possible that other
      products we sell or services that we provide may also become subject to price
      control. To the extent that we are subject to price control, our revenue, gross
      profit, gross margin and net income will be affected since the revenue we derive
      from our sales will be limited and, unless there is also price control on the
      products that we purchase from our suppliers, we may face no limitation on
      our
      costs. Further, if price controls affect both our revenue and our costs, our
      ability to be profitable and the extent of our profitability will be effectively
      subject to determination by the applicable regulatory authorities in the
      PRC.





6


**Our
      operations may not develop in the same way or at the same rate as might be
      expected if the PRC economy were similar to the market-oriented economies of
      OECD member countries.**





The
      economy of the PRC has historically been a nationalistic, “planned economy,”
meaning it functions and produces according to governmental plans and pre-set
      targets or quotas. In certain aspects, the PRC’s economy has been making a
      transition to a more market-oriented economy, although the government imposes
      price controls on certain products and in certain industries. However, we cannot
      predict the future direction of these economic reforms or the effects these
      measures may have. The economy of the PRC also differs from the economies of
      most countries belonging to the Organization for Economic Cooperation and
      Development (the “OECD”), an international group of member countries sharing a
      commitment to democratic government and market economy. For
      instance:





•
            the
                level of state-owned enterprises in the PRC, as well as the level
                of
                governmental control over the allocation of resources is greater
                than in
                most of the countries belonging to the
                OECD;





•
            the
                level of capital reinvestment is lower in the PRC than in other countries
                that are members of the OECD;





•
            the
                government of the PRC has a greater involvement in general in the
                economy
                and the economic structure of industries within the PRC than other
                countries belonging to the OECD;





•
            the
                government of the PRC imposes price controls on certain products
                and our
                products may become subject to additional price controls;
                and





•
            the
                PRC has various impediments in place that make it difficult for foreign
                firms to obtain local currency, as opposed to other countries belonging
                to
                the OECD where exchange of currencies is generally free from
                restriction.





As
      a
      result of these differences, our business may not develop in the same way or
      at
      the same rate as might be expected if the economy of the PRC were similar to
      those of the OECD member countries.





**Because
      our officers and some of our directors reside outside of the United States,
      it
      may be difficult for you to enforce your rights against them or enforce United
      States court judgments against them in the PRC.**





Most
      of
      our directors and all of our executive officers reside in the PRC and
      substantially all of our assets are located in the PRC. It may therefore be
      difficult for United States investors to enforce their legal rights, to effect
      service of process upon our directors or officers or to enforce judgments of
      United States courts predicated upon civil liabilities and criminal penalties
      of
      our directors and officers under federal securities laws. Further, it is unclear
      if extradition treaties now in effect between the United States and the PRC
      would permit effective enforcement of criminal penalties of the federal
      securities laws.





**We
      may have limited legal recourse under Chinese law if disputes arise under
      contracts with third parties.**





Almost
      all of our agreements with our employees and third parties, including our
      supplier and customers, are governed by the laws of the PRC. The legal system
      in
      the PRC is a civil law system based on written statutes. Unlike common law
      systems, such as we have in the United States, it is a system in which decided
      legal cases have little precedential value. The government of the PRC has
      enacted some laws and regulations dealing with matters such as corporate
      organization and governance, foreign investment, commerce, taxation and trade.
      However, their experience in implementing, interpreting and enforcing these
      laws
      and regulations is limited, and our ability to enforce commercial claims or
      to
      resolve commercial disputes is unpredictable. The resolution of these matters
      may be subject to the exercise of considerable discretion by agencies of the
      PRC, and forces unrelated to the legal merits of a particular matter or dispute
      may influence their determination. Any rights we may have to specific
      performance or to seek an injunction under Chinese law are severely limited,
      and
      without a means of recourse by virtue of the Chinese legal system, we may be
      unable to prevent these situations from occurring. The occurrence of any such
      events could have a material adverse effect on our business, financial condition
      and results of operations.





7


**Because
      we may not be able to obtain business insurance in the PRC, we may not be
      protected from risks that are customarily covered by insurance in the United
      States.**





Business
      insurance is not readily available in the PRC. To the extent that we suffer
      a
      loss of a type which would normally be covered by insurance in the United
      States, such as product liability and general liability insurance, we would
      incur significant expenses in both defending any action and in paying any claims
      that result from a settlement or judgment. Since our products are used for
      the
      transportation and storage of CNG and chemicals, any damage caused by the
      failure or alleged failure of our products could result in substantial damages,
      and if the nature or amount of any uninsured loss is significant, we may be
      unable to continue in business





**Because
      our funds are held in banks which do not provide insurance, the failure of
      any
      bank in which we deposit our funds could affect our ability to continue in
      business.**





Banks
      and
      other financial institutions in the PRC do not provide insurance for funds
      held
      on deposit. As a result, in the event of a bank failure, we may not have access
      to funds on deposit. Depending upon the amount of money we maintain in a bank
      that fails, our inability to have access to our cash could impair our
      operations, and, if we are not able to access funds to pay our suppliers,
      employees and other creditors, we may be unable to continue in business.





**Failure
      to comply with the United States Foreign Corrupt Practices Act could subject
      us
      to penalties and other adverse consequences.**





We
      are
      subject to the United States Foreign Corrupt Practices Act, which generally
      prohibits United States companies from engaging in bribery or other prohibited
      payments to foreign officials for the purpose of obtaining or retaining
      business. Foreign companies, including some that may compete with us, are not
      subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
      and other fraudulent practices occur from time-to-time in the PRC. We can make
      no assurance, however, that our employees or other agents will not engage in
      such conduct for which we might be held responsible. If our employees or other
      agents are found to have engaged in such practices, we could suffer severe
      penalties and other consequences that may have a material adverse effect on
      our
      business, financial condition and results of operations.





**If
      the United States imposes trade sanctions on the PRC due to its currency, export
      or other policies, our ability to succeed in the international markets may
      be
      diminished** .





The
      PRC
      currently “pegs” its currency to a basket of currencies, including United States
      dollar. This means that each unit of Chinese currency has a set ratio for which
      it may be exchanged for United States currency, as opposed to having a floating
      value like other countries’ currencies. This policy is currently under review by
      policy makers in the United States. Trade groups in the United States have
      blamed the cheap value of the Chinese currency for causing job losses in
      American factories, giving exporters an unfair advantage and making its imports
      expensive. There is increasing pressure for the PRC to change its currency
      policies to provide for its currency to float freely on international markets.
      As a result, Congress is considering the enacting legislation which could result
      in the imposition of quotas and tariffs. If the PRC changes its existing
      currency policies or if the United States or other countries enact laws to
      penalize the PRC for its existing currency policies, our business may be
      adversely affected, even though we do not sell outside of the PRC. Further,
      we
      cannot predict what action the PRC may take in the event that the United States
      imposes tariffs, quotas or other sanctions on Chinese products. Even though
      we
      do not sell products into the United States market, it is possible that such
      action by the PRC may nonetheless affect our business since we are a United
      States company, although we cannot predict the nature or extent thereof. Any
      government action which has the effect of inhibiting foreign investment could
      hurt our ability to raise funds that we need for our operations. The devaluation
      of the currency of the PRC against the United States dollar would have adverse
      effects on our financial performance and asset values when measured in terms
      of
      the United Stated dollar.





8


**Exchange
      controls that exist in the PRC may limit our ability to utilize our cash flow
      effectively.**





We
      are
      subject to the PRC’s rules and regulations affecting currency conversion. Any
      restrictions on currency exchanges may limit our ability to use our cash flow
      for the distribution of dividends to our stockholders or to fund operations
      we
      may have outside of the PRC. Conversion of Renminbi for capital account items,
      including direct investment and loans, is subject to governmental approval
      in
      the PRC, and companies are required to open and maintain separate foreign
      exchange accounts for capital account items. We cannot be certain that the
      regulatory authorities of the PRC will not impose more stringent restrictions
      on
      the convertibility of the Renminbi, especially with respect to foreign exchange
      transactions. Because a significant component for many of our products, the
      steel vessels, is manufactured in Italy, our inability to pay our foreign
      manufacturer may impair our ability to manufacture our products.





**Fluctuations
      in the exchange rate could have a material adverse effect upon our
      business.**





We
      conduct our business in the Renminbi. To the extent our future revenue are
      denominated in currencies other the United States dollars, we would be subject
      to increased risks relating to foreign currency exchange rate fluctuations
      which
      could have a material adverse affect on our financial condition and operating
      results since our operating results are reported in United States dollars and
      significant changes in the exchange rate could materially impact our reported
      earnings.





**A
      downturn in the economy of the PRC may slow our growth and
      profitability.**





The
      growth of the Chinese economy has been uneven across geographic regions and
      economic sectors. There can be no assurance that growth of the Chinese economy
      will be steady or that any downturn will not have a negative effect on our
      business especially if it results in either a decreased use of products such
      as
      ours or in pressure on us to lower our prices. Since our CNG station business
      is
      dependent upon the development of a market for cars and truck that run on CNG
      rather than gasoline, any economic trends which have the effect of dampening
      the
      market for CNG vehicles could affect our ability both to sell our CNG products
      and to sell CNG at our proposed CNG stations.





**If
      we are not able to protect our intellectual property rights, our business may
      be
      impaired.**





Our
      intellectual property relates to our know-how in developing our products. The
      protection of intellectual property rights in the PRC is weak, and we cannot
      give any assurance that we will be able to protect our intellectual property
      rights. To the extent that our business is dependent upon intellectual property,
      our ability to generate revenue from these products, would be severely impaired
      if we are not able to protect our rights in these products.





9


**Any
      recurrence of severe acute respiratory syndrome, or SARS, or another widespread
      public health problem, such as bird flu, could adversely affect our
      business.**





A
      renewed
      outbreak of SARS or another widespread public health problem, including bird
      flu, in China, where all of our revenues are derived, could have a negative
      effect on our operations. Our operations may be impacted by a number of
      health-related factors, including the following:





•
            quarantines
                or closures of some of our offices which would severely disrupt our
                operations,





•
            the
                sickness or death of our key officers and employees,
                and





•
            a
                general slowdown in the economy of the
                PRC.





Any
      of
      the foregoing events or other unforeseen consequences of public health problems
      could adversely affect our business and results of operations.





**If
      certain tax exemptions within the PRC regarding withholding taxes are removed,
      we may be required to deduct corporate withholding taxes from any dividends
      we
      may pay in the future.**





Under
      the
      PRC’s current tax laws, regulations and rulings, companies are exempt from
      paying withholding taxes with respect dividends paid to stockholders outside
      of
      the PRC. However, if the foregoing exemption is removed, we may be required
      to
      deduct certain amounts from any dividends we pay to our
      stockholders.





**Risks
      Associated with our Business**





**Because
      we are dependent upon a small number of suppliers or customers, the loss of
      a
      major supplier or customer could impair our ability to operate
      profitably.**





In
      general, we do not have long-term contracts with our customers, and major
      contracts with a small number of customers’ accounts for a significant
      percentage of our revenue. Our contracts relate to specific projects. As a
      result, a customer can account for significant revenue in one year and little
      if
      any in the next. Our largest customers for the year ended December 31, 2006
      were
      Sino-petrol Xinxing Company, which accounted for revenue of approximately $2.8
      million, or 23% of our revenue for the year, and Shanghai
      CNPC Enterprises Group Company, which accounted for revenue of approximately
      $1.3 million, or 11% of revenue for the year. O ur
      largest customer for the year ended December 31, 2005 was Milennium Group
      Limited (Hong Kong) which accounted for revenue of approximately $3.8 million,
      or 46% of our revenue for the year, but was not a significant customer in 2006.
      None of these customers is a significant customer in the first quarter of 2007.





**Because
      we are entering into a new business with our proposed operation of CNG stations,
      we will require significant additional funds.**





We
      intend
      to develop the business of owning and operating CNG stations, which is a new
      business for us. Prior to late 2006, our business has been limited to the
      manufacture of equipment, including equipment used for CNG stations, and
      performing related installation services. The operation of the CNG gas station
      business is subject to significant additional risks which are not related to
      our
      equipment manufacturing business. In addition to the normal risks associated
      with our business, there are additional risks that relate to the CNG station
      business. These risks include, but are not limited to:





10


*We
      lack experience in operating CNG stations* .
      Although we have manufactured and installed equipment for use by CNG stations,
      we have never operated stations, and we cannot assure you that we will be
      successful in operating CNG stations.





*We
      require significant additional funds to enable us to develop and expand the
      CNG
      station business.* The
      construction of CNG stations is very capital intensive, and we will require
      significant additional funds for this purpose. We have no agreements to obtain
      funding, and our agreement with the purchasers of our securities in our June
      private placement give them a right of first refusal on future financings.
      In
      addition, if we raise funds at a price which is less than the conversion price
      of the series A preferred stock or the exercise price of the warrants, the
      conversion or exercise price would be reduced.





On
      June
      6, 2006, we entered into an agreement with Wuhan Cleaning Energy and Wuhan
      Yixiang to establish Wuhan Sinoenergy Gas Company (“Wuhan Sinoenergy”) to
      operate CNG stations. Pursuant to this agreement we have paid approximately
      $3,375,000 for a 90% interest in Wuhan Sinoenergy. Pursuant to an agreement
      relating to the formation of Pingdingshan Sinoenergy Gas Company (“Pingdingshan
      Sinoenergy”), a joint venture formed to operate CNG stations in the Pingdingshan
      area, we will invest approximately $1,921,000 for a 90% interest in the venture.
      We require additional financing to equip and construct these CNG stations,
      and
      w e
      cannot
      assure you that we will be able to obtain any financing which we may require,
      either for our CNS station business or our equipment manufacture and supply
      business.





*The
      CNG station business is highly regulated.* The
      storage, transportation and distribution of CNG is subject to PRC regulations,
      including the price at which we both buy and sell CNG. ** The
      price
      controls over the purchase and sale of CNS limits our potential profit from
      the
      sale of CNG. In addition, before we construct a CNG station in many regions,
      we
      need to obtain government approvals. Other regulations may result in increased
      costs in order to comply with these regulations.





*Because
      of the nature of CNG, we could be exposed to liability from gas leaks or
      explosions.* Any
      leaks
      or explosions from our CNG stations could cause severe property damage as well
      as loss of life, which may not be covered by insurance. Any such loss could
      result in a termination of our business and could subject us to regulatory
      actions.





*The
      market for CNG stations is dependent upon the increased use of CNG powered
      vehicles.* CNG-powered vehicles represent only a small fraction of motor vehicles in the
      PRC, and most vehicles are powered by gasoline or diesel fuel. For us to be
      successful in the CNG gas station business, a market for CNG must be developed
      in the area which we propose to enter. Car and truck owners must either buy
      a
      CNG powered vehicle or pay to have a gasoline or diesel powered vehicle
      converted for CNG use. Any economic downturn could materially decrease the
      market for CNG vehicles. Further, in order for a market to develop for CNG
      vehicles, there must be a network of CNG stations on major highways throughout
      the PRC. The failure of such a network to develop could hinder the development
      of a market for CNG vehicles which would in turn limit the market for our CNG
      stations.





**We
      may face liability claims from users of our products** .





As
      the
      manufacturer of equipment that is used to store and transport CNG and other
      products, including petroleum, chemicals and food products, we may be subject
      both to liability in the event that any property damages or loss of life results
      from our products. Any liability which results could hurt our reputation and
      result in the payment of damages which may not be covered by
      insurance.





11


**As
      a result of the reverse acquisition, our expenses will increase
      significantly.**





As
      a
      result of the reverse acquisition and our status as a public company resulting
      from the reverse acquisition, our ongoing expenses have increased significantly,
      including expenses in compensation to our officers, ongoing public company
      expenses ,
      including increased legal and accounting expenses as a result of our status
      as a
      reporting company, expenses incurred in complying with the internal controls
      requirements of the Sarbanes-Oxley Act, and obligations incurred in connection
      with the reverse acquisition. Our failure to generate sufficient revenue and
      gross profit could result in reduced profits of losses as a result of the
      additional expenses.





**Because
      we are dependent on our management, the loss of our key executive officers
      and
      the failure to hire additional qualified key personnel could harm our
      business.**





Our
      business is largely dependent upon the continued efforts of our chief executive
      officer, Bo
      Huang,
      and our c hairman,
      Tianzhou Deng, who are also directors. We do not have employment contracts
      with
      either Mr. Huang or Mr. Deng. The loss either Mr. Huang, Mr. Deng or any of
      our
      other key employees could have a material adverse effect upon our ability to
      operate profitably.





**We
      may not be able to continue to grow through acquisitions.**





In
      addition to our planned growth through the development of our CNG station
      business, an important part of our growth strategy is to expand our business and to acquire
      other businesses in related industries. Such acquisitions may be made with
      cash
      or our securities or a combination of cash and securities. If our stock price
      is
      less than the exercise price of the outstanding warrants, it is not likely
      that
      that warrants will be exercised at their present exercise price. To the extent
      that we require cash, we may have to borrow the funds or sell equity securities.
      We anticipate that if we acquire other Chinese businesses, the seller would
      expect to receive all or substantially all of the sales price in cash, and
      we
      expect that we would have to raise funds in order to consummate any such
      acquisition. Any issuance of equity as a portion of the purchase price or any
      sale of equity, to the extent that we are able to sell equity, to raise funds
      to
      enable us to pay the purchase price would result in dilution to our
      stockholders. We have no commitments from any financing source and we may not
      be
      able to raise any cash necessary to complete an acquisition. If we fail to
      make
      any acquisitions, our future growth may be limited. As of the date of this
      report, we do not have any agreement as to any acquisition. Further, any
      acquisition may be subject to government regulations and approval in the
      PRC.





**If
      we make any acquisitions, they may disrupt or have a negative impact on our
      business.**





If
      we
      make acquisitions, we could have difficulty integrating the acquired companies’
personnel and operations with our own. In addition, the key personnel of the
      acquired business may not be willing to work for us. We cannot predict the
      affect expansion may have on our core business. Regardless of whether we are
      successful in making an acquisition, the negotiations could disrupt our ongoing
      business, distract our management and employees and increase our expenses.
      In
      addition to the risks described above, acquisitions are accompanied by a number
      of inherent risks, including, without limitation, the following:





•
            the
                difficulty of integrating acquired products, services or
                operations;





12


•
            the
                potential disruption of the ongoing businesses and distraction of
                our
                management and the management of acquired companies;





•
            the
                difficulty of incorporating acquired rights or products into our
                existing
                business;





•
            difficulties
                in disposing of the excess or idle facilities of an acquired company
                or
                business and expenses in maintaining such facilities;





•
            difficulties
                in maintaining uniform standards, controls, procedures and policies;





•
            the
                potential impairment of relationships with employees and customers
                as a
                result of any integration of new management
                personnel;





•
            the
                potential inability or failure to achieve additional sales and enhance
                our
                customer base through cross-marketing of the products to new and
                existing
                customers;





•
            the
                effect of any government regulations which relate to the business
                acquired;





•
            potential
                unknown liabilities associated with acquired businesses or product
                lines,
                or the need to spend significant amounts to retool, reposition or
                modify
                the marketing and sales of acquired products or the defense of any
                litigation, whether of not successful, resulting from actions of
                the
                acquired company prior to our acquisition.





Our
      business could be severely impaired if and to the extent that we are unable
      to
      succeed in addressing any of these risks or other problems encountered in
      connection with these acquisitions, many of which cannot be presently
      identified, these risks and problems could disrupt our ongoing business,
      distract our management and employees, increase our expenses and adversely
      affect our results of operations.





**Our
      operating results in future periods may vary from quarter to quarter, and,
      as a
      result, we may fail to meet the expectations of our investors and analysts,
      which may cause our stock price to fluctuate or decline.**





As
      a
      manufacturer of specialized equipment, we do not manufacture for inventory,
      but
      pursuant to a specific contract, and our contract flow is not predictable.
      To
      the extent that we do not generate new business upon completion of existing
      contracts, our revenue will decline. To the extent that we expand our facilities
      to meet present or anticipated increases in sales or develop or CNG station
      business, our failure to generate business could have the effect of
      significantly reducing the profitability of our business. Because of these
      factors, our revenue and operating results have fluctuated from quarter to
      quarter. We expect that fluctuations in both revenue and net income will
      continue due to a variety of factors, many of which are outside of our control.
      Due to the risks discussed in this report, you should not rely on
      period-to-period comparisons of our results of operations as an indication
      of
      future performance.





**Certain
      of our stockholders control a significant amount of our common
      stock.**





Approximately
      59.9% of our outstanding common stock is owned by Skywide Capital Management
      Limited, which is owned by our chief executive officer, Bo
      Huang, and our
      chairman, Tianzhou Deng. Skywide presently has the voting power to elect all
      of
      the directors and approve any transaction requiring stockholder
      approval.





13


**Efforts
      to comply with recently enacted changes in securities laws and regulations
      will
      increase our costs and require additional management resources, and we still
      may
      fail to comply.**





As
      directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted
      rules
      requiring public companies to include a report of management on our internal
      controls over financial reporting in their annual reports on Form 10-KSB. In
      addition, the public accounting firm auditing the company’s financial statements
      must attest to and report on management’s assessment of the effectiveness of our
      internal controls over financial reporting. These requirements are not presently
      applicable to us. If and when these regulations become applicable to us, and
      if
      we are unable to conclude that we have effective internal controls over
      financial reporting or if our independent auditors are unable to provide us
      with
      an unqualified report as to the effectiveness of our internal controls over
      financial reporting as required by Section 404 of the Sarbanes-Oxley Act of
      2002, investors could lose confidence in the reliability of our financial
      statements, which could result in a decrease in the value of our securities.
      We
      have not yet begun a formal process to evaluate our internal controls over
      financial reporting. Given the status of our efforts, coupled with the fact
      that
      guidance from regulatory authorities in the area of internal controls continues
      to evolve, substantial uncertainty exists regarding our ability to comply by
      applicable deadlines.





**The
      terms on which we may raise additional capital may result in significant
      dilution and may impair our stock price.**





Because
      of the lack of a sustained public market for our common stock, the terms of
      our
      recent private placement and the number of outstanding warrants and the exercise
      price and other terms on which we may issued common stock upon exercise of
      the
      warrants, it may be difficult for us to raise additional capital if required
      for
      our present business and for any planned expansion. We cannot assure you that
      we
      will be able to get additional financing on any terms, and, if we are able
      to
      raise funds, it may be necessary for us to sell our securities at a price which
      is at a significant discount from the market price and on other terms which
      may
      be disadvantageous to us. In connection with any such financing, we may be
      required to provide registration rights to the investors and pay damages to
      the
      investor in the event that the registration statement is not filed or declared
      effective by specified dates. The price and terms of any financing which would
      be available to us could result in both the issuance of a significant number
      of
      shares and significant downward pressure on our stock price and could result
      in
      a reduction of the conversion price of the series A preferred stock and exercise
      price of the warrants held by the investors in our June 2006 private
      placement.





**We
      may be required to pay liquidated damages if our board does not consist of
      a
      majority of independent directors.**





The
      purchase agreement relating to the June 2006 private placement requires us
      to
      appoint and maintain such number of independent directors that would result
      in a
      majority of our directors being independent directors, that the audit committee
      would be composed solely of independent directors and the compensation committee
      would have a majority of independent directors. Our failure to maintain these
      requirements would results in our payment of liquidated damages that payable
      in
      cash or by the issuance of additional shares of series A preferred stock, at
      the
      option of the investors.





**If
      we do not maintain the registration of the shares of common stock issued in
      the
      June 2006 private placement, we will be required to issue additional shares
      of
      series A preferred stock as liquidated damages.**





The
      registration rights agreement which we executed in connection with the sale
      of
      the series A preferred stock requires us to issue additional shares of series
      A
      preferred stock if we fail to keep the registration statement current and
      effective thereafter. The liquidated damages are a maximum of 1,770 shares
      of
      series A preferred stock per day, with a maximum of 950,000 shares of series
      A
      preferred stock.





14


**Risks
      Associated with Investing in our Common Stock**





**There
      is a limited trading market for our common stock.**





Although
      our common stock is registered pursuant to the Securities Exchange Act of 1934,
      there has been no sustained market for our common stock and we cannot give
      any
      assurance that there will continue to be a market for our common stock. Further,
      our stock price may fluctuate dramatically in the future in response to any
      of
      the following factors, some of which are beyond our control:





•
            variations
                in our quarterly operating results;





•
            announcements
                that our revenue or income are below analysts’
                expectations;





•
            general
                economic slowdowns;





•
            matters
                affecting the economy of the PRC and the relationship between the
                United
                States and the PRC;





•
            changes
                in market valuations of both similar companies and companies whose
                business is primarily or exclusively in the
                PRC;





•
            sales
                of large blocks of our common
                stock;





•
            announcements
                by us or our competitors of significant contracts, acquisitions,
                strategic
                partnerships, joint ventures or capital
                commitments;





•
            fluctuations
                in stock market prices and volumes, which are particularly common
                among
                highly volatile securities of internationally-based
                companies.





•
            concern
                by potential investors that the large number of shares of common
                stock
                which may be sold pursuant to a prospectus covering shares issuable
                upon
                conversion or exercise of securities issued in our June 2006 private
                placement may have a downward effect upon the market price of the
                stock.





•
            the
                effect of sales pursuant to this prospectus on the trading volume
                of our
                common stock.





**The
      rights of the holders of common stock may be impaired by the potential issuance
      of preferred stock.**





Although
      our articles of incorporation do not provide for the issuance of preferred
      stock, our agreement with the investors in the June 2006 private placement
      requires us to amend and restate our articles of incorporation to provide for
      the issuance of preferred stock. As a result, the board of directors will have
      the right, without stockholder approval, to issue preferred stock with voting,
      dividend, conversion, liquidation or other rights which could adversely affect
      the voting power and equity interest of the holders of common stock, which
      could
      be issued with the right to more than one vote per share, could be utilized
      as a
      method of discouraging, delaying or preventing a change of control. The possible
      impact on takeover attempts could adversely affect the price of our common
      stock. Although we have no present intention to issue any additional shares
      of
      preferred stock or to create any new series of preferred stock other than
      issuances required pursuant to liquidated damages provisions arising for the
      agreements we signed in connection with the June 2006 private placement, we
      may
      issue such shares in the future.





15


**Shares
      may be issued pursuant to our stock plans which may affect the market price
      of
      our common stock.**





We
      may
      issue stock upon the exercise of options or pursuant to stock grants covering
      a
      total of 2,000,000 shares of common stock pursuant to our 2006 long-term
      incentive plan. The exercise of any options we may grant under this plan and
      the
      sale of the underlying shares of common stock and the sale of stock issued
      pursuant to stock grants may have an adverse effect upon the price of our stock. If
      we
      issue all of the shares of common stock issuable pursuant to the plan, these
      shares will represent approximately 8.5% of the outstanding common stock, based
      on the presently outstanding shares of common stock.





**Because
      we are not subject to compliance with rules requiring the adoption of certain
      corporate governance measures, our stockholders have limited protections against
      interested director transactions, conflicts of interest and similar
      matters.**





The
      Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by
      the
      SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market
      as a
      result of Sarbanes-Oxley requires the implementation of various measures
      relating to corporate governance. These measures are designed to enhance the
      integrity of corporate management and the securities markets and apply to
      securities which are listed on those exchanges or the Nasdaq Stock Market.
      Because we are not presently required to comply with many of the corporate
      governance provisions and because we chose to avoid incurring the substantial
      additional costs associated with such compliance any sooner than necessary,
      we
      have not yet adopted all of these measures. We are not in compliance with
      requirements relating to the distribution of annual and interim reports, the
      holding of stockholders meetings and solicitation of proxies for such meeting
      and requirements for stockholder approval for certain corporate actions. Until
      we comply with such corporate governance measures, regardless of whether such
      compliance is required, the absence of such standards of corporate governance
      may leave our stockholders without protections against interested director
      transactions, conflicts of interest and similar matters and investors may be
      reluctant to provide us with funds necessary to expand our
      operations.





**Failure
      to achieve and maintain effective internal controls in accordance with Section
      404 of the Sarbanes-Oxley Act could have a material adverse effect on our
      business and operating results and stockholders could lose confidence in our
      financial reporting.**





Effective
      internal controls are necessary for us to provide reliable financial reports
      and
      effectively prevent fraud. If we cannot provide reliable financial reports
      or
      prevent fraud, our operating results could be harmed. We will be required to
      document and test our internal control procedures in order to satisfy the
      requirements of Section 404 of the Sarbanes-Oxley Act, which requires increased
      control over financial reporting requirements, including annual management
      assessments of the effectiveness of such internal controls and a report by
      our
      independent certified public accounting firm addressing these assessments.
      Failure to achieve and maintain an effective internal control environment,
      regardless of whether we are required to maintain such controls, could also
      cause investors to lose confidence in our reported financial information, which
      could have a material adverse effect on our stock price.





16


**Because
      we have significant related party transactions, institutional and other
      investors may be reluctant to purchase our stock which could affect both the
      price and the market for our stock.**





In
      the
      PRC, there is no private ownership of real estate. Rather, the government grants
      real property rights which are transferable. During 2005, we purchased real
      property rights from a related party for approximately $12.3 million of which
      $9.1 million was paid as of December 31, 2006. We also license technology from
      Beijing Sanhuan, for which we owe Beijing Sanhuan $452,000 at December 31,
      2006,
      and we use Beijing Sanhuan’s services for our subsidiaries. In addition, we have
      significant aged rental receivables from a related party. As a result, investors
      may be reluctant to invest in our common stock, which would affect both the
      stock price and the trading volume in our stock.





**Because
      of our cash requirements and restrictions in our preferred stock purchase
      agreement we may be unable to pay dividends** **.**





We
      expect
      to retain any earnings to finance the growth of our business, particularly,
      our
      proposed CNG station business, which is very capital intensive. Further, we
      are
      prohibited from paying dividends on our common stock while the series A
      preferred stock is outstanding





**Because
      we may be subject to the “penny stock” rules, you may have difficulty in selling
      our common stock.**





If
      a
      public market develops for our common stock and if our stock price is less
      than
      $5.00 per share, our stock may be subject to the SEC’s penny stock rules, which
      impose additional sales practice requirements and restrictions on broker-dealers
      that sell our stock to persons other than established customers and
      institutional accredited investors. The application of these rules may affect
      the ability of broker-dealers to sell our common stock and may affect your
      ability to sell any common stock you may own.





According
      to the SEC, the market for penny stocks has suffered in recent years from
      patterns of fraud and abuse. Such patterns include:





•
            Control
                of the market for the security by one or a few broker-dealers that
                are
                often related to the promoter or
                issuer;





•
            Manipulation
                of prices through prearranged matching of purchases and sales and
                false
                and misleading press releases;





•
            “Boiler
                room” practices involving high pressure sales tactics and unrealistic
                price projections by inexperienced sales
                persons;





•
            Excessive
                and undisclosed bid-ask differentials and markups by selling
                broker-dealers; and





•
            The
                wholesale dumping of the same securities by promoters and broker-dealers
                after prices have been manipulated to a desired level, along with
                the
                inevitable collapse of those prices with consequent investor
                losses.





17


**As
      an issuer of “penny stock” the protection provided by the federal securities
      laws relating to forward looking statements does not apply to
      us.**





Although
      the federal securities law provide a safe harbor for forward-looking statements
      made by a public company that files reports under the federal securities laws,
      this safe harbor is not available to issuers of penny stocks. As a result,
      if we
      are a penny stock we will not have the benefit of this safe harbor protection
      in
      the event of any based upon an claim that the material provided by us contained
      a material misstatement of fact or was misleading in any material respect
      because of our failure to include any statements necessary to make the
      statements not misleading.





**Our
      stock price may be affected by our failure to meet projections and estimates
      of
      earnings developed either by us or by independent securities
      analysts.**





Although
      we do not make projections relating to our future operating results, our
      operating results may fall below the expectations of securities analysts and
      investors. In this event, the market price of our common stock would likely
      be
      materially adversely affected.





**The
      registration and potential sale by the selling stockholders of a significant
      number of shares could encourage short sales by third
      parties.**





We
      have
      registered for sale all of the shares of common stock issuable upon the series
      A
      preferred stock and the warrants issued in the June 2006 private placement.
      The
      potential sale of those shares may result in significant downward pressure
      on
      our stock price, which could allow short sellers of our stock an opportunity
      to
      take advantage of any decrease in the value of our stock. The presence of short
      sellers in our common stock may further depress the price of our common
      stock.





**Our
      Business**





We
      design, manufacture and market a range of pressurized containers for compressed
      natural gas, known as CNG. Compressed natural gas is natural gas, principally
      methane, in
      its
      gaseous state that has been compressed. Natural gas is compressed during
      transportation and storage and, thus, requires pressurized
      containers. Our license permits us to operate CNG stations, CNS equipments
      and
      services, as well as non-standard chemical and refinery equipment.





Although
      our initial business involved the manufacture of non-standard equipment and
      pressure containers, our business has evolved as an increasing market is
      developing in the PRC for the use of CNG as a method of combating air pollution,
      which is increasingly viewed as a major problem throughout the PRC. We believe
      that this need will create a market for CNG powered vehicles. We use our
      capabilities in this industry to manufacture equipment for use in CNG gas
      stations and gas transportation vehicles.





Our CNG
      vehicle and gas station equipment business consists of two divisions.





The
      manufacture of CNG vehicle and gas station equipment, including following
      products:





•
            CNG
                trailer, which is a truck which includes a steel vessel storage system
                to
                transport CNG among CNG stations. This system consists of several
                steel
                pressure containers on a steel frame which have an input/output for
                the
                delivery of CNG.





•
            CNG
                deposited system for gas station usage, which is a similar storage
                system
                that is installed at the CNG station, which consists of electronic
                parts
                that are installed on gasoline powered vehicles to transform gasoline
                burning engines into CNG burning engines.





18


•
            Conversion
                kits for various types of vehicle to enable them to use CNG rather
                than
                gasoline





•
            CNG
                compressor skid, which is a natural gas compression system used to
                compress and store as CNG under
                pressure.





•
            CNG
                dispenser which is a CNG release system used to transform CNG into
                natural
                gas at a specified pressure level in a manner to enable the station
                to
                measure the amount of CNG used.





Our
      CNG
      gas station system business includes the design of construction plans for CNG
      gas stations, the construction of the CNG stations, and the installation of
      CNG
      station equipment and related systems at the gas station.





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





**The
      Chinese Natural Gas Industry**





China’s
      rapidly expanding economy is stretching the limits of its energy resources.
      The
      United States Energy Information Administration has reported that at present,
      only 3% of China’s total energy usage is natural gas, while the world’s average
      consumption of natural gas is 24% of total energy usage, and over the next
      5
      years, China’s use of natural gas is generally expected to double. China’s
      domestic reserve of natural gas was estimated by the Energy Information
      Administration to be 53.3 trillion cubic feet at the beginning of 2005. In
      addition, another huge natural gas field was discovered in Puguang of Sichuan
      Province with the estimated reserve of 356 billion cubic meters.




In
      order
      to meet the growth in natural gas demand, the PRC government has encouraged
      private companies to invest in and build the natural gas infrastructure. On
      December 27, 2002, the Ministry of Construction issued a notice encouraging
      private investment in the sector and provided a legal framework for private
      urban natural gas distribution.





We
      believe that the most important factor in understanding the Chinese natural
      gas
      industry is the country’s rapid economic growth. The Chinese economic growth was
      9.5% and 9.9% in 2004 and 2005 respectively.  According to estimate from
      the Word Bank, the Chinese economic growth reached 10.7% in 2006.  The
      strong demand in the auto sector has been, and is expected to continue to be,
      reflective of the desire of residents to improve their living standards as
      a
      result of an improvement in their income levels, which will, in turn, stimulate
      and drive the vehicle gas consumption.


19


**Our
      Proposed CNG Station Business**





Our
      business plan contemplates the establishment of a network of CNG stations at
      various locations in the PRC. We are developing our first CNG station project
      in
      Wuhan City, Hubei province in the PRC. We chose that location because of its
      proximity to a natural gas pipeline. **** At
      this
      project we intend to build and operate two supply stations and twenty CNG
      stations at which we will sell CNG at retail. We believe that, in the industry,
      one supply station usually supplies ten CNG stations.





On
      June
      6, 2006, we entered into an agreement with Wuhan Cleaning Energy and Wuhan
      Yixiang to establish Wuhan Sinoenergy to operate CNG stations. The agreement
      provides that we will contribute $3,375,000 for a 90% interest in Wuhan
      Sinoenergy (through Beijing Sanhuan as its trustee) and Wuhan Clean Energy
      and
      Wuhan Yixianng will each contribute $190,000 for a 5% interest. Within this
      contribution, $1,500,000 is to be made through our trust agreement with Beijing
      Sanhuan.





In
      August
      2006, the Wuhan Administration Bureau for Industry and Commerce issued a
      business license to Wuhan Sinoenergy with a term from August 2, 2006 to August
      2, 2026. The license covered the manufacture and sales of automotive conversion
      kits and construction and operation of CNG stations. In February 2007, the
      Wuhan
      government granted Wuhan Sinoenergy approval to build four CNG sub-stations
      in
      2007.





In
      October 2006, we received approval from the Pingdingshan municipal government
      to
      operate the CNG filling business in the Pingdingshan area. In November 2006,
      Sinoenergy, Sinogas (through Beijing Sanhuan as its trustee) Pingdingshan
      Jinlongma Vehicle Company (“Jinglongma”), signed a cooperation agreement to
      establish Pingdingshan Sinoenergy to operate these CNG stations. Pursuant to
      the
      agreement, we will pay approximately $1,921,000 for a 90% interest and
      Jinglongma will pay $192,000 for a 10% interest. In December 2006, the
      Pingdingshan government issued a business license to Pingdingshan Sinoenergy.





On
      January 26, 2007, the Company and Hong Kong China New Energy Development
      Investment Co. Ltd (“New Energy”), signed a cooperation agreement relating to
      the an investment in the construction and operation of CNG stations with
      Xuancheng municipal government in Anhui Province. Pursuant to the agreement,
      New
      Energy and the Company will form a natural gas company with registered capital
      of $5 million in Xuancheng to construct and operate in Xuancheng City a
      super-large CNG mother-station that has 100-300 million cubic meters in the
      Xuancheng region. The Xuancheng government has agreed to provide the joint
      venture a construction site of 60 square meters.





On
      February 1, 2007, we and New Energy signed a cooperation agreement relating
      to
      the an investment in the construction of CNG stations with the Huangmei County
      government. Pursuant to the agreement, we will form a natural gas company with
      registered capital of $5 million in Huangmei to construct and operate a
      super-large CNG mother station with expected annual processing capacity of
      100-300 million cubic meters in the Huangmei region. The Huangmei government
      has
      agreed to provide the joint venture a construction site of 60 square
      meters.





As
      of
      March 30, 2007, neither of these companies has received the necessary business
      license and no investment has been made either business. The agreements provide
      for each of the Company and New Energy to invest a total of $5 million in the
      two joint ventures.





In
      March
      2007, we entered into an agreement to purchase a 60% interest in Jiaxing Lixun
      Automotive Electronic Co, Ltd (“Lixun”) fr om
      its
      stockholders for a purchase price of approximately $390,000, which will be
      paid
      at the time the transfer of the shares has been instituted. The procedure for
      the transfer of the shares is in process, and we anticipate that the shares
      will
      be delivered to us by mid-April, 2007. Lixun designs and manufactures electric
      control devices for alternative
      fuel, such as compressed natural gas and liquefied petroleum gas vehicles,
      as
      well as a full range of electric devices, such as computer controllers,
      conversion switches, spark advancers, tolerance sensors and emulators for use
      in
      multi-powered vehicles.





20


**Marketing
      and Sales**





We
      rely
      primarily on “in-house” salesmen, who directly contact and build relationship
      with end user customers, and we sell to the end users. We market our products
      through business connections, trade shows and conferences.





When
      we
      develop of CNG station retail business, we intend to market our services to
      taxi
      and bus companies, who are the largest segment of end-users of our CNG product.
      We will seek to market not only the CNG from our stations, but the conversion
      of
      their gasoline engines to CNG engines.





**Principal
      Customers**





Since
      our
      products are, in general, specially designed to meet the requirements of a
      specific customer and we do not sell products from inventory, our revenue is
      dependent upon our developing a continuing stream of business so that we will
      not incur a significant lag between the time we complete one contract and start
      another. Further, because those products have a relatively long useful life,
      and
      are not consumables, once we deliver the product to the customer, there is
      little ongoing business from one period to the next. Our major customers vary
      from period to period. We
      do not
      have long-term contracts with any of our customers. Our largest customers for
      the year ended December 31, 2006 were Sino-petrol Xinxing Company, which
      accounted for revenue of approximately $2.8 million, or 23% of our revenue
      for
      the year, and Shanghai
      CNPC Enterprises Group Company, which accounted for revenue of approximately
      $1.3 million, or 11% of revenue for the year. The contracts with these two
      companies were completed by December 31, 2006. O ur
      largest customer for the year ended December 31, 2005 was Milennium Group
      Limited (Hong Kong) which accounted for revenue of approximately $3.8 million,
      or 46% of our revenue for the year, but was not a significant customer in 2006.
      None of these customers is a significant customer in the first quarter of
      2007.





O ur
      principal customers for our manufacturing business are China National Petroleum
      Corporation, China Petroleum and Chemical Corporation and their affiliates
      to
      whom we sell CNG station equipment and pressure containers.





If
      we are
      successful in establishing retail
      filling stations, we will target taxi and bus companies in the areas where
      our
      CNG stations are located.





**Source
      of Supply**





The
      principal components of our products are compressors, steel vessels and raw
      steel, as well as electronic parts for the conversion kits used to convert
      a
      gasoline engine to a CNG engine. We can obtain most of these products from
      a
      number of suppliers in the PRC. We are not dependent upon any supplier for
      these
      products.





Our
      steel
      vessels, which were manufactured in Italy by Dalmine Spa, an Italian
      corporation, through Dalmine’s distributors in the PRC. Because of the nature of
      these products, Dalmine requires six months advance notice for delivery. We
      have
      not experienced any difficulty in obtaining raw materials for our products.
      We
      do not have any long-term contracts with any of our suppliers, and we purchase
      raw materials and components pursuant to purchase orders.





**Intellectual
      Property**





Although
      we hold certain patent rights relating to the manufacture of pressure
      containers, our CNG station construction service business is more dependent
      upon
      our know-how than on any patent rights that we have.





21


We
      have
      an agreement with Beijing Sanhuan pursuant to which Beijing Sanhuan
      granted us the right to use Beijing Sanhuan’s technology
      and software relating
      to the integration,
      installation and maintenance of
      CNG
      station systems. Under th is agreement,
      we will pay Beijing
      Sanhuan for
      the technology
      and software at
      the
      rate of $12,80 0 for each
      CNG substation and $23,051 for each CNG mother station. Furthermore,
      Beijing Sanhuan will charge the Company $64 per hour for engineers provided
      by
      Beijing Sanhuan. ****





**Research
      and Development**





We
      do not
      engage in research and development. We have worked from time to time with our
      customers to design a product, typically a pressure container for the customer’s
      product. However, those services are included in the service for the customer’s
      product.





**Competition**





The
      two
      largest state owned energy companies, CNPC (China National Petroleum
      Corporation) Group, and SINOPEC (China Petroleum and Chemical Corporation),
      engaged in the upstream supply of energy and are major companies in exploration
      and transportation of oil and gas. They build much of the PRC’s high pressure
      pipeline infrastructure. Natural gas is distributed to smaller regional firms
      that redistribute the gas to the end user. Although these major companies supply
      natural gas rather than sell the natural gas to end users, they have the
      capability of establishing a their own natural gas distribution networks. When
      we operate CNG stations, we will have to compete based on our locations and
      service, since both the price we pay and the amount we charge are subject to
      price control.





We
      are
      aware of two companies which may be considered to be direct competitors in
      the
      business of CNG station filling
      business: Xinao Gas Field Ltd and China Natural Gas. Xinao Gas Field Ltd. is
      a
      publicly owned company traded on the Hong Kong Stock Exchange, distributes
      natural gas via pipeline, doing business in 13 provinces and municipalities
      that
      have a combined population of 31 million. China Natural Gas is a publicly owned
      company traded on OTC Bulletin Board, distributes natural gas to commercial,
      industrial and residential customers of Xian City, and distributes CNG as a
      vehicular fuel to retail end users of Xian City. Neither of the two companies
      is approved
      to supply natural gas to any area in which our CNG retail business
      covered.





We
      are
      also aware of two privately owned companies which may be considered as
      competitors of us in the business of CNG deposit and transportation equipment
      manufacturing: Shijiazhuang Enric Gas Equipment, Handan Xinxing Petrochemical
      Equipment.


Three
      Italian companies are the competitors of us in the business of gas vehicle
      kits
      produce: Lovato Spa, LANDI Spa, and OMVL Spa. Because those companies are not
      Chinese companies, we believe that our familiarity with the Chinese markets
      gives us a competitive advantage.





**Employees**





On
      March
      31, 2007. we had about 370 employees, of which about 240 are in Yuhan,100 are
      in
      Sinogas and 30 employees work for our CNG filling stations business.
      Approximately 40 of our employees are in executive and administrative, 20
      employees are in marketing and sales, 40 are technical engineers in pressure
      container and CNG deposit and transportation manufacturing, quality control
      as
      well as CNG station construction, the remaining 140 persons are manufacturing
      personnel.





22




**ITEM
      2. DESCRIPTION OF PROPERTY**




In
      China,
      there is no private ownership of land. Rather, all real property is owned by
      the
      government. The government issues a certificate of property right, which is
      transferable, has a term of 50 years and permits the holder to use the property.
      Certificates of land use right rights have been issued by the government
      authority covering parcels of approximately 265,000 square feet and 394,000
      square feet where we maintain our offices and manufacturing facilities. Both
      parcels are located on Jinhua Road in the Si’fang District of Qingdao province
      in the PRC. The certificate of land use right for both parcels, which expires
      in
      2055, is in the name of a related party and has not yet been transferred to
      us
      and no transfer will be effected until we obtain a change in zoning. We are
      in
      the process of applying for transfer of the land use right. The nature of the
      zoning does not affect our right to use the land. We expect that the land use
      right will be transferred to us in 2007.





The
      land
      use right is presently owned by Beijing Sanhuan, which is an affiliated company.
      We have an agreement with Beijing Sanhuan, pursuant to which Beijing Sanhuan
      is
      to transfer to our subsidiary, Sinogas, the land use right relating to the
      land
      on which Sinogas’s facilities are located. The total price for the land use
      right is approximately $12.3 million. As at December 31, 2006, we have paid
      $9.1
      million of the $12.3 million purchase price for the land use right. The land
      use
      right is reflected on our balance sheet as an intangible asset owned by us.
      We
      amortize the land use right over the life of the land use right, and this
      amortization was $250,000 in 2006.





We
      own
      approximately 323,000 square feet plants and office buildings in Qingdao City,
      where we conduct our manufacturing operations.





We
      lease
      office space in Wuhan and Pingdingshan for our CNG retail business development
      activities, and we rent offices in Beijing for our headquarters. Our current
      annual rent for the three leased premises is approximately $36,000. The Beijing
      office lease expires in March 2008, the Wuhan lease expires in October 2007
      and
      the Pingdingshan lease expires in December 2007.





We
      believe that our current space is adequate and that any additional space which
      we may require will be available on commercially reasonable terms.





**ITEM
      3. LEGAL PROCEEDINGS**





We
      are
      not a party to any material legal proceeding.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**





None





23


PART
      II





**ITEM
      5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





**Market
      Information**





Prior
      to
      February 6, 2007, there was no market for our common stock. Since February
      6,
      2007, our common stock has been traded on the OTC Bulletin Board under the
      symbol SNEN. During the period from February 6, 2007 through March 26,
      2007, the high bid price was $2.55 per share and the low bid price was $1.60
      per
      share. Such quotations reflect inter-dealer prices, without retail markup,
      markdown or commission, and may not represent actual transactions.





On
      March
      30, 2007, the closing bid price of our common stock was $2.03 per share.





On March
      30, 2007, we had approximately 50 record holders of our common stock. As of
      the
      date of this annual report, none of these shares are eligible for sale pursuant
      to Rule 144.





We
      have
      not paid dividends since our inception. Our agreement with the investors in
      the
      June 2006 private placement and the certificate of designation for the series
      A
      preferred stock prohibit our payment of dividends while the shares of series
      A
      preferred stock are outstanding.





As
      of
      March 30, 2007, we had the following shares of common stock reserved for
      issuance:





•
            5,125,072
                shares issuable upon conversion of the series A preferred
                stock.





•
            5,370,002
                shares issuable upon exercise of the warrants issued in the June
                2006
                private placement.





•
            2,000,000
                shares issuable upon exercise of stock options or other equity-based
                incentives pursuant to our 2006 long-term incentive
                plan.





**Equity
      Compensation Plan Information**





The
      following table summarizes the equity compensation plans under which our
      securities may be issued as of December 31, 2006.





Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding optionsand
                warrants
            
            Weighted-average
                exercise price of outstanding optionsand
                warrants
            
            Number
                of securities remaining available for future issuance under
                equitycompensation plansEquity
                compensation plans approved by security holders
            
            
            -0-
            
            
            --
            
            
            --Equity
                compensation plan not approved by security holders
            
            
            120,000
            
            
            0.65
            
            
            1,880,000





The
      2006
      long-term incentive plan was approved by the board of directors and
      stockholders.





24


**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





*The
      following discussion of the results of our operations and financial condition
      should be read in conjunction with our financial statements and the related
      notes, which appear elsewhere in this annual report. The following discussion
      includes forward-looking statements. For a discussion of important factors
      that
      could cause actual results to differ from results discussed in the
      forward-looking statements, see “Forward Looking Statements.”*





**Overview**




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




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





All
      of
      our products and services are performed pursuant to agreements with our
      customers, which provide the specifications for the products and services.
      We do
      not sell our products from inventory. As a result, our revenue is dependent
      upon
      the flow of contracts. In any fiscal period, a small number of customers may
      represent a disproportionately large percentage of our business in one period
      and a significantly lower percentage, if any, in a subsequent period. For
      example, our largest customer for the year ended December 31, 2005, Millennium
      Group Limited (Hong Kong), which accounted for revenue of approximately $3.8
      million, or 46% of our revenue for the year, and is not a significant customer
      in 2006. Our contract with Millenium Group related to the construction of CNG
      stations, and that contract was completed in 2005, and does not require any
      significant products or services after the completion of the station. In year
      2006, we derived $2.8 million, or 23% of our revenue, from sales to one
      customer, Sino-petrol Xinxing Company, for the construction of CNG stations.
      Our
      contracts are generally for one-year terms, and there is no assurance that
      the
      contracts will be renewed at the end of the term.




We
      commenced operations on October 29, 2004, did not have any business activity
      until the first quarter of 2005, and, during the first quarter of 2005, we
      were
      in a start-up phase. As a result, since the first two quarters of 2005 do not
      reflect fully developed operations, the comparisons between year 2006 and 2005
      reflect our ability to scale up our operations and not any indication of a
      year
      to year growth rate.




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





25


On
      January 26, 2007, the Company and Hong Kong China New Energy Development
      Investment Co. Ltd (“New Energy”), signed a cooperation agreement relating to
      the an investment in the construction and operation of CNG stations with
      Xuancheng municipal government in Anhui Province. Pursuant to the agreement,
      New
      Energy and the Company will form a natural gas company with registered capital
      of $5 million in Xuancheng to construct and operate in Xuancheng City a
      super-large CNG mother-station that has 100-300 million cubic meters in the
      Xuancheng region. The Xuancheng government has agreed to provide the joint
      venture a construction site of 60 square meters.





On
      February 1, 2007, we and New Energy signed a cooperation agreement relating to
      the an investment in the construction of CNG stations with the Huangmei County
      government. Pursuant to the agreement, we will form a natural gas company with
      registered capital of $5 million in Huangmei to construct and operate a
      super-large CNG mother station with expected annual processing capacity of
      100-300 million cubic meters in the Huangmei region. The Huangmei government
      has
      agreed to provide the joint venture a construction site of 60 square
      meters.





As
      of the
      date of this report, neither of these companies has received the necessary
      business license and no investment has been made either business. The agreements
      provide for each of us and New Energy to invest a total of $5 million in the
      two
      joint ventures.





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




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





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





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




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




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




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




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




26


We
      hold a
      90% interest in Yuhan, with the other 10% being owned by Qingdao Kangtai
      Machinery Equipment Manufacture Co. Limited (“Kangtai”). We had previously owned
      a 55% interest in Yuhan. In August 2006, we entered into an agreement to acquire
      the remaining 45% for $1,500,000, with payment due in installments.  As of
      March 31, 2007, we have paid a total of $503,000 and owed $997,000 **.** The
      agreement, as amended, gives us the
      right
      to acquire the remaining 10% interest in Yuhan during the first six months
      of
      2008 on payment of $640,000.




Yuhan
      was
      set up by Sinogas and Kangtai on May 25, 2005. In connection with Yuhan’s
      organization, Kangtai transferred equipment to Yuhan as part of its investment
      in Yuhan. Kangtai transferred certain contracts to Yuhan, and Yuhan assumed
      the
      manufacturing obligations under these contracts and purchased the related
      inventories from Kangtai at fair market value. Kangtai purchased the
      manufactured products from Yuhan at fair market value and sold the products
      to
      the end users. The sales of these products to Kangtai amounted to $1,592,886
      for
      year 2006. Because a portion of these transactions relate to sales to third
      parties through Kangtai, we treat that portion as a third-party
      receivable.





Our
      functional currency is Renminbi (“RMB”), which is the currency of the PRC, and
      our reporting currency is United States dollars. When
      we
      discuss the amount of our future obligations, we convert RMB to dollars at
      the
      current exchange rate. However, since the payment will be made in the future,
      the amount paid in United States dollars may be different from the amount set
      forth in this annual report as a result of fluctuations in the currency
      rate.





**Results
      of Operations**





The
      following table sets forth our statements of operations for the years ended
      December 31, 2006 and 2005, in dollars (dollars in thousands) and as a
      percentage of revenue:





Year
                Ended December 31,2006
            
            2005Net
                revenue
            
            $
            12,393
            
            
            100.0
            %
            $
            8,236
            
            
            100.0
            %Cost
                of revenue
            
            
            5,909
            
            
            47.7
            %
            
            3,821
            
            
            46.4
            %Gross
                profit
            
            
            6,484
            
            
            52.3
            %
            
            4,415
            
            
            53.6
            %Operating
                expenses
            
            
            2,289
            
            
            18.5
            %
            
            696
            
            
            8.4
            %Other
                income (loss), net
            
            
            (1,865
            )
            
            (15.0
            %)
            
            (72
            )
            
            (0.8
            %)Income
                before income taxes
            
            
            2,330
            
            
            18.8
            %
            
            3,647
            
            
            44.3
            %Income
                tax benefit (expense)
            
            
            1,120
            
            
            9.0
            %
            
            (1,173
            )
            
            (14.2
            %)Minority
                interest
            
            
            (3
            )
            
            (0.0
            %)
            
            (14
            )
            
            (0.0
            %)Net
                income
            
            
            3,447
            
            
            27.8
            %
            
            2,460
            
            
            29.9
            %




In
      2006,
      we had three business segments, and in 2005, we had two business segments.
      The
      third segment in 2006 -- the construction of CNG stations to be operated by
      us
      and the operation of those CNG stations -- is in the development stage. They
      are:





**(i)
      Non-standard pressure container business:**





Non-standard
      equipment and pressure container business has been carried over from the
      predecessor since Sinogas was set up. It is a traditional chemical equipment
      manufacture business with low profit margin. It includes design and manufacture
      of various types of pressure containers:




27


·
            in
                the petroleum and chemical
                industries.


·
            in
                the metallurgy and electricity generation
                industries.


·
            in
                the food and brewery
                industries


·
            various
                types of non-standard containers





**(ii)
      CNG storage, transportation products and CNG station service construction (“CNG
      Station Construction”)**





CNG
      station construction business represents:




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





·
            CNG
                trailer


·
            CNG
                deposited system for gas station usage


·
            Conversion
                kits for various types of
                vehicles


·
            CNG
                compressor skid


·
            CNG
                dispenser (retail measurement
                system)


These
      services were provided by us for other companies that operate CNG
      stations.





(2)
      CNG
      station construction service business




It
      includes the design of CNG station construction plans, construction of CNG
      stations, and installation of CNG station equipment and related systems. Due
      to
      rapid development and early stage of CNG station business in China, by utilizing
      its know how and specialty engineering team in this area and early entering
      into
      the market, the Company enjoys a very high profit margin in this segment.




**(iii)
      CNG station operation**





In
      2006,
      we entered the CNG station business, which involves the design, construction
      and
      equipping of CNG stations and the operation of those stations.





The
      following tables set forth information relating to our business segments for
      2006 and 2005 (dollars in thousands).




2006
            
            Non-standard
                pressure containers
            
            CNG
                station construction
            
            CNG
                station operation
            
            TotalNet
                revenue
            
            $
            5,474
            
            $
            6,919
            
            
            -
            
            $
            12,393Cost
                of revenues
            
            
            4,315
            
            
            1,594
            
            
            -
            
            
            5,909Gross
                profit
            
            
            1,159
            
            
            5,325
            
            
            -
            
            
            6,484Gross
                margin
            
            
            21
            %
            
            77
            %
            
            
            
            
            52
            %Operating
                expenses:Selling
                expenses
            
            $
            197
            
            $
            31
            
            
            -
            
            $
            228General
                and administrative expenses
            
            
            840
            
            
            974
            
            
            247
            
            
            2,061Total
                operating expense
            
            
            1,037
            
            
            1,005
            
            
            247
            
            
            2,289Income
                (loss) from operations
            
            $
            122
            
            $
            4,320
            
            
            ($
                247
            )
            $
            4,195Total
                assets
            
            
            3,107
            
            
            23,100
            
            
            1,626
            
            
            27,833





28





2005
            
            Non-standard
                pressure containers
            
            CNG
                station construction
            
            TotalNet
                revenue
            
            $
            2,035
            
            $
            6,201
            
            $
            8,236Cost
                of revenues
            
            
            1,567
            
            
            2,254
            
            
            3,821Gross
                profit
            
            
            468
            
            
            3,947
            
            
            4,415Gross
                     margin
            
            
            23
            %
            
            64
            %
            
            54
            %Operating
                expenses:Selling
                expenses
            
            $
            57
            
            $
            53
            
            $
            110General
                and administrative expenses
            
            
            268
            
            
            318
            
            
            586Total
                operating expense
            
            
            325
            
            
            371
            
            
            696Income
                from operations
            
            $
            143
            
            $
            3,576
            
            $
            3,719Total
                assets
            
            
            4,516
            
            
            11,259
            
            
            15,755





*Net
      Revenue.* Net
      revenue for year ended December 31, 2006 was approximately $12.4 million, a
      50%
      increase over net revenue of approximately $8.2 million for 2005. Since we
      were
      incorporated on October 29, 2004 and did not commence business activity until
      2005, our revenue in the first half of 2005, particularly in the first quarter,
      was low since we were in the start-up phase. The revenue from the CNG
      construction business for 2006 includes $4.1 million, representing 33% of our
      total net revenue for the year and 59% of our CNG construction revenue, relating
      to two contracts pursuant to which we are providing technical consulting service
      on the constructing and equipping CNG stations. Revenue from our pressure
      container business increased $3.5 million, or 169%, from $2.0 million in 2005
      to
      $5.5 million in 2006. The substantial increase in sales from this division
      results from the low level of sales during 2005, when the Company and this
      division were in their early stages and was only actively engaged in generating
      sales during the last seven months of 2005.




*Cost
      of Revenue.* The cost
      of revenue for 2006 was approximately $5.9 million, compared with approximately
      $3.8 million for 2005. Our cost of revenue for the CNG station construction
      division decreased by $0.8 million, or 31%, from $2.5 million in 2005 to $1.6
      million in 2006. Our cost of revenue for non-standard pressure containers
      division increased by $2.8 million from 1.6 million of 2006 to $4.3 million
      of
      2006, reflecting both the increase in sales and the change in purchase of raw
      material, as discussed below.





Our
      gross
      margin for year 2006 was 52.3%, a modest decline from 53.6% for 2005, with
      the
      gross margin from the CNG station construction division increasing from 64%
      to
      77% and the gross margin for our pressure container business decreasing from
      23%
      to 21%. These changes reflect the following factors:





•
            In
                2005,
                we bought all the raw materials for the CNG vehicles and deposit
                equipment
                manufacturing. The major part of these purchases was steel bottles
                purchased from Italy, which represents a significant portion of the
                costs
                and has a long delivery period. In 2006, our customers provide these
                raw
                materials, and we provided for machining, installation and related
                service. Our gross margin on the services that we performed is higher
                than
                the gross margin on the equipment we purchased. These factors affected
                both our CNG construction and pressure container
                divisions.





•
            The
                improved gross margin resulting from the customers’ purchase of raw
                material was offset by increases in the cost of raw materials which
                we did
                purchase, such as steel tubing as steel plate, which we were not
                able to
                pass on to our customers. The price of steel tube, the key material
                for
                CNG deposit and transportation containers, increased from an average
                of
                $8,500 per unit in 2005 to $13,000 per unit in 2006, and the price
                of
                steel plate, the raw material for non-standard pressure containers,
                also
                increased in a similar manner.





29


•
            Our
                cost of revenue relating our CNG construction division includes a
                $452,000
                know how license fee to Beijing Sanhuan, which is a related company,
                pursuant to which Beijing Sanhuan granted us to a license to use
                its
                technology and software relating to the construction and integration
                of
                CNG stations




*Operating
      Expenses.* Operating expenses were approximately $2.3 million for 2006, compared to
      approximately $700,000 for 2005, with operating expenses relating to both our
      CNG construction division and our non-standard pressure containers each
      increasing by $0.7 million. The increase was primarily due to our efforts to
      develop the market for our products and services, expenses resulting from our
      status as a public corporation following the reverse acquisition in June 2006.
      We also had increased rental expenses and other expenses as we expanded our
      operations. The largest increase in operating expense was general and
      administrative expenses, which includes our rent expense and the amortization
      of
      land use rights as well as additional expenses resulting from our status as
      a
      public company in the United States. The corporate overhead expenses were
      allocated between the two operating divisions based on their relative
      contribution to revenue. Since we have made payments with respect to our land
      use rights for Sinogas’ facilities, we are amortizing our cost, approximately
      $12.3 million, over the 50-year term of these rights. The amortization in 2006
      was approximately $250,000. During a portion of 2006 we had a majority interest
      in three ventures, which are included in our consolidated results of operations.





*Interest
      Expense* .
      Interest expense increased from $41,000 in 2005 to $1.8 million in 2006. The
      substantial increase in interest expense results from the accounting treatment
      of the beneficial conversion feature of the convertible notes that were issued
      in the June 2006 private placement. The value of the beneficial conversion
      feature of the convertible notes was determined to be approximately $1.6
      million, which was credited to paid-in capital and charged to earnings as
      interest expense. Since the notes were automatically converted into common
      stock
      in September 2006, the full amount of the interest charge was recognized in
      2006. In addition, our increased interest charge reflected increased borrowings
      during 2006.




*Income
      from Operations.* Income
      from operations was approximately $4.2 million for 2006, compared with
      approximately $3.7 million in 2005 as a result of the factors described above.




*Income
      Taxes.* As
      Sinogas has received an exemption from corporate income tax for year 2006,
      we
      recorded a tax credit for the full amount of the taxes accrued by
      Sinogas.




**Liquidity
      and Capital Resources**




At
      December 31, 2006, we had cash of approximately $587,799, an increase of
      approximately $256,000 from December 31, 2005. At December 31, 2006, we had
      working capital of approximately $300,000 and stockholders’ equity of
      approximately $16.0 million, compared with working capital of approximately
      $4.4
      million and stockholders’ equity of approximately $7.5 million at December 31,
      2005.




During
      2005, we purchased from an affiliated company the certificate of property right
      for the property on which our offices and manufacturing facilities are located.
      Since the government of the PRC owns title to the land, it issues a certificate
      of land use which is a transferable right to use the land. The purchase price
      was $12.3 million of which $5.0 million was paid during 2005. The balance is
      due
      at such time as the use of the land is changed from industrial to commercial,
      at
      which time the certificate of property rights will be transferred to us. The
      nature of the zoning does not affect our right to use the land, but we believe
      that it has a higher value if it is zoned commercial. In 2006, we have paid
      another $4.1 million for the purchase of the land use right. In our agreement
      with the investors in the June 2006 private placement, we agreed that we would
      not pay the rest of approximately $3.2 million until the rights are transferred
      and we would not pay the balance until the property is sold except that we
      may
      apply up to 50% of net income to make such payments. This restriction terminates
      after the investors have sold all of the shares of common stock issued in the
      private placement, including the shares of common stock issuable upon conversion
      of the note or the series A preferred stock or exercise of the
      warrants.




30


In
      June
      2006, we completed the private placement of securities pursuant to which we raised
      net proceeds of approximately $3.1 million. See “June 2006 Private Placement.”
During the first quarter of 2007, through March 26, 2007, we received net
      proceeds of approximately $5.8 million from the exercise by the investors in
      the
      June 2006 private placement of warrants issued in that private placement.
      However, we cannot assure you that we will receive any additional proceeds
      from
      the exercise of warrants. We are using those funds, together with anticipated
      cash flow from our operations, to enable us to continue our current operations
      without additional financing for the next year, particularly the capital
      expenses relating to the construction of our CNG stations in Wuhan City and
      Pingdingshan City. As of March 30, 2007, we have funding commitments for Wuhan
      Sinoenergy and Pingdingshan Sinoenergy in the total amount of approximately
      $5.3
      million, of which $4.4 million was paid by December 31, 2006. The construction
      of CNG stations during 2007 will require additional funding. Although we
      anticipate that we will be able to obtain bank financing from a Chinese bank
      for
      approximately 50% of the cost, we do not have any agreement with respect to
      this
      funding. If we are unable to raise the necessary funding we may not be able
      to
      develop our CNG station business.





In
      March
      2007, we entered into an agreement to purchase a 60% interest in Lixun
      from its stockholders for a purchase price of approximately $390,000, which
      will
      be paid after the shares being transferred to us. Now the procedure for the
      transfer of the shares has been instituted and we anticipate that the shares
      will be delivered to us by mid-April. We expect to invest an additional $390,000
      in this venture.





We
      hold a
      90% interest in Yuhan, with the other 10% being owned by Qingdao Kangtai
      Machinery Equipment Manufacture Co. Limited (“Kangtai”). We had previously owned
      a 55% interest in Yuhan. In August 2006, we entered into an agreement to acquire
      the remaining 45% for $1.5 million with payment due in installments.  As of
      March 15, 2007, we have paid a total of $503,000 and owed $997,000. **** The
      agreement, as amended, gives us the
      right
      to acquire the remaining 10% interest in Yuhan during the first six months
      of
      2008 for $640,000.





We
      have
      two joint venture agreements with New Energy which provide that we and New
      Energy will each invest a total of $5 million in the ventures. As of the date
      of
      this report, neither of these ventures ahs received the necessary business
      license, and accordingly, neither party does not yet have any obligation to
      fund
      the venture.





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





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





Pursuant
      to a purchase agreement with China Yuanhang Gas Company (Yuanhang Gas), we
      appointed Yuanhang Gas as our import agent to purchase steel tube for CNG gas
      stations equipment manufacturing from Italy for $6.3 million. The purchase
      price
      of this product is in Euros and the purchase price in dollars is subject to
      fluctuations in the exchange rate between Euros and United States dollars.
      At
      December 31, 2006, we have paid $2.7 million as deposit for long-term letters
      of
      credit for these two purchase agreements.





31


**June
      2006 Private Placement**





On
      June
      2, 2006, we entered into an exchange agreement pursuant to which we acquired
      all
      of the equity of Sinoenergy Holding, which owned all of the equity of Sinogas.
      Pursuant to the exchange agreement, we issued 14,215,385
      shares of common stock to the owners of Sinoenergy Holdings.





In
      connection with the acquisition of Sinoenegy Holding, we entered
      into:





(a)
      A
      securities purchase agreement with Barron Partners LP, JCAR Funds Ltd., IRA
      f/b/o John P. O’Shea, Ray
      Rivers and Steve Mazur pursuant
      to which the investors purchased 6% convertible notes in the principal amount
      of
      $3,700,000, 390,087 shares of common stock, and warrants to purchase 6,342,858
      shares of common stock at $0.85 per share, 6,342,858 shares of common stock
      at
      $1.20 per share and 6,342,858 shares of common stock at $1.75 per share. On
      December 31, 2006, the $1.75 warrants expired unexercised. On September 28,
      2006, the convertible notes were automatically converted into 5,692,307 shares
      of series A preferred stock upon the filing of our restated articles of
      incorporation and the certificate of designation for the series A preferred
      stock. Each share of series A preferred stock is convertible into one share
      of
      common stock.





(b)
      A
      stock redemption agreement with our principal stockholders, who were the
      principal stockholders of Franklyn prior to the reverse acquisition. We
      purchased a total of 3,305,000 shares of common stock for a purchase price
      of
      $213,525, which was paid from the proceeds from the issuance of the 6%
      convertible notes, stock and warrants.





Pursuant
      to the securities purchase agreement, the certificate of designation relating
      to
      the series A preferred stock and the warrants:





•
            The
                conversion rate of the series A preferred stock, presently $0.65
                per
                shares, and the exercise price of the warrants are subject to adjustment
                in certain instances, including the issuance by us of stock at a
                price
                which is less than the conversion price, which is initially
                $0.65.





•
            In
                the event that our consolidated pre-tax income, as defined, for the
                year
                ended December 31, 2006 is less than $0.212 per share on a fully-diluted
                basis, then the conversion price or the series A preferred stock
                and the
                exercise price of the warrants shall be reduced by the percentage
                shortfall, up to a maximum of 40%. Fully-diluted pre-tax income is
                based
                on the number of shares of common stock which are outstanding or
                are
                otherwise issuable, regardless of whether such shares would be included
                in
                determining diluted earnings per share under generally accepted accounting
                principles.





•
            In
                the event our consolidated pre-tax income for the year ended December
                31,
                2007 is less than $0.353 per share on a fully-diluted basis, then
                the
                Conversion Price shall be reduced by the percentage shortfall, up
                to a
                maximum of 40%.





•
            We
                have agreed to have appointed such number of independent directors
                that
                would result in a majority of its directors being independent directors
                that the audit committee would be composed solely of independent
                directors
                and the compensation committee would have a majority of independent
                directors. Our failure to meet these requirements for a period of
                60 days
                for an excused reason, as defined in the Purchase Agreement, or 75
                days
                for a reason which is not an excused reason, would results in the
                imposition of liquidated damages which are payable in cash or additional
                shares of series A preferred stock. The liquidated damages are computed
                in
                an amount equal to 12% per annum of the purchase price of the securities,
                based on the number of shares of series A preferred stock then
                outstanding, up to a maximum of $444,000, which is payable in cash
                or
                stock, at the election of the investors. We are in compliance with
                this
                requirement since a majority of our directors are independent and
                the
                audit committee is comprised solely of independent directors and
                the
                compensation committees has a majority of its members as independent
                directors.





32


•
            We
                entered into a registration rights agreement rights agreement pursuant
                to
                which we agreed to file, within 60 days after the closing, a registration
                statement covering the common stock issuable upon conversion of notes
                and
                the series A preferred stock and exercise of the warrants. We have
                filed
                this registration statement and the registration statement was declared
                effective by the SEC. Our failure to maintain the effectiveness of
                the
                registration statement would result in the imposition of liquidated
                damages, which are payable through the issuance of additional shares
                of
                series A preferred stock at the rate of 1,770 shares of series A
                preferred
                stock for each day, based on the registration of all of the underlying
                shares of common stock, with a maximum of 950,000
                shares.





•
            We
                also reimbursed Barron Partners for its due diligence and other expenses
                in the amount of $50,000.





On
      March
      16, 2007, we entered into an agreement with the investors from the June 2006
      private placement and Skywide pursuant to which the provisions in the
      certificate of designation for the series A preferred stock and the warrants
      which could result in an adjustment in the conversion rate of the series A
      preferred stock and the exercise price of the warrants if certain earnings
      targets are not met were deleted. In consideration for the removal of these
      provisions, Skywide, as our principal stockholder, agreed to place 1,000,000
      shares of common stock into escrow. If our consolidated pre-tax income per
      share, on a fully diluted basis, for 2006 and 2007 are less than $0.212 and
      $0.353 per share, respectively, then Skywide shall deliver to the Company for
      cancellation, such percentage of 500,000 shares as equals the percentage
      shortfall from the $0.212 and $0.353 per share target prices. Thus, if pre-tax
      income per share for 2006 is $0.1272 and the pre-tax income per share for 2007
      is $0.2118 per share on a fully-diluted basis, representing, in each case,
      a 40%
      shortfall, the escrow agent shall deliver to the Company for cancellation
      200,000 shares with respect to each year and the remaining 300,000 shall be
      returned to Skywide with respect to each year.





**Critical
      Accounting Policies and Estimates**




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




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




33


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




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





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





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




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





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





The
      government of the PRC imposes significant exchange restrictions on fund
      transfers out of the PRC that are not related to business operations. These
      restrictions have not had a material impact on our operations because we have
      not previously engaged in any significant transactions that are subject to
      the
      restrictions.


Stock-Based
      Compensation: We may grant stock options to employees and stock options or
      warrants to non-employees in non-capital raising transactions for services
      and
      for financing costs.





We
      have
      adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R,
“Accounting for Stock-Based Compensation,” which establishes a fair value method
      of accounting for stock-based compensation plans. In accordance with SFAS No.
      123R, the cost of stock options and warrants issued to employees and
      non-employees is measured at the grant date based on the fair value. The fair
      value is determined using the Black-Scholes option pricing model. The resulting
      amount is charged to expense on the straight-line basis over the period in
      which
      the Company expects to receive benefit, which is generally the vesting period.





34


**New
      Accounting Pronouncements**





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





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





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





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





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





35


In
      March
      2006, the FASB issued Statement No. 156, "Accounting for Servicing of Financial
      Assets", an amendment of FASB Statement No. 140, "Accounting for Transfers
      and
      Servicing of Financial Assets and Extinguishments of Liabilities." This
      Statement amends Statement No. 140 with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. Management does not
      anticipate this Statement will impact the Company’s consolidated financial
      position or consolidated results of operations and cash flows.





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a
      framework for measuring fair value, and expands disclosures about fair value
      measurements. SFAS 157 is effective as of the beginning of the first fiscal
      year
      that begins after November 15, 2007. As such, the Company is required to adopt
      these provisions at the beginning of the fiscal year ended December 31, 2008.
      The Company is currently evaluating the impact of SFAS 157 on its consolidated
      financial statements.





In
      September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans,” which amended several other
      FASB Statements. SFAS 158 requires recognition in the balance sheet of the
      funded status of defined benefit pension and other postretirement benefit plans,
      and the recognition in other comprehensive income of unrecognized gains or
      losses and prior service costs or credits arising during the period.
      Additionally, SFAS 158 requires the measurement date for plan assets and
      liabilities to coincide with sponsor’s year-end. The Company has adopted a
      defined contribution plan as required in the PRC, and, accordingly we do not
      believe that the adoption of SFAS 158 will have any impact on us.





The
      FASB
      issued FASB Interpretation No.(“FIN”) 48, “Accounting for Uncertainty in Income
      Taxes,” in July 2006 .This interpretation establishes new standards for the
      financial statement recognition, measurement and disclosure of uncertain tax
      positions taken or expected to be taken in income tax returns. Then new rules
      will be effective for Sinoenergy in the first quarter of 2008. We continue
      to
      evaluate the impact of this interpretation, and do not anticipate its adoption
      will have a material effect on our financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108,
“Considering the Effects of Prior Year Misstatements when quantifying
      misstatements in Current Year Financial Statements,” which eliminated the
      diversity in practice surrounding the quantification and evaluation of financial
      statement errors. The guidance outlined in SAB 108 is effective for Sinoenergy
      and is consistent with our historical practices for assessing such matters
      when
      circumstances have required such an evaluation. Accordingly, we do not believe
      that adoption of SAB 108 will have any impact on us.





In
      February 2007, the FASB issued SFAX 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities-Including an Amendment of SFAS 115,” which
      allows for the option to measure financial instruments and certain other items
      at fair value. Unrealized gains and losses on items for which the fair value
      option has been elected are reported in earnings. We do not presently have
      any
      financial assets or liabilities that we would elect to measure at fair value,
      and therefore we expect this standard will have no impact on our financial
      statements.





**ITEM
      7. FINANCIAL STATEMENTS**





The
      financial statements begin on Page F-1.




**ITEM
      8. CHANGES IN AND DISAGEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





None





36


**ITEM
      8A. CONTROLS AND PROCEDURES**





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





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





**ITEM
      8B. OTHER INFORMATION**





None





**PART** **III** ****





**ITEM
      9.** **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(a)
      OF THE EXCHANGE ACT**





**Directors
      and Executive Officers**





The
      following table sets forth certain information with respect to our directors
      and
      executive officers.





Name
            Age
            PositionBo
                Huang
            36
            Chief
                executive officer and directorTianzhou
                Deng
            50
            Chairman
                and directorQiong
                (Laby) Wu
            31
            Chief
                financial officerYanying
                Liu
            41
            SecretaryRobert
                I. Adler
            71
            DirectorRenjie
                Lu
            71
            DirectorGreg
                Marcinkowski
            45
            DirectorBaoheng
                Shi
            68
            Director





Bo
      Huang
      has been our chief executive officer and a director since the completion of
      the
      reverse acquisition in June 2006. He has been chief executive officer and
      chairman of Sinogas since its organization in 2005. He and Mr. Deng are the
      founders of Sinogas. He was president of Beijing Tricycle Technology Development
      Co., Ltd , a company engaged in the development of natural gas conversion kits
      from 2003 to 2005, and vice president of Chengchen Group, an investment and
      trading company from 1997 to 2003. Mr. Huang graduated from Renmin University
      of
      China in Beijing in 1993 with a bachelor’s degree in international finance.





Tianzhou
      Deng has been our chairman and a director since the completion of the reverse
      acquisition in June 2006. He is also a founder of Sinogas. He has been the
      chief
      executive officer and chairman of Beijing Sinogas Co., Ltd ., a company engaged
      in research and development with respect to CNG stations from 2001 to 2005,
      chairman of Shanghai CNPC Group Co., Ltd., an investment and trading company
      from 2003 to 2005, president and director of Beijing Tricycle Technology
      Development Co., Ltd., a company engaged in the development of natural gas
      conversion kits from 1999 to 2001, president and director of Natural Gas Vehicle
      Development Center, from 1997 to 1999. Mr. Deng graduated from University of
      Petroleum, China in 1982 with a chemical bachelor degree, and received a master
      of management degree from China Science & Technology University. Mr. Deng
      holds a senior engineer certificate with professor rank issued by the Chinese
      government. Mr. Deng is recognized as a leader in the CNG/LPG industry in China.





37


Laby
      Wu
      has been our chief financial officer since June 2006. Ms. Wu was a senior
      auditor with the accounting firm of Ernst & Young Hua Ming Accounting Firm
      from February 2004 until June 2006. From 2003 until 2004, Ms. Wu was a
      consultant in the accounting and tax planning department of the accounting
      and
      tax consulting firm of HLB-Beijing Yongtuo CPAs. From 2001 until 2003, Ms.
      Wu
      was an auditor with HLB - Yongtuo Certified Public Accountants Co., Ltd., and
      from 1998 until 2001, Ms. Wu was an administrative manager and office manager
      for the manufacturing firm of Trend Ceramic Group Co., Ltd. Ms. Wu, a certified
      public accountant, received her bachelor’s degree in material science and
      engineering from Ji Nan University in China, her bachelor degree in accounting
      and economics from Deakin University in Australia, and her master degree in
      professional accounting from Deakin University.





Yanging
      Liu has been our secretary since June 2006, and she held a similar position
      with
      Sinogas since 2004. Ms. Liu is not considered one of our executive officers.
      In
      addition, Ms. Liu serves as a business development manager. From 1999 until
      2004, Ms. Liu was manager of business development and finance for Beijing
      Sanhuan Technology Development Co., Ltd. Ms. Liu received her bachelor degree
      in
      management from the University of Jianghan.





Robert
      I.
      Adler is a private investor. During the past five years, Mr. Adler has been
      an
      investment adviser with UBS Financial Services and most recently he taught
      financial English for a semester in Shanghai University of Finance and
      Economics. Mr. Adler’s prior experience includes terms as a managing director
      for ING Furman Selz Asset Management, vice president and senior investment
      officer of BHF Securities Corp and DG Bank, New York Branch and vice president
      of Kuhn, Loeb & Co. Mr. Adler obtained a B.A. degree from Swarthmore College
      and studied at New York University School of Business Administration. Mr. Adler
      is a member of Institute of Chartered Financial Analysts. Mr. Adler is also
      a
      director of China Medicine Corporation, a company that markets and distributes
      medicine products in the PRC.





Renjie
      Lu
      has more than 40 years of working experience in energy industry in China. As
      an
      industry veteran, he currently is a senior member of Advisory Council Committee
      of Shengli Administration Bureau, SINOPEC (China Petroleum & Chemical Corp,
      a NYSE-listed company). Mr. Lu has been chief executive officer and director
      of
      Shengli Administration Bureau, SINOPEC from 1989 to 1996, where he managed
      about
      500,000 employees; he was chief executive officer and director of Jianghan
      Administration Bureau, SINOPEC from 1987 to 1989; and executive vice president
      of Zhongyuan Exploration Bureau, SINOPEC from 1975 to 1987. Mr. Lu graduated
      from University of Petroleum, China in 1963 with a BSc.




Greg
      Marcinkowski has been a vice president of operations at WorldStrides since
      2000.
      WorldStrides is a U.S. provider of student educational and performing arts
      tours
      in a variety of programs and destinations throughout the world. From 1999 to
      2000, Mr. Marcinkowski was the vice president of purchasing at Solo Cup
      Corporation, which is a manufacturer of packaging products for retail food
      industries. Mr. Marcinkowski has a MBA and a BSc in mechanical engineering
      from
      Northwestern University.





Baoheng
      Shi is a pioneer and a top scientist/researcher in Chinese clean energy area.
      Mr. Shi is professor of Beijing University, University of Petroleum, China,
      and
      China Geology University. He is deputy director of natural resource, China
      National Science & Technology Development Committee. Since 1993, Mr. Shi has
      initiated natural gas vehicle usage in China, and is recognized as a pioneer
      in
      the industry in China. He published “Natural Gas Vehicle Development” in 1999
      and “Technology of Natural Gas Vehicle” in 2000. Mr. Shi has been director of
      New Technology Development Center, China National Petroleum Corp, a NYSE-listed
      company from 1993 to 2000; president of China National Petroleum’s Science &
Technology Bureau from 1978 to 1993. Mr. Shi has a B.Sc. from Beijing
      University.




Our
      directors are elected for a term of one year and until their successors are
      elected and qualified.





38


**Committees**





Our
      business, property and affairs are managed by or under the direction of the
      board of directors. Members of the board are kept informed of our business
      through discussion with the chief executive and financial officers and other
      officers, by reviewing materials provided to them and by participating at
      meetings of the board and its committees.





Since
      July 28, 2006, when our independent directors were elected, our board of
      directors has had two committees - the audit committee and the compensation
      committee. The audit committee is comprised of Robert I. Adler, Greg
      Marcinkowski, Renjie Lu, Baoheng Shi, with Mr. Adler as chairman. The
      compensation committee is comprised of Renjie Lu, Robert I. Adler, Greg
      Marcinkowski, Renjie Lu, Baoheng Shi and Tianzhou Deng, with Mr. Lu as chairman.
      Our 2006 long-term incentive plan is administered by a sub-committee of the
      compensation committee consisting of Renjie Lu, Robert I. Adler, Greg
      Marcinkowski, Renjie Lu and Baoheng Shi, with Mr. Lu as chairman.





Our
      audit
      committee will be involved in discussions with our independent auditor with
      respect to the scope and results of our year-end audit, our quarterly results
      of
      operations, our internal accounting controls and the professional services
      furnished by the independent auditor. Our board of directors has adopted a
      written charter for the audit committee which the audit committee reviews and
      reassesses for adequacy on an annual basis.


The
      compensation committee serves as the stock option committee for our stock option
      plan, and it reviews and approves any employment agreements with management
      and
      changes in compensation for our executive officers.





**Section
      16(a) Compliance**





Section
      16(a) of the Securities Exchange Act of 1934, requires our directors, executive
      officers and persons who own more than 10% of our common stock to file with
      the
      SEC initial reports of ownership and reports of changes in ownership of common
      stock and other of our equity securities. During the calendar year ended
      December 31, 2006, the following officers, directors and 10% stockholders were
      late in their filings: Mr. Huang, Mr. Deng and Skywide were seven days late
      in
      filing a Form 3, Ms. Wu was 44 days late in filing a Form 3, and Mr.
      Marcinkowski was 45 days late in filing a Form 3. Mr. Lu and Mr. Shi have not
      filed Form 3s.





**ITEM
      10. EXECUTIVE COMPENSATION**





**Directors’
      Compensation**





Each
      independent director receives an annual directors’ fee of $12,000. In addition,
      pursuant to the 2006 long-term incentive plan, each newly-elected independent
      director received at the time of his or her election, a five-year option to
      purchase 30,000 shares of common stock at fair market value, which was $0.65
      per
      share, on the date of his or her election. In addition, the plan provides for
      the annual grant to each independent director of an option to purchase 5,000
      shares of common stock on first trading day in April of each calendar year
      at
      market price, subject to stockholder approval, commencing in 2007.





**Executive
      Officers’ Compensation**





Prior
      to
      completion of the reverse acquisition in June 2006, we did not pay any
      compensation to any executive officers. The following table is the compensation
      to our chief executive officer and chief financial officer during 2006. No
      officer received compensation of $100,000 or more.





39


Name
                and Position
            
            Salary
            
            Other
                CompensationBo
                Huang, chief executive officer
            
            $
            12,000
            
            
            -0-Qiong
                Wu, chief financial Officer
            
            
            16,000
            
            
            -0-





**Employment
      Agreements**





We
      have
      no employment agreements with any of our executive officers, and none of our
      executive officers have any severance arrangements.





**2006
      Long-Term Incentive Plan**





In
      2006,
      we adopted the 2006 long-term incentive plan covering 2,000,000 shares of common
      stock. The plan provides for the grant of incentive and non-qualified options,
      stock grants, stock appreciation rights and other equity-based incentives to
      employees, including officers, and consultants. The 2006 Plan is to be
      administered by a committee of not less than two directors each of whom is
      to be
      an independent director. In the absence of a committee, the plan is administered
      by the board of directors. Independent directors are not eligible for
      discretionary options. However, each newly elected independent director receives
      at the time of his election, a five-year option to purchase 30,000 shares of
      common stock at the market price on the date of his or her election. In
      addition, the plan provides for the annual grant of an option to purchase 5,000
      shares of common stock on April 1st of each year, commencing April 1, 2007.
      In
      July 2006, in connection with their election as directors, we granted options
      to
      purchase 30,000 shares of common stock at an exercise price of $0.65 per share
      to each of Robert I. Adler, Renjie Lu, Greg Marcinkowsky, and Baoheng Shi.
      No
      other options were granted under the plan.





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





The
      following table provides information as to shares of common stock beneficially
      owned as of March 31, 2007 by:


· each
      director;


· each
      officer named in the summary compensation table;


· each
      person owning of record or known by us, based on information provided to us
      by
      the persons named below, to own beneficially at least 5% of our common stock;
      and


· all
      directors and executive officers as a group.





Name
            
            Shares
                of Common Stock Beneficially Owned
            
            PercentageTianzhou
                Deng
              45
                Jinghua Road
              Qingdao,
                Shandong, China
            
            
            6,396,923.5
            
            
            29.9
            %Bo
                Huang
              45
                Jinghua Road
              Qingdao,
                Shandong, China
            
            
            6,396,923.5
            
            
            29.9
            %Wentao
                Yang
              Eastpride
                Capital Limited
              234-5149
                Country Hills Blvd NW, Suite 429
              Calgary,
                Alberta, Canada T3A 5K8
            
            
            1,421,538
            
            
            6.7
            %Robert
                I. Adler
            
            
            15,000
            
            
            *Greg
                Marcinkowski
            
            
            15,000
            
            
            *Renjie
                Lu
            
            
            15,000
            
            
            *Baohend
                Shi
            
            
            15,000
            
            
            *All
                officers and directors as a group (two individuals beneficially owning
                stock)
            
            
            12,853,847
            
            
            60.0
            %




*
            Less
                than 1%.





40


Except
      as
      otherwise indicated each person has the sole power to vote and dispose of all
      shares of common stock listed opposite his name. Each person is deemed to own
      beneficially shares of common stock which are issuable upon exercise or warrants
      or options or upon conversion of convertible securities if they are exercisable
      or convertible within 60 days of March 31, 2007.





Mr.
      Deng
      and Mr. Huang each own a 50% interest in Skywide Capital Management Limited
      (“Skywide”), which owned 12,793,847 shares of commons stock. Thus Mr. Deng and
      Mr. Huang are deemed to beneficially own 50% of the shares owned by Skywide.
      However, as the sole owners of Skywide, they have joint voting and dispositive
      power with respect to the shares owned by Skywide.





The
      shares beneficially owned by Wentao Yang are held of record by Eastpride Capital
      Limited. Mr. Yand has the sole voting and dispositive power with respect to
      securities owned by Eastpride.





The
      shares beneficially owned by Mr. Adler, Mr. Marcinkowski, Mr. Lu and Mr. Shi
      represent shares issuable upon exercise of options held by each of them which
      are currently exercisable.





See
“Item
      5. Market for Common Equity and Related Stockholder Matters” for information
      relating to our equity compensation plans.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**





**Certain
      Relationships and Related Transactions**





From
      the
      time of our organization until Sinoenergy Holding acquired Sinogas in November
      2005, Sinogas principal stockholder was Beijing Sanhuan Technology Development
      Co., Ltd., which was then owned by Bo Huang and Tianzhou Deng. Mr. Huang and
      Mr.
      Deng have advised us that they no longer have any direct or indirect ownership
      or, and are not directors of, Beijing Sanhuan except that Mr. Bo Huang is still
      the legal representative of Beijing Sanhuan as at December 31, 2006. During
      2005, Sinogas signed an agreement to acquire the land use right for the land
      on
      which Sinogas’ offices and manufacturing facilities are located for $12.3
      million, of which $5.0 million was paid during 2005 and $4.1 million was paid
      in
      2006. The balance due
      will
      be paid when Sinogas obtains final approval from the local government for the
      transfer of the land use right into our name. Upon government approval, the
      land
      use right will have a term of 50 years from the date of approval.





In
      our
      agreement with the investors in the June 2006 private placement, we agreed
      that
      we would not pay approximately $3.2 million until the rights are sold and we
      would not pay the balance except that we may apply up to 50% of net income
      to
      make such payments. This restriction terminates after the investors have sold
      all of the shares of common stock issued or issuable upon conversion or exercise
      of the securities issued in the June 2006 private placement.





We
      have
      an agreement with Beijing Sanhuan pursuant to which Beijing Sanhuan
      granted us the right to use Beijing Sanhuan’s technology
      and software relating
      to the integration,
      installation and maintenance of
      CNG
      station systems. Under th is agreement,
      we will pay Beijing
      Sanhuan for
      the technology
      and software at
      the
      rate of $12,80 0 for each
      CNG substation and $23,051 for each CNG mother station. Furthermore,
      Beijing Sanhuan will charge the Company $64 per hour for engineers provided
      by
      Beijing Sanhuan. ****





41


In
      August
      and December, 2006, we established two new subsidiaries, Wuhan Sinoenergy and
      Pingdingshan Sinoenergy, with Beijing Sanhuan serving as a trustee for these
      two
      subsidiaries, for which we will pay Beijing Sanhuan a fee of $2,561.





During
      2005, we made purchases from Beijing Sanhuan in the amount of
      $31,000.





At
      June
      30, 2006, we owned a 55% interest in our subsidiary, Yuhan, and the other 45%
      was owned by Kangtai and one individual. Yuhan was set up by Sinogas and Kangtai
      on May 25, 2005. In connection with Yuhan’s organization, Kangtai transferred
      equipment to Yuhan as part of its investment in Yuhan, Kangtai transferred
      certain contracts to Yuhan, and Yuhan assumed the manufacturing obligations
      under these contracts and purchased the related inventories from Kangtai at
      fair
      market value. Kangtai purchased the manufactured products from Yuhan at fair
      market value and sold the products to the end user. The sales of these products
      to Kangtai amounted to $1,592,886 for 2006 and $979,000 for 2005. Because these
      transactions relate to sales to third parties through Kangtai, we treat the
      receivable from those sales as a third-party receivable. In August 2006, we
      entered into an agreement to purchase the 45% minority interest in Yuhan for
      $1,500,000. As of March 31, 2007, we have purchased a 35% interest in Yuhan,
      bringing our equity in Yuhan to 90%. As March 31, 2007, we had paid **$** 503,000 and
      owed $997,000.  We have the right to acquire the remaining 10% interest in
      Yuhan during the first six months of 2008 for $640,000.





Kangtai,
      the predecessor of Yuhan, rented manufacturing facilities from us at a rental
      of
      approximately $1.1 million for the period ended May 2005. At December 31, 2006,
      the outstanding rental receivable was approximately $875,000. In March 23,
      2007,
      Kangtai paid another $384,187 for the outstanding rental fee.





We
      believe that all transactions with Beijing Sanhuan and Kangtai were at prices
      and on terms no less favorable to us that would be available from non-affiliated
      third parties.





On
      June
      2, 2006, we entered into an exchange agreement pursuant to which we acquired
      all
      of the equity of Sinoenergy which owned all of the equity of Sinogas. Pursuant
      to the exchange agreement, we issued 14,215,385 shares of common stock to the
      owners of Sinoenergy - Skywide, to which we issued 12,793,847 shares of common
      stock, and Eastpride, to which we issued 1,421,538 shares of common
      stock.





On
      June
      2, 2006, a pursuant to a stock redemption agreement with our principal
      stockholders, who were the principal stockholders of Franklyn before the reverse
      acquisition, we purchased a total of 3,305,000 shares of common stock for a
      purchase price of $213,525, which was paid from the proceeds of the notes,
      stock
      and warrants. The following table sets forth the sellers, the number of shares
      purchased and the purchase price payable to each seller:





Name
            Number
                of Shares
            Purchase
                PriceFrank
                L. Kramer
            1,000,000
            $
                62,600Deborah
                Salerno
            1,000,000
            62,600John
                P. O’Shea
            1,000,000
            62,600Lynn
                Suave
            150,000
            9,690Mark
                Lubchenco
            100,000
            6,465Gary
                S. Joiner
            35,000
            2,270Marika
                Xirouhakis
            20,000
            7,3003,305,000
            $213,525





42


In
      connection with the private placement, the IRA f/b/o John P. O’Shea also
      purchased for $200,000, a 6% convertible note in principal amount of $200,000,
      21,086 shares of common stock, and warrants to purchase 342,857 shares of common
      stock at $0.85 per share, 342,857 shares of common stock at $1.20 per share,
      and
      342,857 shares of common stock at $1.75 per share.





We
      agreed
      to include in this registration statement the shares of common stock held by
      the
      Company’s remaining stockholders.





**Director
      Independence**





Four
      of
      our directors, Robert I. Adler, Greg Marcinkowski, Renjie Lu, Baoheng Shi,
      are
      independent directors, using the Nasdaq definition of independence. These four
      directors comprise the audit committee and the stock option subcommittee of
      the
      compensation committee they, together with Mr. Tianzhou Deng, our chairman,
      comprise the compensation committee. Mr. Deng is not an independent
      director.





**ITEM
      13. EXHIBITS**





2.1
            Exchange
                Agreement dated as of June 2, 2006, among the Registrant and the
                former
                stockholders of Sinoenergy13.1
            Restated
                articles of incorporation23.2
            By-laws33.3
            Certificate
                of designation for the series A preferred stock54.1
            Form
                of convertible note issued in June 2006 private placement14.2
            Form
                of “A” warrants issued to investors in June 2006 private
                placement14.3
            Form
                of “B” warrants issued to investors in the June 2006 private
                placement14.4
            Form
                of “C” warrants issued to investors in the June 2006 private
                placement110.1
            Securities
                purchase agreement dated June 2, 2006, between the Company and the
                investors in the June 2006 private placement110.2
            Agreement
                dated July 6, 2006, by and among the Company,Barron
                Partners LP**,**the
                other investors named in Schedule A to the securities
                purchase agreement dated June 2, 2006,and
                IRA FBO John P. O’Shea, Pershing LLC as Custodian410.3
            Registration
                rights agreement dated June 2, 2006, between the Registrant and the
                investors in the June 2006 private placement110.4
            Registration
                rights provisions pursuant to the stock exchange agreement110.5
            Agreement
                with former holders of the Registrant’s common stock110.6
            2006
                Long-term incentive plan110.7
            Agreement
                dated June 6, 2006, among Sinoenergy Holding Limited, its wholly-owned
                subsidiary, Qingdao Sinogas General Machinery Limited Corporation,
                Wuhan
                Fukang Automotive Cleaning Energy Company and Wuhan Yixiang Industry
                Trade
                Company (English translation)610.8
            Agreement
                between Qingdao Sinogas General Machinery Co. Ltd. and Beijing Sanhuan
                Technology Development Co. Ltd. (English Translation)610.9
            Agreement
                dated July , 2006, among Sinoenergy Holding Limited, Qingdao Kangtai
                Machinery Equipment Manufacture Co. Limited and Guili Shi (English
                translation)610.10
            Agreement,
                dated March 16, 2007, by and among Sinoenergy Corporation, the June
                2006
                Private Placement Investors and Skywide Capital Management
                Limited710.11
            Agreement
                dated March 26, 2007, between Beijing Sinogas Sanhuan Technology
                Development Co., Ltd. and Qingdao Sinogas General Machinery Limited
                Corporation (English translation)2




43


10.12
            Agreement
                dated January 26, 2007, among People’s Government of Xuancheng City, Anhui
                Province, China New Energy Development Investment Company Limited
                and the
                Registrant (English translation)210.13
            Agreement
                dated February 1, 2007, among People’s Government of Huangmei County,
                Hubei Province, China New Energy Development Investment Company Limited
                and the Registrant (English translation)221.1
            List
                of Subsidiaries231.1
            Certification
                of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.231.2
            Certification
                of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.232.2
            Certification
                of chief executive officer and chief financial officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of 2002.2





1
            Filed
                as an exhibit to the Company’s current report on Form 8-K which was filed
                with the Commission on June 15, 2006 and incorporated herein by
                reference.


2
            Filed
                herewith


3
            Filed
                as an exhibit to the General Form for Registration of Securities
                of Small
                Business Issuers on Form 10-SB which was filed with the Commission
                on
                March 27, 2000


4
            Filed
                as an exhibit to the Company’s current report on Form 8-K/A which was
                filed with the Commission on July 31, 2006 and incorporated herein
                by
                reference.


5
            Filed
                as an exhibit to the Company’s Form 8-K report which was with the
                Commission on October 4, 2006 and incorporated herein by
                reference.


6
            Filed
                as an exhibit to the Company’s quarterly report on Form 10-QSB for the
                quarter ended June 30, 2006, and incorporated herein by
                reference.


7
            Filed
                as an exhibit to the Company’s Form 8-K report which was filed with the
                Commission on March 21, 2007, and incorporated herein by
                reference.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Our
      financial services for the year ended December 31, 2005 were certified by
      Rotenberg and Co., LLP (“Rotenberg”). Rotenberg also reviewed our unaudited
      financial statements for the three quarters of 2006.





We
      were
      billed by Rotenberg during 2006 and 2005 as follows:




Description
                of services
            
            2006
            
            2005Audit
                fees
            
            
            50,000
            
            
            135,000Audit
                related fees
            
            
            29,000
            
            
            -0-Tax
                fees
            
            
            -0-
            
            
            -0-All
                other fees
            
            
            -0-
            
            
            -0-79,000
            
            
            135,000




On
      December 11, 2006, we engaged Schwartz Levitsky Feldman LLP (“Schwartz
      Levitsky”) as our registered independent accounting firm.





44


We
      were
      billed by Schwartz Levitsky during 2006 as follows:




Description
                of services
            
            2006Audit
                fees
            
            
            78,000Audit
                related fees
            
            
            -0-Tax
                fees
            
            
            -0-All
                other fees
            
            
            -0-78,000





*Audit
      fees.* Audit
      fees represent fees for professional services performed by Rotenberg and
      Schwartz Levitswky for the audit of our annual financial statements and the
      review of our quarterly financial statements, as well as services that are
      normally provided in connection with statutory and regulatory filings or
      engagements. **





*Audit-related
      fees.* Audit-related
      fees represent fees for audit related services performed by our independent
      auditors that are reasonably related to the performance of the audit or review
      of our financial statements. In 2006, Rotenberg billed us $29,000 for services
      related to our SB-2 registration statement and advice relating to the PRC tax
      policy totaled $29,000 in connection with their services relating to the
      registration statement.





*Tax
      Fees.* Tax
      fees
      represent fees for tax compliance services performed by our independent auditor.
      Neither Rotenberg nor Schwartz Levitsky performed any tax compliance
      services.





*All
      other fees.* Neither
      Rotenberg nor Schwartz Levitsky performed any services other than the services
      described above.





**Policy
      on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
      of
      Independent****Auditors**




The
      audit
      committee’s policy is to pre-approve all audit and permissible non-audit
      services provided by the independent registered public accounting firm. These
      services may include audit services, audit-related services, tax services and
      other services. The independent registered public accounting firm and management
      are required to periodically report to the audit committee regarding the extent
      of services provided by the independent registered public accounting firm in
      accordance with this pre-approval, and the fees for the services performed
      to
      date. All services were pre-approved by the Audit Committee.





45


**SIGNATURES**





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


SINOENERGY
                CORPORATION.
              (Registrant)Dated:
              April 9, 2007
            
            s/
              Bo
              HuangBo
              Huang, Chief Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      report has been signed by the following persons on behalf of the registrant
      and
      in the capacities and on the dates indicated. Each person whose signature
      appears below hereby authorizes Bo Huang and Qiong (Laby) Wu or either of them
      acting in the absence of the other as his or her true and lawful
      attorney-in-fact and agent, with full power of substitution and resubstitution
      for him or her and in his or her name, place and stead, in any and all
      capacities to sign any and all amendments to this report, and to file the same,
      with all exhibits thereto and other documents in connection therewith, with
      the
      Securities and Exchange Commission.





Signature
            
            Title
            
            Dates/
                Bo Huang
            
            Chief
                Executive Officer
            
            April
                8, 2007Bo
                Huang
            
            and
                Director(Principal
                Executive Officer)s/
                Qiong (Laby) Wu
            
            Chief
                Financial Officer
            
            April
                9, 2007Qiong
                (Laby) Wu
            
            (Principal
                Financial and Accounting Officer)s/
                Tianzhou Deng
            
            Director
            
            April
                9, 2007Tianzhou
                Dengs/
                Robert I. Adler
            
            Director
            
            April
                10, 2007Robert
                I. Adlers/
                Renjie Lu
            
            Director
            
            April
                9, 2007Renjie
                Lus/Greg
                Marcinkowski
            
            Director
            
            April
                7, 2007Greg
                Marcinkowskis/Baoheng
                Shi
            
            Director
            
            April
                9, 2007Baoheng
                Shi





46





**SINOENERGY
      CORPORATION AND SUBSIDIAR** **IES**





**Consolidated
      Financial Statements**


**Year
      Ended December 31, 2006 and 2005**





**Index
      to Financial Statements**





PageReports
                of Independent Registered Public Accounting Firms
            F-2
                to F-3Item
                1. Financial StatementsConsolidated
                Balance sheet as of December 31, 2006
            F-4Consolidated
                Statements of Operations for the Years Ended December 31, 2006 and
                2005
            F-5Consolidated
                Statements of Changes in Stockholders’ Equity for the Years Ended December
                31, 2006 and 2005
            F-6Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006 and
                2005
            F-7Notes
                to the Consolidated Financial Statements
            F-8
                to F-38





F-1





REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors and Stockholders of


Sinoenergy
      Corporation





We
      have
      audited the accompanying consolidated balance sheet of Sinoenergy Corporation
      as
      at December 31, 2006 and the related consolidated statements of operations,
      cash
      flows and changes in stockholders’ equity for the year ended December 31, 2006.
      These consolidated financial statements are the responsibility of the management
      of Sinoenergy Corporation. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audit . The
      consolidated statements of operations, cash flows and changes in stockholders’
equity for the year ended December 31, 2005 were audited by other auditors,
      whose report dated March 21, 2006 expressed an opinion without reservation.





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. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall 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 Sinoenergy Corporation
      as of
      December 31, 2006 and the results of its operations and its cash flows for
      the
      year ended December 31, 2006 in conformity with United States generally accepted
      accounting.





As
      described in Note 8, Sinoenergy Corporation has not yet obtained final approval
      from the relevant authorities for the acquisition of land use rights to the
      property, which it occupies. However, Sinoenergy Corporation has used all
      facilities on the land and has reflected the full costs according to the
      purchase agreement as long term assets on the balance sheet described as
“Property and equipment - buildings” and “Intangible assets - land use rights”,
      with the expectation that approval will be obtained within the next fiscal
      year.
      Sinoenergy Corporation may be at risk as more fully set out in the note
      mentioned above should the application be rejected. The accompanying
      consolidated financial statements do not include any adjustments that might
      result should its application not be approved.






**“SCHWARTZ
                LEVITSKY FELDMAN LLP”**Toronto, Ontario, Canada
            Chartered
                AccountantsMarch 6, 2007
            Licensed
                Public
                Accountants





F-2


REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors and Stockholders of


Sinoenergy
      Corporation and Subsidiaries


(formerly
      known as Franklyn Resources III, Inc.)





We
      have
      audited the accompanying revised consolidated statements of operations, changes
      in stockholders’ equity, and cash flows of Sinoenergy Corporation and
      Subsidiaries (formerly known as Franklyn Resources III, Inc.) for the year
      ended
      December 31, 2005 (all expressed in United States dollars). These revised
      consolidated financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these revised
      consolidated financial statements based on our audit.





We
      conducted our audit in accordance with The Public Company Accounting Oversight
      Board Standards. Those standards require that we plan and perform the audits
      to
      obtain reasonable assurance about whether the financial statements are free
      of
      material misstatement. An audit includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements. An audit
      also includes assessing the accounting principles used and significant estimates
      made by management, as well as evaluating the overall financial statement
      presentation. We believe that our audit provides a reasonable basis for our
      opinion.





In
      our
      opinion, the revised consolidated financial statements referred to above present
      fairly, in all material respects, the results of its operations and cash flows
      of Sinoenergy Corporation and Subsidiaries (formerly known as Franklyn Resources
      III, Inc.) for the year ended December 31, 2005 in conformity with accounting
      principles generally accepted in the United States of America.





As
      described more fully in Note 1, the consolidated financial statements have
      been
      restated to revise the presentation of shares of Sinoenergy Corporation and
      Subsidiaries (formerly known as Franklyn Resources III, Inc.) in connection
      with
      the recapitalization.








/s/
      Rotenberg & Co. LLP





Rotenberg
      & Co., LLP





Rochester,
      New York


March
      21,
      2006


(Except
      for Note 1, to which the date is October 13, 2006)





F-3





**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Balance Sheet**


**December
      31, 2006**


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





**ASSETS**
            
            Note(s)CURRENT
                ASSETSCash
            
            
            
            
            
            588Accounts
                receivable(net)
            
            
            3-Related
                party
            
            
            
            
            
            594-Third
                party
            
            
            
            
            
            3,777Other
                receivables
            
            
            4-Related
                party
            
            
            
            
            
            1,220-Third
                party
            
            
            
            
            
            1,176Deposits
                and prepayments-Third party
            
            
            5
            
            
            3,187Deferred
                expenses
            
            
            
            
            
            4Inventories
            
            
            6
            
            
            937TOTAL
                CURRENT ASSETS
            
            
            
            
            
            11,483LONG
                TERM ASSETSProperty,
                plant and equipment (net)
            
            
            7
            
            
            3,556Intangible
                assets
            
            
            8
            
            
            12,114Goodwill
            
            
            9
            
            
            676Long
                term deferred tax asset
            
            
            
            
            
            4TOTAL
                ASSETS
            
            
            
            
            
            27,833**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESShort
                term bank loan
            
            
            10
            
            
            3,160Accounts
                payable-
                Related party
            
            
            
            
            
            452-
                Third party
            
            
            
            
            
            211Other
                payables
            
            
            11-
                Related party
            
            
            
            
            
            4,073-
                Third party
            
            
            
            
            
            2,359Accrued
                expenses
            
            
            
            
            
            176Warranty
                accrual
            
            
            
            
            
            40Advances
                from customers
            
            
            12
            
            
            701Income
                taxes payable
            
            
            13
            
            
            7TOTAL
                CURRENT LIABILITIES
            
            
            
            
            
            11,179Minority
                interests
            
            
            14
            
            
            614STOCKHOLDERS’
                EQUITYCommon
                stock-$.001 Par Value;
              Issued
                and Outstanding-14,636,472 shares
            
            
            18
            
            
            15Series
                A convertible preferred stock-$0.001 Par Value - 5,692,307 shares
            
            
            18
            
            
            6Additional
                paid-in capital
            
            
            18
            
            
            9,935Capital
                surplus
            
            
            
            
            
            20Statutory
                surplus reserve fund
            
            
            16
            
            
            1,140Retained
                earnings
            
            
            
            
            
            4,576Accumulated
                other comprehensive income
            
            
            
            
            
            348Total
                stockholders’ equity
            
            
            
            
            
            16,040TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            
            
            
            
            27,833Commitments
            
            
            21
            
            
            17,163




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


F-4


**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Statements of Operations**


**For
      the years ended December 31, 2006 and 2005**


**(In
      thousands of United States dollars except per-share
      information)**





Note(s)
            
            Year
                Ended December 31,2006
            
            2005NET
                REVENUE
            
            
            17
            
            
            12,393
            
            
            8,236COST
                OF REVENUE
            
            
            
            
            
            (5,909
            )
            
            (3,821
            )GROSS
                PROFIT
            
            
            
            
            
            6,484
            
            
            4,415OPERATING
                EXPENSESSelling
                expenses
            
            
            
            
            
            228
            
            
            110General
                and administrative expenses
            
            
            
            
            
            2,061
            
            
            586TOTAL
                OPERATING EXPENSES
            
            
            
            
            
            2,289
            
            
            696INCOME
                FROM OPERATIONS
            
            
            
            
            
            4,195
            
            
            3,719OTHER
                INCOME(EXPENSES)Other
                non-operating income
            
            
            
            
            
            -
            
            
            76Interest
                expense
            
            
            18
            
            
            (1,788
            )
            
            (41
            )Other
                expenses
            
            
            
            
            
            (77
            )
            
            (107
            )OTHER
                INCOME (LOSS), NET
            
            
            
            
            
            (1,865
            )
            
            (72
            )INCOME
                BEFORE INCOME TAXES
            
            
            
            
            
            2,330
            
            
            3,647Income
                tax benefit (expense)
            
            
            13
            
            
            1,120
            
            
            (1,173
            )INCOME
                BEFORE MINORITY INTEREST
            
            
            
            
            
            3,450
            
            
            2,474Minority
                interest
            
            
            
            
            
            (3
            )
            
            (14
            )NET
                INCOME
            
            
            
            
            
            3,447
            
            
            2,460Other
                comprehensive incomeForeign
                currency translation adjustment
            
            
            
            
            
            224
            
            
            124COMPREHENSIVE
                INCOME
            
            
            
            
            
            3,671
            
            
            2,584Earnings
                Per Share of Common Stock -Basic
            
            
            
            
            
            0.24
            
            
            0.17Weighted
                Average Shares of Common Stock Outstanding- Basic
            
            
            19
            
            
            14,462
            
            
            14,216Earnings
                Per Share of Common Stock -Diluted
            
            
            
            
            
            0.18
            
            
            0.17Weighted
                Average Shares of Common Stock Outstanding- Diluted
            
            
            19
            
            
            19,287
            
            
            14,216




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


F-5


**Sinoenergy
      Corporation and Subsidiaries**


**Consolidated
      Statements of Changes in Stockholders’ Equity**


**For
      the years ended December 31, 2006 and 2005**


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




Number
                of Shares
            
            Par
                Value Common Stock
            
            Par
                Value Series A Preferred
              Stock
            
            Additional
                Paid in Capital
            
            Statutory
                Surplus Re-serve Fund
            
            Accumulated
                Other Comprehensive Income
            
            Retained
                Earning
            
            Capital
                Surplus
            
            Total
                Stockholder’s equityBalance,
                December 31, 2004
            
            
            
            
            
            
            
            
            
            
            
            4,950
            
            
            
            
            
            
            
            
            (112
            )
            
            21
            
            
            4,859Net
                income for 2005
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,460
            
            
            
            
            
            2,460Adjustment
                for capital surplus
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            46
            
            
            46Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            124
            
            
            
            
            
            
            
            
            124Transfer
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            329
            
            
            
            
            
            (329
            )
            
            
            
            
            -Balance,
                December 31, 2005
            
            
            
            
            
            
            
            
            
            
            
            4,950
            
            
            329
            
            
            124
            
            
            2,019
            
            
            67
            
            
            7,489Recapitalization
                of reverse take over
            
            
            14,215,385
            
            
            14
            
            
            
            
            
            (14
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Issuance
                of common stock
            
            
            421,087
            
            
            1
            
            
            
            
            
            253
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            254Issuance
                of warrants attached to convertible notes
            
            
            
            
            
            
            
            
            
            
            
            1,343
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,343Beneficial
                premium recorded
            
            
            
            
            
            
            
            
            
            
            
            1,594
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,594Convertible
                notes converted to preferred shares A
            
            
            
            
            
            
            
            
            6
            
            
            2,092
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,098Fair
                value of stock option
            
            
            
            
            
            
            
            
            
            
            
            30
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            30Adjustment
                for capital financing expense
            
            
            
            
            
            
            
            
            
            
            
            (313
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (313
            )Adjustment
                for capital surplus and reverse
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (79
            )
            
            (47
            )
            
            (126
            )Net
                income for year 2006
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,447
            
            
            
            
            
            3,447Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            224
            
            
            
            
            
            
            
            
            224Transfer
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            811
            
            
            
            
            
            (811
            )
            
            
            
            
            -Balance,
                December 31, 2006
            
            
            14,636,472
            
            
            15
            
            
            6
            
            
            9,935
            
            
            1,140
            
            
            348
            
            
            4,576
            
            
            20
            
            
            16,040




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





F-6


**Consolidated
      Statements of Cash Flows**


**For
      the years ended December 31, 2006 and 2005**


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





Year
                Ended December 31,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            
            3,447
            
            
            2,460Amortization
                of beneficial conversion (including interest)
            
            
            1,594
            
            
            -Cost
                of stock option granted
            
            
            30
            
            
            -Minority
                interest
            
            
            3
            
            
            14Deferred
                tax (debit)/credit
            
            
            (15
            )
            
            11Depreciation
            
            
            333
            
            
            289Amortization
                of intangible assets
            
            
            291
            
            
            14Provision
                for doubtful debts
            
            
            98
            
            
            4Changes
                in operating assets and liabilities:(Increase)
                in accounts receivable
            
            
            (1,339
            )
            
            (2,181
            )(Increase)
                in other receivables, deposits and prepayments
            
            
            (1,617
            )
            
            (1,203
            )Decrease
                /(Increase ) in inventories
            
            
            888
            
            
            (1,783
            )Increase
                in accounts payable
            
            
            183
            
            
            479Increase
                in accrued expenses
            
            
            179
            
            
            23(Increase)/decrease
                in deferred expenses
            
            
            (4
            )
            
            3(Decrease)/increase
                in advances from customers
            
            
            (1,531
            )
            
            2,225Increase
                in other payables
            
            
            1,283
            
            
            1,086(Decrease)/increase
                in income tax payable
            
            
            (1,155
            )
            
            1,162Net
                cash provided by operating activities
            
            
            2,668
            
            
            2,603CASH
                FLOWS FROM INVESTING ACTIVITESPayment
                for purchase of property, plant and equipment
            
            
            (2,667
            )
            
            (134
            )Payment
                for purchase of land use right
            
            
            (4,059
            )
            
            (4,986
            )Other
                receipts from investment
            
            
            134
            
            
            -Net
                cash used in investing activities
            
            
            (6,592
            )
            
            (5,120
            )CASH
                FLOWS FROM FINANCING ACTIVITESCash
                received from bank loan
            
            
            683
            
            
            2,478Cash
                received from convertible notes
            
            
            3,301
            
            
            -Cash
                received/(paid)from other financing activities
            
            
            (28
            )
            
            328Net
                cash provided in financing activities
            
            
            3,956
            
            
            2,807Effect
                of changes in exchange rate
            
            
            224
            
            
            -Net
                increase in cash
            
            
            256
            
            
            290Cash
                at beginning of the year
            
            
            332
            
            
            42Cash
                at end of the year
            
            
            588
            
            
            332Supplementary
                Cash flow disclosure:Interest
                Paid
            
            
            195
            
            
            20Tax
                Paid
            
            
            66
            
            
            -




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


F-7





**Sinoenergy
      Corporation and Subsidiaries**


**Notes
      to the consolidated financial statements**





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





**(a)
      Recapitalization Transaction** ****





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




On
      June
      2, 2006, Sinoenergy (then known as Franklyn) entered into the following
      agreements:




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




·
            An
                agreement with Sinoenergy’s principal stockholders, who were the former
                principal stockholders of Franklyn before the reverse acquisition,
                pursuant to which the Company purchased 3,305,000 shares of common
                stock
                for $213,525 using the proceeds of the financing described
                below.




·
            In
                connection with the acquisition of Sinoenergy Holding, we entered
                into a
                securities purchase agreement, as amended on July 6, 2006 (the “Purchase
                Agreement”) with Barron Partners LP, JCAR Funds Ltd.,Ray
                Rivers, Steve Mazur and IRA f/b/o John P. O’Sheapursuant
                to which the investors purchased 6% convertible notes in the principal
                amount of $3,700,000, 390,087 shares of common stock, and warrants
                to
                purchase 6,342,858 shares of common stock at $0.85 per share, 6,342,858
                shares of common stock at $1.20 per share and 6,342,858 shares of
                common
                stock at $1.75 per share. The conversion price of the notes and the
                exercise price of the warrants are subject to adjustment. The $1.75
                warrants expired unexercised on December 31, 2006. The convertible
                notes
                were automatically converted into 5,692,307 shares of series A preferred
                stock on September 28, 2006 when the Company amended its articles
                of
                incorporation and filed a certificate of designation for the series
                A
                preferred stock. Each share of series A preferred stock is convertible
                into one share of common stock.




Under
      generally accepted accounting principles, both acquisitions described above
      are
      considered to be capital transactions in substance, rather than business
      combinations. That is, the acquisitions are equivalent, in the acquisition
      of
      Sinoenergy Holding and Sinogas, to the issuance of stock by Sinogas for the
      net monetary assets of Sinoenergy Holding, and in the Sinoenergy
      Holding acquisition, the issuance of stock by Sinoenergy Holding for the
      net monetary assets of Sinoenergy. Each transaction is accompanied by a
      recapitalization, and is accounted for as a change in capital structure.
      Accordingly, the accounting for the acquisition is identical to that resulting
      from a reverse acquisition, except that no goodwill is recorded. Under reverse
      takeover accounting, the comparative historical financial statements in the
      Sionenergy /Sinoenergy Holding acquisition of the “legal acquirer”, Sinogas, are
      those of the “accounting acquirer”. The accompanying financial statements
      reflect the recapitalization of the shareholders’ equity as if the transactions
      occurred as of the beginning of the first period presented.





F-8


On
      September 28, 2006, the Company’s articles of incorporation were amended and
      restated. The restated articles of incorporation changed the Company’s name to
      Sinoenergy Corporation and created a class of 10,000,000 shares of preferred
      stock, par value $0.001 per share, with the directors having broad powers to
      set
      the rights, preferences, privileges and limitations of one of more series of
      preferred stock, and increased the authorized common stock to 100,000,000 shares
      of common stock, par value $0.001 per share. On September 28, 2006, the Company
      also filed a certificate of designation setting forth the rights, preferences,
      privileges and limitations of the series A convertible preferred stock. As
      a
      result of the filing of the restated articles of incorporation and the
      certificate of designation for the series A preferred stock, the 6% convertible
      notes were automatically converted into an aggregate of 5,692,307 shares of
      series A preferred stock.





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





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





•
If,
      while Barron Partners owns shares of series A preferred stock, the Company
      issues common stock at a price, or options, warrants or other convertible
      securities with a conversion or exercise price less than the conversion price
      (initially $0.65 per share), with certain specified exceptions, the number
      of
      shares issuable upon conversion of one share of series A preferred stock is
      adjusted to reflect a conversion price equal to the lower price.





•
If
      the
      Company’s consolidated pre-tax income per share, on a fully-diluted basis, for
      the fiscal year ended December 31, 2006, is less than $0.212 per share, the
      conversion price shall be reduced proportionately by up to 40%. The full 40%
      adjustment will be made if pre-tax income per share on a fully-diluted basis
      is
      $0.1272 or less.





•
If
      the
      Company’s consolidated pre-tax income for the year ended December 31, 2007 is
      less than $0.353 per share on a fully-diluted basis, then the conversion price
      shall be reduced by the percentage shortfall, up to a maximum of 40%. The full
      40% adjustment will be made if pre-tax income per share on a fully-diluted
      basis
      is $0.2118 or less.





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





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





• In
      March
      2007, the Company, Skywide Capital Management Limited (“Skywide”), a
      principal stockholder of the Company, and the
      investors in the June 2006 private placement signed an agreement to eliminate
      the above mentioned ratchets. Pursuant to this agreement, the adjustment
      provisions in the certificate of designation for the series A preferred stock
      and the warrants that provide for an adjustment in the conversion or exercise
      price were eliminated and Skywide agreed to place 1,000,000 shares of common
      stock into escrow. If the Company’s consolidated pre-tax income per share, on a
      fully diluted basis, for 2006 and 2007 are less than $0.212 and $0.353 per
      share, respectively, then Skywide shall deliver to the Company for cancellation,
      such percentage up to 40% of 500,000 shares as equals the percentage shortfall
      from the $0.212 and $0.353 per share target prices.


F-9





**(b)
      History of Sinogas**





Qingdao
      Sinogas General Machinery Limited Corporation (“Sinogas”) was registered in
      Qingdao, China in October 29, 2004, as a limited liability company under the
      laws of the PRC, and the registered capital was $7.5 million, which was paid
      in
      full.





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





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





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





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





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





**(c)
      The business of Sinogas**





In
      accordance with provisions of Articles of Association and Business License,
      the
      business term of Sinogas is fifteen years, from October 29, 2004 to October
      29,
      2019.





Sinogas
      manufactures pressure containers of class 1, 2, 3 petroleum refinery equipment,
      designs and installs compressed natural gas station equipment, and compressed
      natural gas storage and transportation equipment.





F-10


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





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





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





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





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





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





**(d)
      Subsidiaries of the Company**





Sinogas
      is a wholly-owned subsidiary of Sinoenergy Holding and Sinoenergy Holding is
      a
      wholly-owned subsidiary of Sinoenergy. Sinogas and Qingdao Kangtai Machinery
      Equipment Manufacture Co. Limited (“Kangtai”), a non-affiliated party,
      established Qingdao Sinogas Yuhan Chemical Equipment Co., Ltd. (“Yuhan”), which,
      at December 31, 2006, was 90% owned by Sinogas and 10% owned by
      Kangtai.





F-11


The
      term
      of the business of Yuhan is from May 25, 2005 to April 30, 2009 and the business
      scope is to manufacture, process and install machinery facilities (not including
      special equipments and cars); as the wholesaler and retailer of steels,
      machinery and electronic products, hardware, chemical equipment (not including
      dangerous equipments).





We
      had
      previously owned a 55% interest in Yuhan. In August 2006, we entered into an
      agreement to acquire the remaining 45% for $1,500,000, with payment due
      installments. Pursuant
      to an agreement among Sinoenergy, Sinogas, Kangtai and Mr. Guili Shi, who
      purchased 25% of Yuhan’s equity from Kangtai in July 2006, Sinoenery and Sinogas
      agreed to purchase all the 45% of equities of Yuhan held by Kangtai and Mr.
      Guili Shi for total price of $1.5 million payable in three installments.





As
      of
      March 15, 2007, we have paid a total of $503,000 and owed $997,000 to Kangtai,
      and held 90% equity of Yuhan ****





In
      June
      2006, Sinoenergy, Sinogas (through Beijing Sanhuan as its trustee), Wuhan Fukang
      Automotive Cleaning Energy Company (“Wuhan Cleaning Energy”) and Wuhan Yixiang
      Industry Trade Company (“Wuhan Yixiang”), signed a cooperation agreement to
      establish Wuhan Sinoenergy Gas Company (“Wuhan Sinoenergy”) to operate CNG
      stations. Based on the agreement, the Company, through Sinoenergy and Sinogas,
      will contribute capital totaling $3,375,000 for a 90% interest, and each of
      Wuhan Clean Energy and Wuhan Yixiang will contribute $190,000 for a 5% interest
      each.





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





On
      August
      2, 2006, Wuhan Administration Bureau for Industry and Commerce issued a Business
      License to Wuhan Sinoenergy. The term of the business of Wuhan Sinoenergy is
      from August 2, 2006 to August 2, 2026 and the business scope is the manufacture
      and sale of automobile conversion kits that enable a gasoline powered automobile
      to operate on compressed natural gas and the construction and operation of
      CNG
      stations.





In
      November 2006, Sinoenergy, Sinogas (through Beijing Sanhuan as its trustee)
      Pingdingshan Jinlongma Vehicle Company (“Jinglongma”), signed a cooperation
      agreement to establish Pingdingshan Sinoenergy Gas Company (“Pingdingshan
      Sinoenergy”) to operate CNG stations. Based on the agreement, the Company,
      through Sinoenergy and Sinogas, contributed capital of $1,921,000 for a 90%
      interest during 2006, representing the Company’s capital obligation under the
      agreement, and Jinglongma agreed to contribute capital of $192,000 for a 10%
      equity.





On
      December 4, 2006, Pingdingshan Administration Bureau for Industry and Commerce
      issued a Business License to Pingdingshan Sinoenergy. The term of the business
      of Pingdingshan Sinoenergy is from December 4, 2006 to December 3, 2026, and
      the
      business scope is the manufacture and sale of automobile conversion kits that
      enable a gasoline powered automobile to operate on compressed natural gas and
      the construction and operation of CNG stations.


F-12





**2.**
            **Summary
                of Significant Accounting
                Policies**





Basis
      of Presentation





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




Use
      of
      Estimates





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





Goodwill





Goodwill
      represents the excess of purchase price of business combinations over the fair
      value of the net assets acquired and is tested for impairment at least annually
      unless business events indicate an impairment test is required. For example,
      an
      impairment test would be conducted if an asset of significant value was sold
      or
      disposed of in the cost center. The impairment test requires allocating goodwill
      and all other assets and liabilities to assigned reporting units. The fair
      value
      of each reporting unit is estimated and compared to the net book value of the
      reporting unit. If the estimated fair value of the reporting unit is less than
      the net book value, including goodwill, then the goodwill is written down to
      the
      implied fair value of the goodwill through a charge to expense. Because quoted
      market prices are not available for the Company’s reporting units, the fair
      values of the reporting units are estimated based upon several valuation
      analyses, including comparable companies, comparable transactions and premiums
      paid. The goodwill on the Company’s financial statements was a result of the
      Yuhan acquisition, and relates entirely to the pressure container reporting
      segment.





Cash
      and Cash Equivalents





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





Allowance
      for Doubtful Accounts





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





F-13


Inventories





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





Property,
      Plant and Equipment





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





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





Buildings
                and facility
            20
                yearsMachinery
                and equipment
            8
                yearsMotor
                vehicles
            10
                yearsOffice
                equipment and others
            5
                to 8 years





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





Intangible
      Assets





Intangible
      assets, representing patents and technical know-how acquired, are stated at
      cost
      less accumulated amortization and impairment losses. Amortization is calculated
      on the straight-line method over the estimated useful lives of 10 years. The
      technical know -how,
      which is acquired at the end of year 2004 is valued and amortized according
      to
      relative industry standard. The patent is acquired in May of 2005, and is
      amortized over the life of the patent.





The
      land
      use right for the land on which Sinogas’ facilities are located is an intangible
      asset. There is no private ownership of land in the PRC. All land is owned
      by
      the government and the government grants what is known as a land use right,
      which is a transferable right to use the land. The Company has a contract to
      acquire the land use right for the land on which Sinogas’ facilities are
      located, and it is reflected as an intangible asset at December 31, 2006. Land
      use right is generally granted for a period of 50 years. The Company has an
      agreement with Beijing Sanhuan, an affiliate, pursuant to which Beijing Sanhuan
      is to transfer to Sinogas the land use right relating to the land on which
      Sinogas’ facilities are located. The purchase price for the land use right is
      approximately $12.3 million. As of December 31, 2006, Sinogas has paid Beijing
      Sanhuan $9.1 million for the purchase of the land use right and the outstanding
      balance of approximately $3.2 million is reflected as a current liability in
      the
      financial statements. This balance will be paid when Sinogas obtains final
      approval from the local government for the transfer of the land use right into
      its name. Application has been made to the government authorities, and the
      Company expects that the transfer will be completed before July 2007. Upon
      government approval, the land use right will have a term of 50 years from the
      date of approval.





As
      the
      land use right has been purchased by the Company, it has been recognized as
      a
      long-term asset although, at December 31, 2006, the right had not yet been
      transferred into its name. The amount is amortized over the 50 year term of
      the
      land use right. Similarly, the buildings, although purchased, are reflected
      as
      assets of the Company, will only be transferred into the name of the Company
      when the land use right received government approval.





F-14


Impairment
      of Assets





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





Revenue
      Recognition





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





The
      Company recognizes product sales generally at the time the product is shipped.
      CNG construction and building technical consulting service revenue is recognized
      on the percentage of completion basis. The revenue is measured by reference
      to
      the proportion of construction work completed to the total estimated work
      according to the report provided by technical department of the Company,
      simultaneously, the cost is recognized based on total contracted cost and the
      completion basis. Receivables and payables are recorded accordingly. Revenue
      is
      presented net of any sales tax and value added tax.





Value
      Added and Business Taxes - The Company is subject to value added tax (“VAT”) for
      manufacturing products and business tax for services provided. The applicable
      VAT tax rate is 17% for products sold in the PRC, and the business tax rate
      is
      5% for services provided in PRC. The amount of VAT liability is determined
      by
      applying the applicable tax rate to the invoiced amount of goods sold (output
      VAT) less VAT paid on purchases made with the relevant supporting invoices
      (input VAT). VAT is collected from customers by the Company on behalf of the
      PRC
      tax authorities and is therefore not charged to the consolidated statements
      of
      operations.





Under
      the
      commercial practice of the PRC,
      we
      paid **** value added
      taxes (“VAT”) and business tax based on tax invoices issued. The
      tax
      invoices may be issued subsequent to the date on which revenue is recognized,
      and there may be a considerable delay between the date on which the revenue
      is
      recognized and the date on which the tax invoice is issued. In the event that
      the PRC tax authorities dispute the date of which revenue is recognized for
      tax
      purposes, the PRC tax office has the right to assess a penalty, which can range
      from zero to five times the amount of the taxes which are determined to be
      late
      or deficient. According to the PRC tax laws, any potential tax penalty payable
      on late or deficient payments of this tax could be between zero and five times
      the amount of the late or deficient tax payable, and will be expenses as a
      period expense if and when a determination has been made by the taxing
      authorities that a penalty is due.





Warranty
      reserves





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





At
      present, nearly all the products sold are either
      of
      non-standard pressure containers or CNG deposit and transportation container.
      Under Chinese law, all those pressure vessels being sold must be tested by
      the
      Qingdao Bureau of Quality and Technical Supervision before they can be delivered
      to the customer. As a result, once the products have passed this inspection
      process, the Company does not believe it has any material exposure under its
      warranties.





F-15


Income
      Taxes





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





The
      Company reviewed the differences between the tax basis under PRC tax laws and
      financial reporting under PRC GAAP. Temporary differences, resulting in deferred
      tax assets or liabilities have been recognized in the financial
      statement.





Foreign
      Currency Transactions





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





Fair
      Value of Financial Instruments





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





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





Minority
      Interest





The
      minority interest refers to the percentage of the equity of Yuhan owned by
      Kangtai, the percentage of equity of Wuhan Sinoenergy owned by Wuhan Cleaning
      Energy and Wuhan Yixiang, and the percentage of equity of Pingdingshan
      Sinoenergy owned by Pingdingshan Jinlongma Vehicle Company.


F-16


Stock-Based
      Compensation





The
      Company may issue stock options to employees and stock options or warrants
      to
      non-employees in non-capital raising transactions for services and for financing
      costs.





Option
                Number
            
            Weighted
                average exercise price
            
            Remaining
                contractual lifeOptions
                outstanding at December 31, 2005
            
            
            0Options
                granted during the 2006
            
            
            120,000
            
            $
            0.65
            
            
            4.5
                yearsOptions
                outstanding at December 31, 2006
            
            
            120,000Options
                exercisable at December 31, 2006
            
            
            60,000
            
            $
            0.65
            
            
            4.5
                years





In
      June
      2006, pursuant to the 2006 long-term incentive plan, each newly-elected
      independent director receives at the time of his or her election, a five-year
      option to purchase 30,000 shares of common stock at the fair market value on
      the
      date of his or her election, which was $0.65 per share. Those granted options
      will be exercised 50% 6 months after granting date, and the remaining 50% can
      be
      exercised after 24 months from the granting date. In addition, the plan provides
      for the annual grant to each independent director of an option to purchase
      5,000
      shares of common stock on first trading day in April of each calendar year,
      at
      market price, subject to stockholder approval of the plan, commencing in 2007.





The
      Company has adopted Statement of Financial Accounting Standards (“SFAS”) No.
      123R, “Accounting for Stock-Based Compensation,” which establishes a fair value
      method of accounting for stock-based compensation plans. In accordance with
      SFAS
      No. 123R, the cost of stock options and warrants issued to employees and
      non-employees is measured at the grant date based on the fair value. The fair
      value is determined using the Black-Scholes option pricing model. The resulting
      amount is charged to expense on the straight-line basis over the period in
      which
      the Company expects to receive benefit, which is generally the vesting period.





The
      fair
      value of options grant used for purposes of estimating the pro froma amounts
      summarized above is estimated on the date of grant using the Black-Scholes
      option price model with the weighted average assumptions shown in the following
      table:





2006Expected
                volatility
            
            
            50
            %Risk-free
                rate
            
            
            4.64
            %Expected
                term (years)
            
            
            3Dividend
                yield
            
            
            0.0
            %Weighted
                average fair value per share
            
            $
            0.25





Earnings
      Per Share





Basic
      earnings per share is computed by dividing the earnings for the year by the
      weighted average number of common shares outstanding for the year. Diluted
      earnings per share reflects the potential dilution of securities by including
      shares of common stock issuable upon exercise or conversion of series A
      preferred stock, stock options granted and warrants, in the weighted average
      number of common shares outstanding for a period, if dilutive.





F-17


Comprehensive
      Income and Loss





The
      Company has adopted the provisions of Statement of Financial Accounting
      Standards No.130,”Reporting Comprehensive Income” (“SFAS No.130”). SFAS No.130
      establishes standards for the reporting and display of comprehensive income,
      its
      components and accumulated balances in a full set of general purpose financial
      statements. SFAS No.130 defines comprehensive income (loss) to include all
      changes in equity except those resulting from investments by owners and
      distributions to owners, including adjustments to minimum pension liabilities,
      accumulated foreign currency translation, and unrealized gains or losses on
      marketable securities.





The
      Company’s only component of other comprehensive income (loss) is foreign
      currency translation gain of $224,000 and $124,000 for the years ended December
      31, 2006 and 2005, respectively, This amount has been recorded as a separate
      component of stockholders’ equity.





Recently
      Issued Accounting Pronouncements





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





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





In
      March
      2006, the FASB issued Statement No. 156, "Accounting for Servicing of Financial
      Assets", an amendment of FASB Statement No. 140, "Accounting for Transfers
      and
      Servicing of Financial Assets and Extinguishments of Liabilities." This
      Statement amends Statement No. 140 with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. Management does not
      anticipate this Statement will impact the Company’s consolidated financial
      position or consolidated results of operations and cash flows.





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 157, "Fair Value
      Measurements”. SFAS 157 defines fair value, establishes a framework for
      measuring fair value, and expands disclosures about fair value measurements.
      SFAS 157 is effective as of the beginning of the first fiscal year that begins
      after November 15, 2007. As such, the Company is required to adopt these
      provisions at the beginning of the fiscal year ended December 31, 2008. The
      Company is currently evaluating the impact of SFAS 157 on its consolidated
      financial statements.





F-18


In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans,” which amended several other FASB Statements. SFAS 158 requires
      recognition in the balance sheet of the funded status of defined benefit pension
      and other postretirement benefit plans, and the recognition in other
      comprehensive income of unrecognized gains or losses and prior service costs
      or
      credits arising during the period. Additionally, SFAS 158 requires the
      measurement date for plan assets and liabilities to coincide with sponsors
      year-end. The Company adopted a defined contribution plan required by the PRC,
      accordingly we do not believe that the adoption of SFAS 158 will have any impact
      on us.





The
      FASB
      issued FASB Interpretation No.(“FIN”) 48, “Accounting for Uncertainty in Income
      Taxes,” in July 2006 .This interpretation establishes new standards for the
      financial statement recognition, measurement and disclosure of uncertain tax
      positions taken or expected to be taken in income tax returns. The new rules
      will be effective for Sinoenergy in the first quarter of 2008. We continue
      to
      evaluate the impact of this interpretation, and do not anticipate its adoption
      will have a material effect on our financial statements.





In
      September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year
      Misstatements when quantifying misstatements in Current Year Financial
      Statements,” which eliminated the diversity in practice surrounding the
      quantification and evaluation of financial statement errors. The guidance
      outlined in SAB 108 is effective for Sinoenergy and is consistent with our
      historical practices for assessing such matters when circumstances have required
      such an evaluation. Accordingly, we do not believe that adoption of SAB 108
      will
      have any impact on us.





In
      February 2007, the FASB issued SFA S
      159,
“The Fair Value Option for Financial Assets and Financial Liabilities-Including
      an Amendment of SFAS 115,” which allows for the option to measure financial
      instruments and certain other items at fair value. Unrealized gains and losses
      on items for which the fair value option has been elected are reported in
      earnings. We do not presently have any financial assets or liabilities that
      we
      would elect to measure at fair value, and therefore we expect this standard
      will
      have no impact on our financial statements.





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





Details
      of allowance for doubtful receivables deducted from accounts receivable are
      as
      follows (dollars in thousands):





December
                31, 2006Accounts
                receivable
            
            $
            4,468Less:
                allowance for doubtful receivables
            
            
            97Balance
            
            $
            4,371





Within
      the balance, $593,821 represents receivables from Kangtai, the minority
      shareholder of Yuhan, for sales received by Kangtai on behalf of Sinogas and
      Yuhan.





Of
      the
      third party receivables, $1,125,238 represents the receivable balance for $1.9
      million CNG deposit and transportation equipment sales to a petrochemical
      company in Shanghai; $909,242 represent receivable balance for CNG station
      technical supporting and construction consulting service provided to a Shanghai
      company with the total sales amount of $1.28 million.





F-19


**4.**
            **Other
                Receivables**





(1)
            Other
                Receivables With Related Party





Other
      receivables from related party include $63,398 for water and power charge to
      Kangtai, and $172,915 from an unsecured loan due from Kangtai, and $837,916
      receivables from Kangtai for rental fee. On March 23, 2007, Kangtai has paid
      $348,000 for the rent due.





(2)
            Other
                Receivables With Third Party





The
      other
      receivables with third party mainly represents $502,484 due from Shanghai
      Zhongyou Group, who in the third quarter of 2006 took over the debt owned by
      Xuancheng City Gas (subsidiary of Shanghai Zhongyou Group) to the Company for
      equipment purchasing.





**5.**
            **Deposits
                and Prepayments**





The
      balance at December 31, 2006 represents advance payment to suppliers for goods
      to be delivered to the Company.





The
      third
      party balances $3,187,000 represent advance payments to overseas suppliers
      for
      CNG station equipment purchase by the Company and its subsidiaries for CNG
      filling station construction.





**6.**
            **Inventories**





Inventories
      at December 31, 2006 are summarized as follows (dollars in
      thousands):




December
                31, 2006Raw
                materials
            
            $
            339Work
                in progress
            
            
            483Finished
                goods
            
            
            115Total
            
            $
            937





**7.**
            **Property,
                Plant and Equipment**





As
      of
      December 31, 2006, property, plant and equipment consist of the following
      (dollars in thousands):





December
                31, 2006**Cost**Buildings
                and facility
            
            $
            2,736Machinery
                and equipment
            
            
            2,137Motor
                vehicles
            
            
            153Office
                equipment and others
            
            
            70$
            5,096**Accumulated
                depreciation**Buildings
                and facility
            
            $
            379Machinery
                and equipment
            
            
            1,139Motor
                vehicles
            
            
            8Office
                equipment and others
            
            
            14$
            1,540**Carrying
                value**Buildings
                and facility
            
            $
            2,357Machinery
                and equipment
            
            
            998Motor
                vehicles
            
            
            145Office
                equipment and others
            
            
            56$
            3,556





F-20


Included
      in the cost of buildings and facility is $97,101, representing work-in-process
      relating the construction of CNG stations by Wuhan and Pingdingshan Sinoenergy,
      which commenced in August and December 2006, respectively.





**8.**
            **Intangible
                Assets**




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





Patents
      and technology know how are amortized over 10 years up to September 2014, the
      amortization for expenses for the next five years for patent and technology
      know-how and land use right are approximately $29,000 and $250,000 each year,
      respectively.




The
      Company has an agreement with Beijing Sanhuan, a former affiliated company,
      pursuant to which Beijing Sanhuan is to transfer to Sinogas the land use right
      relating to the land on which Sinogas’s facilities are located. The total
      transfer price for the land is approximately $12.3 million.





*Land
      Use Right*





There
      is
      no private ownership of land in China. All land is owned by the government
      and
      the government grants what is known as a land use right, which is a transferable
      right to use the land. Since the Company does not own the land, the land use
      right is treated as an intangible asset. The Company has a contract to acquire
      the land use right for the land on which Sinogas’ facilities are located, and it
      is reflected as an intangible asset as December 31, 2006. A land use right
      is
      generally granted for a period of 50 years. The Company has an agreement with
      Beijing Sanhuan, a former affiliate, pursuant to which Beijing Sanhuan is to
      transfer to Sinogas the land use right relating to the land on which Sinogas’
facilities are located. The purchase price for the land use right is
      approximately $12.3 million. As of December 31, 2006, Sinogas has paid Beijing
      Sanhuan $9.1 million for the purchase of the land use right and the outstanding
      balance of approximately $3.2 million is reflected as a current liability in
      the
      financial statements. This balance will be paid when Sinogas obtains final
      approval from the local government for the transfer of the land use right into
      its name. Application has been made to the government authorities, and the
      Company expects that the transfer will be completed before July 2007. Upon
      government approval, the land use right will have a term of 50 years from the
      date of approval.





F-21


The
      land
      use right has been recognized as a long-term asset although at December 31,
      2006, the right had not yet been transferred into its name. Similarly, the
      buildings, although purchased, are reflected as assets of the Company, will
      only
      be transferred into the name of the Company when the land use right received
      government approval. Since the Company has used the land use during 2006 and
      had
      made payments on account of the purchase price, it has commenced amortization
      of
      the land use right. Amortization in 2006 amounted to $250,000.





**9.**
            **Goodwill**





On
      May
      25, 2006, the Company and Qingdao Kangtai Machinery Equipment Manufacture Co.
      Limited (“Kangtai”) formed Qingdao Sinogas Yuhan Chemical Equipment Co., Ltd.
      (“Yuhan”), in which the Company held a 55% interest and Kangtai held a 45%
      interest. In August 2006, we entered into an agreement to acquire the remaining
      45% interest for a purchase price of approximately $1.5 million, which was
      payable in installments. At December 31, 2006, the Company’s financial
      statements reflect a 90% ownership of Yuhan, based on having received government
      approval for the Company’s ownership of a 90% interest in Yuhan. As of March 15,
      2007, we have paid a total of $503,000 and owed $997,000 **.** The
      agreement, as amended, gives us the
      right
      to buy the remaining 10% interest in Yuhan during the first six months of 2008
      for approximately $640,000. The consolidated balance sheet reflects goodwill
      of
      $676,000, which represents the excess of the purchase price for 35% of Yuhan’s
      equity over 35% of Yuhan’s tangible assets at date of acquisition.





**10.**
            **Short
                Term Bank Loan**





The
      Company has a $2.5 million short-term loan from the Qingdao First Branch of
      Shibei District, Agriculture Bank of China, (hereafter refers to as 1st Branch,
      or the bank). The loan is a short-term working capital loan with the borrowing
      date starting from November 2, 2005 for $1.5 million and from November 7, 2005
      for $1 million and matured on November 1, 2006. The interest rate for the short
      term loan is 6.669% annually. In November 2006, the Company repaid $0.6 million
      to 1 st Branch,
      and 1 st Branch
      and the Company signed an agreement to defer the payment of the remaining $1.9
      million to April 6, 2007. The interest rate for the loan has been changed to
      7.56% per annum.





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





The
      Company also has a $1.2 million short term loan from Shenzhen Development Bank,
      Qingdao Branch (“Shenzhen Development Bank”). In November 27, 2006, the Company
      signed a short term loan with Shenzhen Development Bank secured by an account
      receivable of Sinogas of $1,949,546. The loan bears interest at 5.58% plus
      1%
      service fee and is due on November 26, 2007.




F-22


**11.**
            **Other
                Payables**





(1)
            Other
                Payables to Related Party:





Other
      payables at December 31, 2006, represent $3,112,071 payables to Beijing Sanhuan
      for balance of the purchase price of the land use right, $811,061 payable to
      Kangtai for the unpaid part of the 35% acquisition of the equity of Yuhan by
      the
      Company, $18,996 unsecured, interest free advance from Mr. Guili Shi and $1,264
      to Mr. Guiqiang Shi who is a stockholder of Kangtai; and $129,073 from Mr.
      Tanzhou Deng, the chairman of the Company.





(2)
            Other
                Payables to Third Party





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





(3)
            VAT
                and Business taxes





As
      of
      December 31, 2006, the Company owed VAT and business tax of $412,000 and
      $265,000, respectively, which, are accrued for the revenues recorded. According
      to the PRC tax laws, any potential tax penalty payable on late or deficient
      payments of this tax could be between zero and five times the amount of the
      late
      or deficient tax payable, and will be expensed as a period expense if and when
      a
      determination has been made by the taxing authorities that a penalty is
      due.





**12.**
            **Advances
                from Customers**





Advances
      from customers at December 31, 2006 were mainly the advances received by Yuhan,
      the subsidiary of the Company. In general, for the sales orders, Yuhan receives
      30% to 60% of contract amount as down-payment before product manufacturing.





**13.**
            **Income
                Taxes Payable**





Pursuant
      to the PRC income tax laws, the Company’s PRC subsidiaries are generally subject
      to enterprise income tax at a statutory rate of 33%, which comprises 30%
      national income tax and 3% local income tax.





On
      November 2, 2006, a PRC subsidiary, Sinogas, being a wholly foreign owned
      manufacturing enterprise was granted an enterprise income tax holiday of 100%
      enterprise income tax exemption for 2006 and 2007 and 50% enterprise income
      tax
      exemption for the following three years (2008 through 2010). Based on enterprise
      income tax exemption approval, the Company recorded a full tax credit against
      the statutory income tax provision on the income in 2006.





Another
      PRC subsidiary, Yuhan, being located in a science and technology development
      zone, is subject to an enterprise income tax rate of 24%.





The
      Company’s other PRC subsidiaries, Wuhan and Pingdingshan, are in the start-up
      stage, and have no taxable income subject to enterprise income tax for
      2006.





No
      provision for United States or other overseas tax is made as Sinoenergy
      Corporation and Sinoenergy Holding Limited are both investment holding
      companies, and have no assessable taxable either in the United States or the
      British Virgin Island for 2006.





F-23


Reconciliation
      between the income tax computed at the United States statutory tax rate and
      the
      Company’s provision for income tax is:





2006
            
            2005U.S.
                statutory rate
            
            
            34
            %
            
            34
            %Foreign
                income note recognized in the U.S.
            
            
            (34
            %)
            
            (34
            %)PRC
                Enterprise Income Tax
            
            
            33
            %
            
            33
            %Tax
                holiday granted to the subsidiaries in PRC
            
            
            (33
            %)
            
            (33
            %)Provision
                of income tax for year
            
            
            -
            
            
            1,173Prior
                year provision written back due to tax holiday and relief
            
            
            1,121
            
            
            -





**14.**
            **Minority
                Interests**





The
      activities of the minority interests’ equity during the year ended December 31,
      2005 and 2006 are summarized as follows (dollars in thousands):





Beginning
                balance (January 1, 2005)
            
            
            -Add:
                contribution by minority stockholders
            
            
            558Minority
                interests in income
            
            
            14Others
            
            
            69Balance,
                December 31, 2005
            
            $
            641Add:
                Minority interests’ income
            
            
            3Less:
                Sold to majority stockholder
            
            
            (30
            )Balance,
                December 31, 2006
            
            $
            614





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





The
      principal related companies and related parties with which the Company had
      transactions in year 2006 and 2005 are as follows:





Name
                of the Company
            
            RelationshipBeijing
                Sanhuan Technology Development Co., Ltd (Beijing Sanhuan)
            
            Parent
                company of a subsidiary before November 8, 2005. Legal representative
                was
                the key management person of the Company in 2006.Qingdao
                Kangtai Machinery Equipment Manufacture Co. Limited (Kangtai)
              
              Name
                of Related Party
              Mr.
                Guili Shi
              Mr.
                GuiQiang Shi
              Mr.
                Tanzhou Deng
            
            Minority
                shareholder of a subsidiary (Yuhan) from May 2005
              
              Shareholder
                of Kangtai
              Shareholder
                of Kangtai
              Chairman
                of the Company




F-24





**15.**
            **Related
                Party Relationships and Transactions
                (Continued)**





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





(1)
            Sales
                and purchase transactions with related
                parties





Name
                of the related party
            
            2006
            
            2005Mr.
                Guili Shi
            
            Owned
                25% of equity of Yuhan, which was purchased by the CompanyBeijing
                Sanhuan
            
            -Guaranteed
                a short-term loan to Sinogas
              -Agreement
                in transfer land use right to Sinogas, for which Sinogas totally
                paid $9.1
                million ($4.1 million was paid in 2006) up to December 31,
                2006
              -$2,561
                fee paid as a result of Beijing Sanhuan acting as an trustee in connection
                with establishing of 2 new subsidiaries-Wuhan Sinoenergy and Pingdingshan
                Sinoenergy
              -Grant
                CNG technology know-how license with total charges of $452,000 in
                2006
            
            -Prepaid
                $4,986,000 for land use right.
              -Guaranteed
                a short-term loan to Sinogas
              -Guaranteed
                a short-term loan to SinogasKangtai
            
            -      
                Sales with the amount of $1,592,886
              -      
                10% of equity of Yuhan was purchased by the Company
            
            -Sales
                with amount of $566,886





Kangtai
      is the predecessor company of Yuhan. Kangtai purchases products from Yuhan
      to
      fulfill open purchase orders. Yuhan completed those contracts that were made
      by
      Kantai prior the separation.




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


F-25





(2)
            Inter-company
                receivables





Name
                of the Company
            December
                31, 2006Kangtai
            -
                $837,916 inter-company receivables for rental fee;
              -
                $236,313 receivables for water and power fee charge and unsecured
                loan.
              -
                $593,821 sales received on behalf of the
                Company





(3)
            Inter-company
                payables





Name
                of the Company
            December
                31, 2006Beijing
                Sanhuan
            -
                $3,112,071 payables for land use right
              -
                $451,734 for know-how using of CNG station system
                integrationKangtai
            -
                $811,061 payable for 35% equity purchase of Yuhan;Mr.
                Guili Shi
            -
                $18,996Mr.
                GuiQiang Shi
            -
                $1,264Mr.
                Tanzhou Deng
            -
                $129,073





The
      amounts due from and to related parties are interest free, unsecured with no
      fixed terms.





**16.**
            **Statutory
                Surplus Reserve Fund**





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





**17.**
            **Segment
                Information**





Operating
      segments are defined by SFAS No.131, “Disclosure about Segments of an Enterprise
      and Related Information”, as components of an enterprise about which separate
      financial information is available that is evaluated regularly by the Company
      in
      deciding how to allocate resources and in assessing performance. The Company
      has
      three operating segments, which are (i) non-standard pressure containers, (ii)
      CNG station construction and CNG station service and (iii) CNG operation
      business, which is in the development stage.





As
      all
      businesses of the Company are carried out in the PRC, the Company is deemed
      to
      operate as one geographical segment. The detail information basis on different
      business segmentation that the company engaged in are as follows:





F-26


**(i)
      Non-standard pressure container business:**





Non-standard
      equipment and pressure container business has been carried over from the
      predecessor since Sinogas was set up. It is a traditional chemical equipment
      manufacture business with low profit margin. It includes design and manufacture
      of various types of pressure containers:




·
            in
                the petroleum and chemical
                industries.


·
            in
                the metallurgy and electricity generation
                industries.


·
            in
                the food and brewery
                industries


·
            various
                types of non-standard containers





**(ii)
      CNG storage, transportation products and CNG station service construction (“CNG
      Station Construction”)**





CNG
      station construction business represents:




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





·
            CNG
                trailer


·
            CNG
                deposited system for gas station usage


·
            Conversion
                kits for various types of
                vehicles


·
            CNG
                compressor skid


·
            CNG
                dispenser (retail measurement
                system)





These
      services were provided by us for other companies that operate CNG
      stations.





(2)
      CNG
      station construction service business




It
      includes the design of CNG station construction plans, construction of CNG
      stations, and installation of CNG station equipment and related systems. Due
      to
      rapid development and early stage of CNG station business in China, by utilizing
      its know how and specialty engineering team in this area and early entering
      into
      the market, the Company enjoys a very high profit margin in this segment.





**(iii)
      CNG station operation**





In
      2006,
      the Company entered the CNG station business, which involves the design,
      construction and equipping of CNG stations and the operation of those stations.





The
      following tables set forth information relating to our business segments for
      2006 and 2005 (dollars in thousands).




2006
            
            Non-standard
                pressure containers
            
            CNG
                station construction
            
            CNG
                station Operation
            
            TotalNet
                revenue
            
            $
            5,474
            
            $
            6,919
            
            
            -
            
            $
            12,393Cost
                of revenues
            
            
            4,315
            
            
            1,594
            
            
            -
            
            
            5,909Gross
                profit
            
            
            1,159
            
            
            5,325
            
            
            -
            
            
            6,484Gross
                margin
            
            
            21
            %
            
            77
            %
            
            
            
            
            52
            %Operating
                expenses:Selling
                expenses
            
            $
            197
            
            $
            31
            
            
            -
            
            $
            228General
                and administrative expenses
            
            
            840
            
            
            974
            
            
            247
            
            
            2,061Total
                operating expense
            
            
            1,037
            
            
            1,005
            
            
            247
            
            
            2,289Income
                (loss) from operations
            
            $
            122
            
            $
            4,320
            
            
            ($
                247
            )
            $
            4,195Total
                assets
            
            
            3,107
            
            
            23,100
            
            
            1,626
            
            
            27,833





F-27


2005
            
            Non-standard
                pressure containers
            
            CNG
                station construction
            
            TotalNet
                revenue
            
            $
            2,035
            
            $
            6,201
            
            $
            8,236Cost
                of revenues
            
            
            1,567
            
            
            2,254
            
            
            3,821Gross
                profit
            
            
            468
            
            
            3,947
            
            
            4,415Gross
                margin
            
            
            23
            %
            
            64
            %
            
            54
            %Operating
                expenses:Selling
                expenses
            
            $
            57
            
            $
            53
            
            $
            110General
                and administrative expenses
            
            
            268
            
            
            318
            
            
            586Total
                operating expense
            
            
            325
            
            
            371
            
            
            696Income
                from operations
            
            $
            143
            
            $
            3,576
            
            $
            3,719Total
                assets
            
            
            4,516
            
            
            11,259
            
            
            15,755





**18.**
            **Capital
                Stock**





a)
            Authorized
                common stock and preferred stock:





100,000,000
      Common stock at pal value of $0.001


10,00,000
      Preferred A share at pal value of $0.001





b)
            Recapitalization





On
      June
      2, 2006, the Company entered into an exchange agreement pursuant to which the
      Company acquired all of the equity of Sinoenergy Holding, through issuing
      14,215,385 shares of common stock to the owners of Sinoenergy
      Holdings.





In
      connection with the acquisition, the Company entered into a stock redemption
      agreement with the principal stockholders of Franklyn prior to the reverse
      acquisition. The Company purchased a total of 3,305,000 shares of common stock
      for a purchase price of $213,525, which was paid from the proceeds from the
      sale
      of the convertible notes.





c)
            Convertible
                Notes





In
      connection with the acquisition of Sinoenergy Holding, the Company entered
      a
      securities purchase agreement with Barron Partners LP, JCAR Funds Ltd., IRA
      f/b/o John P. O’Shea, Ray Rivers and Steve Mazur pursuant to which the Company
      sold 6% convertible notes in the principal amount of $3,700,000 with the
      following detachable securities:





F-28


·
            390,087
                shares of common stock;


·
            Warrants
                to purchase 6,342,858 shares of common stock at $0.85 per shares
                with an
                expiration date on June 2, 2011 (A
                Warrants);


·
            Warrants
                to purchase 6,342,858 shares of common stock at $1.20 per share with
                an
                expiration date on June 2, 2011 (B
                Warrants);


·
            Warrants
                to purchase 6,342,858 shares of common stock at $1.75 per share with
                an
                expiration date on December 31, 2006 (C
                Warrants);





The
      convertible notes were due March 31, 2007 (Maturity Date) and were to be
      automatically converted into series A convertible preferred stock at a
      conversion price of $0.65 per share, subject to adjustment, upon the filing
      by
      the Company of an amendment to its articles of incorporation which increased
      its
      authorized capital stock and a certificate of designation which creates the
      right of the holders of a series of preferred stock to be designated as the
      series A convertible preferred stock. The notes provided that if the restated
      certificate of incorporation and the certificate of designation are not filed
      at
      the time that the notes are converted, the notes are convertible into common
      stock at a conversion price of $0.65 per share, subject to
      adjustment.





Based
      on
      the conversion price of $0.65 per share, in September 2006, the Company issued
      a
      total of 5,692,307 shares of series A preferred stock which are convertible
      into
      an aggregate of 5,692,307 shares of common stock, subject to adjustment.





The
      conversion price of the note and the conversion rate of the series A preferred
      stock are subject to adjustment in certain instances, including the issuance
      by
      us of stock at a price which is less than the conversion price, which is
      initially $0.65.





In
      the
      event that the consolidated pre-tax income, as defined, for the year ended
      December 31, 2006 is less than $0.212 per share on a fully-diluted basis, then
      the conversion price is to be reduced by the percentage shortfall, up to a
      maximum of 40%. Fully-diluted pre-tax income is based on the number of shares
      of
      common stock which outstanding or are otherwise issuable, regardless of whether
      such shares would be included in determining diluted earnings per share under
      generally accepted accounting principles.





In
      the
      event the Company’s consolidated pre-tax income for the year ended December 31,
      2007 is less than $0.353 per share on a fully-diluted basis, then the conversion
      price then in effect shall be reduced by the percentage shortfall, up to a
      maximum of 40%.





Such
      reductions shall be made at the time the Company files its Form 10-KSB for
      the
      year ended December 31, 2006 and 2007, respectively, and shall apply to the
      convertible notes or all shares of the series A preferred stock, as the case
      may
      be, and warrants which are outstanding on the date the Form 10-KSB is filed,
      or,
      if not filed on time, on the date that filing was required.





On
      March
      16, 2007, the Company, Skywide Capital Management Limited (“Skywide”), a
      principal stockholder of the Company, and the investors in the June 2006 private
      placement signed an agreement to eliminate the above mentioned reduction terms
      on the conversion price of the convertible notes, series A preferred stock
      and
      warrants. (See also note 23(2) and 23(4))





F-29


Pursuant
      to this agreement, the adjustment provisions in the certificate of designation
      for the series A preferred stock and the warrants that provide for an adjustment
      in the conversion or exercise price were eliminated and Skywide agreed to place
      1,000,000 shares of common stock into escrow. If the Company’s consolidated
      pre-tax income per share, on a fully diluted basis, for 2006 and 2007 is less
      than $0.212 and $0.353 per share, respectively, then Skywide shall deliver
      to
      the Company for cancellation, such percentage of 500,000 shares for each year
      as
      equals the percentage shortfall from the $0.212 and $0.353 per share target
      prices respectively, up to a maximum of 40% to the shares set
      escrowed.





The
      proceeds of $3,700,000 received by the Company were allocated first to the
      390,087 shares of common stock at $0.65 per share, amounting to $253,557 and
      the
      remainder allocated between the warrants and the convertible notes without
      warrants on a pro rata basis based on relative fair values. Paid in capital
      was
      credited by the value of the warrants in the amount of $1,343,006





On
      September 28, 2006, the convertible notes were automatically converted into
      5,692,307 shares of series A preferred stock upon the Company’s filing on its
      restated articles of incorporation and the certificate of designation for the
      series A preferred stock. Each share of series A preferred stock is convertible
      into one share of common stock, subject to adjustment.





The
      assumptions used to determine the warrants valuation under the Black-Scholes
      pricing model were as follows:





2006Type
                of warrant issued
            
            A
                Warrants
            
            B
                Warrants
            
            C
                WarrantsNumber
                of warrants issued
            
            
            6,342,857
            
            
            6,342,857
            
            
            6,342,857Assumptions:Expected
                volatility
            
            
            45
            %
            
            45
            %
            
            45
            %Risk
                free interest rate
            
            
            3.5
            %
            
            3.5
            %
            
            3.5
            %Expected
                life years
            
            
            5
            
            
            5
            
            
            0.5Dividend
                yield
            
            
            -
            
            
            -
            
            
            -Weighted
                average fair value per share
            
            $
            0.23
            
            $
            0.17
            
            $
            0.00





On
      June
      2, 2006, the value of the beneficial conversion feature on all issued
      convertible notes was determined to be $1,593,846 which was credited to paid
      in
      capital and charged to earnings as interest expense amortized to maturity date
      with the unamortized debt discount remaining on the convertible notes on there
      automatic conversion to series A preferred stock being also expensed as interest
      during 2006.





d)
            Incentive
                Stock Options





The
      Company adopted a long-term incentive plan covering 2,000,000 shares of common
      stock in year 2006. The plan provides for the grant of incentive and
      non-qualified options, stock grants, stock appreciation rights and other
      equity-based incentives to employees, including officers, and consultants.
      The
      plan is to be administered by a committee of not less than two directors each
      of
      which is to be an independent director. In the absence of a committee, the
      plan
      is administered by the board of directors. Independent directors are not
      eligible for discretionary options. However, each newly elected independent
      director receives at the time of his election, a five-year option to purchase
      30,000 shares of common stock at the market price on the date of his or her
      election. In addition, the plan provides for the annual grant of an option
      to
      purchase 5,000 shares of common stock on April 1st of each year, commencing
      April 1, 2007.





F-30


In
      July
      2006 the Company granted options to purchase 30,000 shares of common stock
      at an
      exercise price of $.65 per share to four of its independent directors. No other
      options were granted under the plan.





2006Number
              of
                options
            
            Weighted
                average
              exercise
                priceOutstanding,
                beginning of year
            
            
            -
            
            
            -Granted
                during the year
            
            
            120,000
            
            $
            0.65Exercised
                during the year
            
            
            -
            
            
            -Expired
                or cancelled during the year
            
            
            -
            
            
            -Options
                outstanding at the year end
            
            
            120,000
            
            $
            0.65




Under
      the
      Stock Option Plan, 50% of the options will be exercisable 6 months later from
      the granting date and 50% can be exercisable 24 months after the grant.





The
      assumptions used to determine the stock option valuation expense under the
      Black-Scholes pricing model were as follows:




2006Number
                of stock options granted
            
            
            120,000Assumptions:Expected
                volatility
            
            
            50
            %Risk
                free interest rate
            
            
            4.64
            %Expected
                life years
            
            
            3Dividend
                yield
            
            
            -Weighted
                average fair value share
            
            $
            0.25




During
      2006, the stock options were granted to 4 independent directors of the Company
      resulting in an expense of $29,794.





F-31


f)
            Warrants




Number
                of warrantsAWarrants
            
            BWarrants
            
            CWarrantsBalance
                at December 31, 2005
            
            
            -
            
            
            -
            
            
            -Issued
                during the year
            
            
            6,342,858
            
            
            6,342,858
            
            
            6,342,858Exercised
                in the year
            
            
            -
            
            
            -
            
            
            -Expired
                in the year
            
            
            -
            
            
            -
            
            
            (6,342,858
            )Balance
                at December 31, 2006
            
            
            6,342,858
            
            
            6,342,858
            
            
            -





Warrants
      were issued at June 2, 2006 in as part of the financing for the Company.
      Exercise prices for the warrants was $0.85 and $1.20 per share of common stock
      for the A warrants and B warrants, respectively. The A and B Warrants expire
      five years after the issuance. Total C Warrants had an exercise price of $1.75
      and expired December 31, 2006. The C Warrants expired unexercised.





**19.**
            **Basic
                and Diluted Earnings Per
                Share**





Earnings
      per share is calculated in accordance with the Statement of Financial Accounting
      Standards No. 128 ("SFAS No. 128"), "Earnings per share". SFAS No. 128
      superseded Accounting Principles Board Opinion No.15 (APB 15). Net earning
      per
      share for all periods presented has been restated to reflect the adoption of
      SFAS No. 128. Basic net earnings per share is based upon the weighted average
      number of common shares outstanding. Diluted net earnings per share is based
      on
      the assumption that all dilutive convertible shares and stock options were
      converted or exercised. Dilution is computed by applying the treasury stock
      method. Under this method, options and warrants are assumed to be exercised
      at
      the beginning of the period (or at the time of issuance, if later), and as
      if
      funds obtained thereby were used to purchase common stock at the average market
      price during the period.


The
      breakdown for the fully diluted outstanding shares is as follows:





December
                31, 2006Common
                stock outstanding
            
            
            14,462,268Common
                stock issuable upon conversion of series A preferred stock
            
            
            1,017,680Common
                stock issuable pursuant to $.85 warrants
            
            
            2,196,185Common
                stock issuable pursuant to $1.20 warrants
            
            
            1,569,216Stock
                option/incentive plan
            
            
            41,553Total
                diluted outstanding shares
            
            
            19,286,902




F-32





**20.**
            **Concentrations
                and Credit Risk**





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





At
      December 31, 2006, the Company has a credit risk exposure of uninsured cash
      in
      banks of approximately $587,799. The Company does not require collateral or
      other securities to support financial instruments that are subject to credit
      risk.





The
      net
      sales to customers representing at least 10% of net total sales as well as
      relative account receivable balance are as follows (dollars in
      thousands):





Sales
            
            AR
            
            Sales
            
            ARCustomers
            
            For
                year 2005
            
            December
                31, 2005
            
            For
                year 2006
            
            December
                31, 2006MilenniumGroup
                Limited
            
            $
            3,740
            
            
            46
            %
            $
            1,494
            
            
            48
            %Shijiazhuang
                Enric Gas Equipment
            
            
            831
            
            
            11
            %
            
            -
            
            
            -Sino-petrol
                Xinxing Company
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,835
            
            
            23
            %
            
            -
            
            
            -Shanghai
                CNPC Enterpirses
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,278
            
            
            11
            %
            $
            909
            
            
            21
            %





**21.**
            **Commitments
                and Contingencies**





(1)
      Legal
      Proceedings - The Company is not currently a party to any material threatened
      or
      pending legal proceedings.





(2)
      Commitments - The Company has the following material contractual obligations
      and
      capital expenditure commitments:


(a)
      An
      agreement to acquire the land use rights for the land on which Sinogas’ business
      is conducted. The outstanding balance of approximately $3.1
      million.





(b)
      The
      Company leases, pursuant to short-term leases, office space in Wuhan and
      Pingdingshan for our CNG retail business development activities, and we rent
      offices in Beijing for our headquarters. The total annual rent is $36,000.
      The
      leases expire from October 2007 through March 2008. These leases have standard
      escalation provisions.





(c)
      The
      Company has a purchase order with Fornovo Gas S.r.l of Italy for the purchase
      of
      36 compressor units gasvector and 60 high capacity dispensers for a total
      purchase price of $9.6 million.





(d)
      The
      Company has a purchase agreement signed with China Yuanhang Gas Company
      (Yuanhang Gas), pursuant to which the Company engaged Yuanhang Gas an import
      agent to purchase steel tubes for CNG gas stations equipment manufacturing
      from
      Italy in the sum of $6.3 million. The purchase price of this products is in
      Euros and the purchase price in dollars is subject to fluctuations in the
      exchange rate between Euros and United States dollars.





At
      December 31, 2006, the Company has paid a total of $2,660,302 as a deposit
      for
      long-term letter of credit and prepayments for the above mentioned two purchase
      orders in paragraphs (c) and (d).





F-33


**22.**
            **Retirement
                Benefits**





The
      full-time employees of the Company are entitled to staff welfare benefits
      including medical care, casualty, housing benefits, education benefits,
      unemployment insurance and pension benefits through a Chinese
      government-mandated multi-employer defined contribution plan. The Company is
      required to accrue the employer-portion for these benefits based on certain
      percentages of the employees’ salaries. The total provision for such employee
      benefits was $81,161 and $47,777 for year 2006 and 2005, respectively, and
      were
      recorded as other payables. The PRC government is responsible for the staff
      welfare benefits including medical care, casualty, housing benefits,
      unemployment insurance and pension benefits to be paid to these employees.
      The
      Company is responsible for the education benefits to be paid.





**23.**
            **Subsequent
                Events**




(1)
      Additional 10% equity purchase of Yuhan





The
      Company had previously owned a 55% interest in Yuhan. In August 2006, the
      Company entered into an agreement to acquire the remaining 45% for $1,500,000,
      with payment due in installments.  As of December 31, 2006, the Company
      owns 90% of Yuhan and up to March 15, 2007, we paid a total of $503,000 and
      owe
      $997,000. **** The
      agreement, as amended, gives us the
      right
      to buy the remaining 10% interest in Yuhan during the first six months of 2008
      on payment of the rest $640,000.





(2)
      Exercise of Warrants and Conversion of Series A Preferred Stock





As
      of
      March 30, 2007, the Company has issued 7,207,384 shares of common stock, of
      which 5,657,143 shares were issued upon exercise of A warrants and 983,006
      shares were issued upon exercise of B warrants, and 567,235 shares were issued
      upon conversion of series A preferred stock. The Company received $5,988,178
      from the exercise of the warrants.





(3)
      Cooperation Agreement to Establish Joint Venture





On
      January 26, 2007, the Company and Hong Kong China New Energy Development
      Investment Co. Ltd (“New Energy”), signed a cooperation agreement relating to
      the an investment in the construction and operation of CNG stations with
      Xuancheng municipal government in Anhui Province. Pursuant to the agreement,
      New
      Energy and the Company will form a natural gas company with registered capital
      of $5 million in Xuancheng to construct and operate in Xuancheng City a
      super-large CNG mother-station that has 100-300 million cubic meters in the
      Xuancheng region. The Xuancheng government has agreed to provide the joint
      venture a construction site of 60 square meters.





On
      February 1, 2007, we and New Energy signed a cooperation agreement relating
      to
      the an investment in the construction of CNG stations with the Huangmei County
      government. Pursuant to the agreement, we will form a natural gas company with
      registered capital of $5 million in Huangmei to construct and operate a
      super-large CNG mother station with expected annual processing capacity of
      100-300 million cubic meters in the Huangmei region. The Huangmei government
      has
      agreed to provide the joint venture a construction site of 60 square
      meters.





As
      of
      March 30, 2007, neither of these companies has received the necessary business
      license and no investment has been made either business. The agreements provide
      for each of the Company and New Energy to invest a total of $5 million in the
      two joint venture.





(4)
      Agreement on modifying the terms of the series A preferred stock and warrants
      issued in the June 2006 private placement





F-34


On
      March
      16, 2007, the Company, Skywide Capital Management Limited (“Skywide”), a
      principal stockholder of the Company, and the investors in the June 2006 private
      placement signed an agreement to eliminate the above mentioned ratchets.
      Pursuant to this agreement, the adjustment provisions in the certificate of
      designation for the series A preferred stock and the warrants that provide
      for
      an adjustment in the conversion or exercise price were eliminated and Skywide
      agreed to place 1,000,000 shares of common stock into escrow. If the Company’s
      consolidated pre-tax income per share, on a fully diluted basis, for 2006 and
      2007 is less than $0.212 and $0.353 per share, respectively, then Skywide shall
      deliver to the Company for cancellation, such percentage up to 40% of 500,000
      shares as equals the percentage shortfall from the $0.212 and $0.353 per share
      target prices.





(5)
      Acquisition of Equity in Jiaxing Lixun Automotive Electronic Co.,
      Ltd





In
      March 13,
      2007, the Company entered into an agreement to purchase a 60% interest in Jiaxing
      Lixun Automotive Electronic Co, Ltd (“ Lixun”)
      from its stockholders for a purchase price of approximately $390,000, which
      will
      be paid at the time the transfer of the shares are instituted. The procedure
      for
      the transfer of the shares is in process, and the Company anticipates that
      the
      shares will be delivered to us by mid-April, 2007. Lixun designs and
      manufactures electric control devices for alternative
      fuel, such as compressed natural gas and liquefied petroleum gas vehicles,
      as
      well as a full range of electric devices, such as computer controllers,
      conversion switches, spark advancers, tolerance sensors and emulators for use
      in
      multi-powered vehicles. The Company expects the transaction to be completed
      before the middle of April 2007.





(6)
      Delivery of equipment for Pingdingshan subsidiary





On
      March
      2, 2007, Pingdingshan Sinoenergy Gas Co., Ltd, a 90% owned subsidiary of the
      Company, received the first shipment of imported equipment for the construction
      of three CNG sub-stations in Pingdingshan.




F-35