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


Washington,
      DC 20549





**Form
      10-KSB**





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




for
      the
      fiscal year ended




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




for
      the
      transition period from January 1, 2007 to September 30, 2007




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.)





1603-1604,
                Tower B Fortune Centre Ao City, Beiyuan Road, Chaoyang District,
              Beijing
                China, 100107(Address
                of principal executive offices)Issuer’s
                telephone number: +86-10-84928149




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. $73,328,661 based on the closing price
      on December 18, 2007.




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




As
      of
      December 28, 2007, there were  31,418,065 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










INDEX





PagePART
                I
            3ITEM
                1. DESCRIPTION OF BUSINESS
            3ITEM
                2. DESCRIPTION OF PROPERTY
            22ITEM
                3. LEGAL PROCEEDINGS
            22ITEM
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            22PART
                II
            22ITEM
                5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS
            22ITEM
                6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            23ITEM
                7. FINANCIAL STATEMENTS
            35ITEM
                8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE
            35ITEM
                8A. CONTROLS AND PROCEDURES
            35ITEM
                8B. OTHER INFORMATION
            35PART
                III
            36ITEM
                9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND
                CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                ACT
            36ITEM
                10. EXECUTIVE COMPENSATION
            38ITEM
                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
            42ITEM
                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 both the supply and demand for CNG, the ability of our
      CNG
      suppliers to provide us with natural gas in the quantities that we may require,
      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, including the effect of price controls on our business, 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.




**Summary**





Our
      historic business has been the manufacture of pressure containers and compressed
      natural gas (CNG) facilities and equipment. We and our predecessor have been
      engaged in these businesses for 50 and ten years, respectively. In June 2006,
      we
      developed a plan to develop and operate of natural gas filling stations and
      build and operate natural gas process plants in Central and East China. This
      business is currently our principal business.





Compressed
      natural gas, known as CNG, 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. In addition
      to our CNG related products, we design and 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
      our CNG
      vehicle and gas station equipment business, which is operated by Qingdao Sinogas
      General Machinery Company Limited (“Sinogas”), our wholly-owned subsidiary, we
      manufacture CNG vehicle and gas station equipment, and we design of construction
      plans for CNG gas stations, construct the CNG stations, and install CNG station
      equipment and related systems at the gas station.




3




Commencing
      in the second quarter of calendar 2007, we began to manufacture and sell an
      electronic device to enable a vehicle to use alternative fuel as well as CNG
      vehicle conversion kits. This business is operated by Sinogas and Jiaxing
      Lixun Automotive Electronic Co, Ltd (“Lixun”), which is our majority-owned
      subsidiary. Through Lixun, we design and sell customized automotive alternate
      fuel (CNG/LPG) electronic device to either domestic customers as well as
      overseas customers, including customers in the United States, Russia and Italy.
      These conversion kits are sold to manufacturers on an OEM basis and are also
      sold in the after market.




The
      government of the 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. We
      have
      been developing our CNG wholesale and retail business by building our own
      natural gas processing plants and CNG filling stations in Central and East
      China
      to meet this perceived need.




In
      October 2007, we opened two CNG filling stations in Wuhan City, and in November
      2007, we opened a third CNG filling station in Xuancheng. In addition, as at
      December 27, 2007, we had substantially completed ten additional CNG filing
      stations, which are in the process of obtaining government approval, and another
      20 CNG stations are either under construction or in the construction planning
      stage. These stations are to be opened in Wuhan City, Xuancheng City and
      Pingdingshan City. We expect to open the 30 stations in total by the end of
      June
      2008.




We
      also
      plan to establish four natural gas processing plants in Hubei and Anhui Province
      with the designed annual capacity to process 400 million cubic meters natural
      gas based on a quota which we obtained from China Petroleum and Chemical
      Corporation, known as Sinopec, from a main pipeline which is presently under
      construction. The four plants are under construction and will be operated by
      Hubei Gather, a 55% subsidiary, and Anhui Gagher, a company in which we have
      a
      45% interest. We expect these plants to become operations in the end of calendar
      2008 or early 2009. Both Hubei Gather and Anhui Gagher are the parties to the
      natural gas purchase agreement with Sinopec. We cannot assure you that we will
      meet any of these timetables.




**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 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, 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 prospectus
      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 Holding. The financial condition and
      results of operations for periods prior to June 2, 2006 reflect the financial
      condition and operating results of Sinogas.




4




In
      connection with the acquisition of Sinoenergy Holding:




·
            On
                July 6, 2006, we sold for $3,700,000, our 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. On September 30, 2006, when we
                filed
                our restated articles of incorporation and created the series A
                convertible preferred stock, the notes were automatically converted
                into
                5,692,307 shares of series A preferred stock. As of December 20,
                2007, all
                of the preferred stock had been converted, the $1.75 warrants had
                expired
                unexercised, and there were outstanding warrants to purchase 685,715
                shares of common stock at $.85 and 910,715 shares of common stock
                at $1.20
                per share. The exercise prices of the warrants are subject to reduction
                if
                ourconsolidated
                pre-tax income for the year ended December 31, 2007 is less than
                $0.353
                per share on a fully-diluted basis, then the exercise price of the
                warrants shall be reduced by the percentage shortfall, up to a maximum
                of
                40%. Thus, the maximum reduction would reduce the exercise price
                of the
                $0.85 warrants to $0.51 and the exercise price of the $1.20 warrants
                to
                $0.72.




·
            We
                entered into a stock redemption agreement with our then principal
                stockholders, pursuant to which we purchased 3,305,000 shares of
                common
                stock for $213,525.




References
      to “we,” “us,” “our” and similar words refer to the 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.




Our
      executive offices are located at 1603-1604, Tower B Fortune Centre Ao City,
      Beiyuan Road, Chaoyang District, Beijing China, 100107, telephone
      011-86-10-84928149.





**Change
      of Fiscal Year**





In
      late
      September 2007, we changed our fiscal year to the year ended September 30.
      The
      change in our fiscal year is effective commencing with the fiscal year beginning
      October 1, 2007. This transitional report on Form10-KSB includes the audited
      transitional financial statements for the period from January 1, 2007 to
      September 30, 2007 and unaudited financial statements for the comparable period
      of 2006.




**Risk
      Factors**




An
      investment in our securities involves a high degree of risk. In determining
      whether to purchase our securities, you should carefully consider all of the
      material risks described below, together with the other information contained
      in
      this report before making a decision to purchase our securities. You should
      only
      purchase our securities if you can afford to suffer the loss of your entire
      investment.


**R** **ISKS** **A** **SSOCIATED** **** **WITH** **C** **OMPANIES** **C** **ONDUCTING** **B** **USINESS** **** **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.




5




**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




**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.




6




**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.




**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.




7




**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.




**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.**




We
      have
      and will continue to maintain property insurance for our CNG stations and
      manufacture facilities which are operational to protect us from any damages
      caused by the failure or alleged failure of our products. However, 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.




**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.




8




**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.




**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.




9




**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.




**If
      our favorable tax treatment is overturned, we may be subject to significant
      penalties** *.*




On
      March 16, 2007, the PRC’s National People’s Congress passed a new corporate
      income tax law, which will become effective on January 1, 2008. This new income
      tax unifies the corporate income tax rate of domestic enterprise and foreign
      investment enterprises to 25%. Preferential tax treatments will continue to
      be
      granted to entities that are classified as “high and new technology enterprises
      strongly supported by the State” or conduct business in sectors that are
      encouraged by the PRC’s National People’s Congress. This new tax law, however,
      does not clearly define the requirements or criteria for receiving these
      preferential tax treatments. Many of our subsidiaries presently benefit from
      full or 50% exemptions from enterprise income tax for up to a total of five
      years. Because clear implementation and requirement rules or guidelines for
      the
      new tax law have not yet been promulgated, we cannot assure you that our
      subsidiaries will maintain their preferential tax status or that we will not
      be
      assessed significant penalties..




**If
      the PRC tax authorities dispute our method of paying value added taxes, 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..


**RISKS
        ASSOCIATED WITH OUR BUSINESS**




**Because
      central government has the power to withdraw the licenses issued for
      manufacturing CNG truck trailers, we can not guarantee the ever holding to
      the
      licenses.**




We
      are
      issued a C2 and C3 license by central government of the PRC to permit us to
      manufacture CNG truck trailers. The central government will perform a routine
      check every four years with respect to the technical and quality controls as
      well as overall manufacturing abilities of those companies who hold C2 and
      C3
      licenses. The central government has the power to withdraw a license from those
      companies which may be disqualified as a result of these inspections by the
      central government. While the central government has not withdrawn a company’s
      C2 or C3 license, we can not provide any assurance that we may maintain our
      C2
      and C3 licenses.




10




**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, in our 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.




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




We
      are
      commencing the development of our business of owning and operating CNG stations,
      which was 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:




*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. Although we raised $30,000,000
      through the sale of our debt securities in September 2007, w e
      may
      require additional financing to equip and construct our proposed 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 and is subject to price
      controls.* 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.




11




*We
      must secure enough CNG recourses to supply our filling stations in future.* Natural
      gas is limited in China, especially in central and eastern China where we are
      seeking to develop our CNG retail business. Although we have agreements to
      provide us with a fixed amount of natural gas, we cannot assure you that these
      agreements will be sufficient to satisfy our CNG needs and we cannot assure
      that
      such CNG will be delivered on a timely basis. The contracts are subject to
      annual allocations and a major pipeline which is expected to provide us with
      CNG
      is still under construction and it may not be ready when scheduled and its
      capacity may not be as great as the operator anticipated when it agreed to
      provide us with CNG.




*Our
      natural gas process plants, which will be operated by Hubei Gather and Anhui
      Gagher, may not open according to our schedule.* We do
      not own or control any supply or natural gas. Our retail and wholesale natural
      gas business is dependent upon receiving the necessary natural gas from other
      suppliers who have agreed to provide the natural gas using a pipeline which
      is
      under construction. Although our supplier, Sinopec, has announced that the
      pipeline will be completed in late 2008 or early 2009, we have no ability to
      control the timing of the pipeline, and we can give no assurance that Sinopec
      will open and/or operate its new pipeline according to its released time
      schedule or that it will be able to deliver the quanity of natural gas
      contemplated by our agreement. Any delays in the construction or delivery of
      natural gas through the Sinopec pipeline or any reduction in the quantity which
      can be delivered to us will impair our abilty to operate this business
      profitably, if at all.




**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.




**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. Furthermore, we will require additional qualified management
      and other key personnel for our CNG station business.




**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 or to form joint ventures with other
      companies. Such acquisitions may be made with cash or our securities or a
      combination of cash and securities. Any joint ventures may require us to make
      significant capital contributions in order to develop the business contemplated
      by the joint venture. 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. Further,
      any acquisition may be subject to government regulations and approval in the
      PRC.




12




**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;




·
            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, our revenue from this segment
      of our business 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.




13




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




As
      of
      September 30, 2007, approximately 40.7% 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.




**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.**




The
      SEC
      has adopted rules requiring public companies to include a report of management
      on our internal controls over financial reporting in our annual reports on
      Form
      10-KSB, commencing with our fiscal year ended September 30, 2008. In addition,
      our independent registered public accounting firm must attest to and report
      on
      management’s assessment of the effectiveness of our internal controls over
      financial reporting commencing with the following year. We are not presently
      required to make this attestation. 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 raised $30,000,000 capital may result in significant dilution
      and may impair our stock price.**




On
      September 28, 2007, we raised $30,000,000 through the sale of our notes. If
      our
      consolidated net income, as defined, does not reach the stated level for any
      of
      2007, 2008 or 2009, the conversion price will be adjusted in accordance with
      a
      fixed formula, which could result in the issuance of more shares of common
      stock. The
      adjustment in the conversion price is made on a formula basis. The
      following table sets forth a computation of the resulting conversion price
      if
      (a) the target levels are not met in any of the three years, (b) the number
      of
      fully-diluted shares of common stock (other than shares issuable upon conversion
      of the Convertible Notes) remain 35,164,495 throughout the three years, and
      (c)
      none of the notes are converted. Any change in any of these components will
      affect the amount of any adjusted conversion rate and conversion
      price.





Conversion
                Rate
            
            Conversion
                Price
            
            Conversion
                Rate
            
            Conversion
                PriceYear
            
            Beginning
                of year
            
            Beginning
                of Year
            
            As
                Adjusted
            
            As
                Adjusted2007
            
            
            31,546
            
            $
            3.17
            
            
            40,028
            
            $
            2.502008
            
            
            40,028
            
            $
            2.50
            
            
            48,764
            
            $
            2.052009
            
            
            48,764
            
            $
            2.05
            
            
            57,762
            
            $
            1.73




**Because
      the financing agreements give the investors certain rights relating to our
      business which may affect our ability to develop our
      business.**




The
      agreement restricts our use of funds which may impair our ability to develop
      our
      business. The proceeds from the loan are maintained in a separate account which
      require the signatures of our chief executive officer, our chairman and one
      senior officer of one of the lenders. At December 20, 2007, the proceeds in
      this
      account were $ million. Additionally, the investors have the right of approval
      with respect to our budgets in accordance with a schedule set forth in an
      investor rights agreement, and we are required to engage an independent auditor
      from a list of auditors designated by the investors. We are required to pay
      $2.5
      million on April 1 of each fiscal year, commencing April 1, 2008, if, on or
      before that date, none of the firms listed on the schedule has been appointed
      as
      our auditor. We are also prohibited from dismissing the auditor without the
      investor’s consent unless the dismissal is approved by an audit committee on
      which a designee of the investor is member. These rights may affect our ability
      to develop our business and may have an negative impact on our stock price.




14




**The
      conversion price of the convertible notes is subject to reduction based on
      the
      market price of our stock** .




The
      indenture pursuant to which we issued $14,000,000 of convertible notes provides
      that if the market price of the common stock on any March 28 or September 28
      is
      less than the conversion price, the conversion price is reduced to the market
      price, as defined, but the conversion price is not to be reduced pursuant to
      this provision below $2.10 per share.




**We
      may be required to pay liquidated damages if we can not fulfill the requirements
      regulated in the our $30,000,000 financing** . ****




If
      our
      common stock is not listed on the Nasdaq Global Market or the Nasdaq Capital
      Market by September 19, 2008, we will be required to pay by September 28, 2008,
      an additional payment on each Convertible Note in the amount of 3.3% of the
      principal amount of such note. Furthermore, the Company will be required to
      pay
      additional interest at a rate of 3.0% per annum if the Company has not obtained
      a listing of its common stock on the Nasdaq Global Market or the Nasdaq Capital
      Market by September 19, 2008 and maintained such listing continuously thereafter
      as long as the notes are outstanding. Our ability to have our common stock
      listed in either of these markets may be affected by any failure which we may
      have in our internal controls. In the event that the registration statement
      registering the shares of common stock underlying the convertible notes has
      not
      been declared effective by the SEC on or before March 14, 2008 or if
      effectiveness of the Registration Statement is suspended at any time other
      than
      pursuant to a suspension notice, for each 90-day period during which the
      registration default remains uncured, we shall be required to pay additional
      interest at the rate of one percent 1% of the Convertible Notes.




**Any
      adjustment in the conversion rate or event which requires payment of liquidated
      damages could have a depressive effect on our stock price and the market for
      our
      stock** .




If
      we are
      required to adjust the conversion price pursuant to any of the adjustment
      provisions of the agreements relating to our $30,000,000 financing or if we
      are
      required to pay liquidated damages, thus adjustment or payment, or the
      perception that an adjustment or payment may be required may have a depressive
      effect on both our stock price and the market for our stock.


**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 was no market for our common stock prior to February 6, 2007, 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;




15




·
            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.




**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 6.4% 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.




16




**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.




**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 former
      related party, Bejing Sanhuan Technology Development Co., Ltd (Beijing Sanhuan)
      with initial purchase price of $12.3 million, which ws increased to $18.6
      million, of which $15.4 million was paid as of September 30, 2007. We also
      license technology from Beijing Sanhuan for which we owed $170,000, of which
      $103,000 was paid as of September 30, 2007, and we use Beijing Sanhuan’s
      services for our subsidiaries. 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, the agreements
      relating to our September 2007 financing has restrictions on our use of our
      funds.




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




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;




17




·
            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.




**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 treated as 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
      Business**




Historically,
      our business has been the manufacture of pressure containers and compressed
      natural gas (CNG) facilities and equipment. In June 2006, we launched our
      program to develop and operate natural gas filling stations and construct and
      operate natural gas process plants in Central and East China. This business
      is
      currently our principal business.





Since
      the
      second quarter of calendar 2007, through Lixun, we are manufacturing and selling
      an electronic device to enable a vehicle to use alternative fuel as well as
      CNG
      vehicle conversion kits. Through
      Lixun, we also design and sell customized automotive alternate fuel (CNG/LPG)
      electronic device to either domestic customers as well as overseas customers,
      including customers in the United States, Russia and Italy. These conversion
      kits are sold to manufacturers on an OEM basis and are also sold in the after
      market. For the nine months ended September 30, 2007, the division, which
      accounted for 41.5% of our revenue, was our largest source of revenue.




The
      government of the 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. We
      have
      been developing our CNG wholesale and retail business by building our own
      natural gas processing plants and CNG filling stations in Central and East
      China
      to meet this perceived need.




In
      October 2007, we opened two CNG filling stations in Wuhan City, and in November
      2007, we opened a third CNG filling station in Xuancheng. In addition, we have
      ten additional CNG filing stations nearly completed and under quality checking
      by government officers, and another about 20 stations under construction or
      in
      the construction planning stage. These stations are to be opened in Wuhan City,
      Xuancheng City and Pingdingshan City. We expect to open the 30 stations in
      total
      by the end of June 2008, although we can give no assurance that these targets
      will be met.




18




We
      also
      plan to establish four natural gas processing plants in Hubei and Anhui Province
      with the designed annual capacity to process 400 million cubic meters per
      natural gas based on a quota which we obtained from Sinopec from a main pipeline
      which is presently under construction. The four plants are under construction
      and will be operated by Hubei Gather, a 55% subsidiary, and Anhui Gagher, in
      which we have a 45% interest. We expect these plants will become operational
      at
      the end of 2008 or in early 2009. Both Hubei Gather and Anhui Gagher are the
      parties to the natural gas purchase agreement with Sinopec.




The
      government of the 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. Since June
      2006, we have been developing our CNG wholesale and retail business by building
      our own natural gas processing plants and CNG filling stations in Central and
      East China to meet this perceived need.




We
      plan
      to establish a network of CNG stations at various locations in Central and
      East
      China. We are developing our first CNG station project in Wuhan City, in the
      Hubei Province, Pingdingshan City of Henan Province, and Xuancheng City of
      Anhui
      Province in the PRC. In each of these locations, we obtained the municipal
      government’s approval for retail and we secured natural gas quota from the
      main-pipeline of Petrol China and Sinopec, the only two natural gas suppliers
      of
      China, to support the CNG filling stations in those cities.




Our
      first
      two CNG stations are located in Wuhan City, Hubei Province. Each station has
      four filing outlets and is open seven days a week, 24 hours a day. We have
      staffed each station with 12 to 14 employees. Wuhan City is the capital of
      Hubei
      Province. As the biggest city in central China, it has a population of
      approximately 9,100,000 as well as 6,300 buses and 20,000 taxis. Based on
      statistics provided by the government agency, Wuhan currently has about 7,000
      CNG-burning vehicles and buses. We believe that between 20 and 30 CNG filing
      stations will be required in order to meet the anticipated demand. As of
      November 30, 2007, there were fewer than 10 CNG filling stations. The third
      CNG
      station is located in Xuancheng in Anhui Province.




We
      also
      plan to establish four natural gas processing plants in the area of Hubei and
      Anhui Province to process, under full annual capacity, 400 million cubic meters
      natural gas based on a quota which we obtained from Sinopec from a main pipeline
      which is presently under construction. The four plants are under construction
      and will be operated by Hubei Gather, our 55% subsidiary, and Anhui Gagher,
      in
      which we have a 45% interest. Both Hubei Gather and Anhui Gagher are the parties
      to the natural gas purchase agreement with Sinopec. The pipeline over which
      the
      natural gas will be transmitted to us is presently under construction. Our
      ability to supply natural gas is dependent upon our having and retaining a
      reliable source of natural gas.




**Marketing
      and Sales**




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.




In
      marketing our pressure containers and CNG facilities and equipment, 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.




19




The
      purchasers of conversion kits are primarily manufacturers who use the kits
      on an
      OEM basis and after market vehicle maintenance plants. We develop and service
      those customers by our in-house salesmen who market the products through
      business connections, trade show 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.




To
      our
      proposed natural gas process and wholesale business, the targeted customers
      will
      be companies that require significant quantities of natural gas for their own
      fleets as well as to CNG filling stations. We will also supply our own retail
      outlets from our wholesale facilities.




During
      the nine months ended September 30, 2007, there are two customers accounting
      for
      in excess of 10% of consolidated sales as 24.3% and 13.1% of consolidated sales
      respectively, or an aggregate of 37.5% of consolidated sales.




**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 as well as suppliers in the international market. We
      had
      purchased steel bottles, a key raw material for CNG truck trailers, from an
      Italian supplier. In May 2007, we also purchased steel tubes in the PRC domestic
      market and engaged a Korean company to manufacture the bottles from the steel
      tubes, and in August 2007, we engaged a PRC company to manufacture these
      bottles. We are
      not dependent upon any supplier for these products.




The
      natural gas for our retail and wholesale natural gas business is available
      from
      a limited number of suppliers, Sinopec, Petrol China or affiliated companies
      of
      Petrol China. The suppliers require both the supply of natural gas the pipeline
      which is the only commercially reasonable way to deliver the natural gas. If,
      for any reason, we are unable to obtain a reliable supply of natural gas, we
      will be unable to generate revenue from this business.




**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.




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 this agreement, we pay Beijing Sanhuan for the technology and
      software at the rate of $12,800 for each CNG substation and $23,051 for each
      CNG
      mother station. We also pay Beijing Sanhuan $64 per hour for engineers provided
      by Beijing Sanhuan. ****




As
      the
      designer and manufacturer of automotive alternate fuel (CNG/LPG) electronic
      device, Jiaxing Lixun has applied series of Chinese patents for the technical
      know how relating to these products, however, we cannot assure you that the
      patents will be granted or, if granted, that we will be able to enforce our
      rights against an alleged infringer.




20




**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,
      referred to as CNPC Group, and Sinopec are engaged in the sale and 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 business: Xinao Gas Field Ltd and China Natural Gas.
      Xinao Gas Field distributes natural gas via pipeline, doing business in 13
      provinces and municipalities that have a combined population of 31 million.
      China Natural Gas 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. We believe that neither of the two companies
      is
      approved to supply natural gas to any area in which our CNG retail business
      covered. In operating CNG stations, the location of the station is a crucial
      element in generating business. In marketing to large potential users, such
      as
      taxi and bus companies, we need to show that we are a reliable supplier of
      natural gas.




We
      are
      also aware of two 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
      September 30, 2007, we had about 572 employees, of whom, approximately 59 of
      our
      employees are in executive and administrative, 73 employees are in marketing
      and
      sales, 119 are technical engineers in pressure container and CNG deposit and
      transportation manufacturing, quality control as well as CNG station
      construction, the remaining 321 persons are manufacturing personnel. We believe
      that our employee relations are good.




**ITEM
      2. DESCRIPTION OF PROPERTY**




In
      China,
      there in 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, generally has a term of 50 years and permits the holder to use
      the
      property. Certificates of property 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 property right for both parcels expires in
      2057.




21




The
      property was purchased from an affiliated company and the purchase price was
      $18.4 million of which $15.4 million was paid during the period from 2005 to
      September 2007. The balance is due at such time as the land is sold out to
      commercial developing, and the Company get the proceeds of the land
      transferring **.**




**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




**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. The following table
      sets forth the high and low bid price of our stock by quarter since commencement
      of trading. These prices represent inter-dealer quotations without retail
      markup, markdown, or commission and may not necessarily represent actual
      transactions.




High
            
            Low2007First
                quarter (from February 6)
            
            $
            2.33
            
            $
            1.60Second
                quarter
            
            $
            2.78
            
            $
            1.83Third
                quarter
            
            $
            3.23
            
            $
            2.25Fourth
                quarter (through December 26)
            
            $
            5.15
            
            $
            3.14




On
      December 26, 2007, the last reported sales price for our common stock was $3.70
      per share.




On
      December 26, 2007, we had approximately 40 record holders of our common stock.
      The number of record owners does not reflect any shares that are held by
      stockholders in the name of their brokerage firm or in the name of Cede &
Co.





We
      have
      not paid dividends since our inception. Our agreement with the investors in
      the
      June 2006 private placement, and the indentures relating to our $30,000,000
      private placement of notes prohibit or restricts our payment of
      dividends.





As
      of
      December 26, 2007, we had the following shares of common stock reserved for
      issuance:





·
            1,746,428
                shares issuable upon exercise of the warrants issued in the June
                2006
                private placement and issued for services of investment relations
                company.




22


·
            4,416,404
                shares issuable upon transferring of 3% senior guaranteed convertible
                notes.





·
            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 September 30, 2007.





Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding options and
                warrants
            
            Weighted-average
                exercise price of outstanding options and warrants
            
            Number
                of securities remaining available for future issuance under equity
                compensation plansEquity
                compensation plans approved by security holders
            
            
            1,320,000
            
            
            1.88
            
            
            680,000Equity
                compensation plan not approved by security holders
            
            
            0
            
            
            0
            
            
            0




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




**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 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 - (i) the manufacture of CNG
      vehicle and gas station equipment, and (ii) 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.




23





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.





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 other business
      since
      we will be operating CNG filling stations. The business of operating CNG
      stations requires a substantial capital investment, and we have raised
      approximately $30 million from the sale of our convertible and fixed rate notes
      in September 2007. As discussed under “Liquidity and Capital Resources,” the
      indentures relating to these notes have restrictions on our incurring additional
      debt. 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 for third parties. 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
      by central government and municipal government. As a result of these price
      controls, our gross margin is effectively dependent upon the government’s
      pricing policies. The operation of CNG stations is reported as a separate
      segment.





During
      2007, we entered into two agreements to form joint ventures for the operation
      of
      natural gas process plants. We have a majority interest in one of these two
      ventures and a minority interest in the other. At September 30, 2007, our total
      commitments under these agreements were approximately $5.0 million, of which
      we
      had paid a total of approximately $1.6 million. These two companies are in
      the
      early construction stage, and neither of these ventures has commenced
      operations. We also have contracted for the purchase of natural gas which is
      to
      be delivered through a pipeline which is presently under construction and which
      is expected to be completed in or about 2009. These contracts do not have
      specific delivery quantities or prices, all of which are to be determined at
      a
      later date.




In
      early
      2007, we established a division to sell and manufacture CNG vehicle conversion
      kits to OEM and sale in the after market. These kits are designed to enable
      a
      gasoline powered vehicle to operate on CNG. We began to generate revenue from
      this business segment in the second quarter of calendar 2007. In
      March
      2007, we purchased a 60% interest in Jiaxing
      Lixun Automotive Electronic Co, Ltd (“Lixun”) from its stockholders for
      $390,000. In July 2007, we paid additional $400,000 to increase our equity
      ownership in Jiaxing Lixun to 70%. 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
      business of manufacturing of electronic part of vehicle conversion kits as
      well
      as produce conversion kit is reported as a separate segment in the nine months
      ended September 30, 2007.




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




·
            the
                design of CNG station and construction plans, construction of CNG
                stations
                and installation of CNG station equipment and related systems;
                and





·
            the
                manufacture of equipment for CNG vehicles and gas
                stations.




24




Our
      original business is the manufacture and sale of nonstandard equipment and
      pressure container business. During the nine months ended September 30, 2007,
      we
      received new orders in this division which generated a higher gross margin
      because of the additional value of the services we provided, compared with
      the
      comparable period of 2006 in which our sales were the traditional sales that
      generated a relatively lower profit margin.





The
      gross
      margin for CNG gas stations technical consulting service was high, as a result
      of our know-how in CNG system design and the absence of significant competition.
      Because our emergence into CNG filling station business, we did not receive
      any
      CNG station construction service order in the nine months ended September 30,
      2007. We anticipate that, at least in the near term, we will devote most, if
      not
      all, of our CNG construction business to the construction of our own CNG filling
      stations.





Steel
      and
      steel tubing are major component for our CNG vehicle and gas station equipment.
      We purchase steel plate from a Chinese domestic manufacturer, and we believe
      that alternative suppliers are available. We had purchased steel bottles, a
      key
      raw material for CNG truck trailers, from an Italian supplier, which carried
      the
      risk of delays that could interrupt our manufacturing process. Accordingly
      from
      May 2007, we also began to purchase steel tubes from PRC domestic market and
      engaged a Korean company to manufacture the bottles from the steel tubes, and
      in
      August 2007, we engaged a PRC company to manufacture these bottles. Although
      we
      believe that we have reduced the risks of interruption of our manufacturing
      process, we cannot eliminate the risk entirely.





Our
      functional currency is Renminbi (“RMB”), which is the currency of the PRC, and
      our reporting currency is United States dollars. In addition, our purchases
      from
      our Italian supplier are in Euros. When
      we
      discuss the amount of our future obligations, we convert RMB or Euros 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 report as a result of fluctuations in the currency
      rates.





**Results
      of Operations**




In
      the
      nine months ended September 30, 2007, we had four business segments, and in
      the
      same period of 2006, we had three business segments. The third segment -- the
      construction of CNG stations to be operated by us and the operation of those
      CNG
      stations -- is in the development stage. The fourth segment - the sale of CNG
      conversion kits first generated revenue in the second quarter of calendar year
      2007.




**(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 Facilities and Construction”)**





CNG
      station construction business represents:




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





·
            CNG
                trailer




25




·
            CNG
                deposited system for gas station usage


·
            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.




**(** **iv** **)
      Vehicle fuel conversion equipment**




Manufacturing
      of CNG vehicle conversion kits and electronic
      control devices for alternative
      fuel.





**Nine
      months ended September 30, 2007 and 2006**




The
      information set forth below has been derived from our audited financial
      statements for the nine months ended September 30, 2007 and our restated
      unaudited financial statements for the nine months ended September 30,
      2006.





Nine
                months ended September 30, 2007
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            Vehicle
                conversion kits
            
            TotalNet
                revenue
            
            $
            3,250
            
            $
            6,064
            
            
            -
            
            $
            6,609
            
            $
            15,923Cost
                of revenues
            
            
            1,873
            
            
            2,716
            
            
            -
            
            
            4,041
            
            
            8,090Gross
                profit
            
            
            1,377
            
            
            3,888
            
            
            -
            
            
            2,568
            
            
            7,833Gross
                margin
            
            
            42
            %
            
            64
            %
            
            
            
            
            39
            %
            
            49
            %Operating
                expenses:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0Selling
                expenses
            
            
            100
            
            
            23
            
            
            -
            
            
            111
            
            $
            234General
                and administrative expenses
            
            
            529
            
            
            970
            
            
            1,130
            
            
            700
            
            
            3,329Total
                operating expense
            
            
            629
            
            
            993
            
            
            1,130
            
            
            811
            
            
            3,563Income
                (loss) from operations
            
            $
            748
            
            $
            2,895
            
            
            ($1,130
            )
            $
            1,757
            
            $
            4,270




26


Nine
                months ended September 30, 2006
            
            Non-standard
                pressure containers
            
            CNG
                station facilities and construction
            
            CNG
                station Operation
            
            TotalNet
                revenue
            
            $
            4,361
            
            $
            5,403
            
            
            -
            
            $
            9,764Cost
                of revenues
            
            
            3,353
            
            
            1,625
            
            
            -
            
            
            4,978Gross
                profit
            
            
            1,008
            
            
            3,778
            
            
            -
            
            
            4,786Gross
                margin
            
            
            23
            %
            
            70
            %
            
            
            
            
            49
            %Operating
                expenses:Selling
                expenses
            
            $
            152
            
            $
            38
            
            
            -
            
            $
            190General
                and administrative expenses
            
            
            455
            
            
            908
            
            
            33
            
            
            1,396Total
                operating expense
            
            
            607
            
            
            946
            
            
            33
            
            
            1,586Income
                (loss) from operations
            
            $
            401
            
            $
            2,832
            
            
            ($33
            )
            $
            3,200





*Net
      Revenue.* Net
      revenue for nine months ended September 30, 2007 (the “September 2007 period”)
      was approximately $15.9 million, a 64% increase from the net revenue of
      approximately $6.2 million for the nine months ended September 30, 2006 (the
      “September 2006 period”). This increase results primarily from the sale of our
      vehicle conversion kit, which generated revenue of $6.6 million, or 41.5 %
      of
      sales in the September 2007 period. During the September 2007 period, this
      segment, which first generated revenue in the second quarter of 2007, was our
      largest source of revenue. In addition, our revenue from CNG station facilities
      and construction increased by $661,000, or 12.2%, in the September 2007 period
      from the September 2006 period. These increases were offset by a decrease of
      $1.1 million, or 25.4%, in sales of pressure containers. This decrease results
      from a restructuring of our pressure container product line in the first quarter
      of 2007, when our sales from this segment were less than $800,000.




27




*Cost
      of Revenue.* The cost
      of revenue for the September 2007 period was approximately $8.0 million,
      compared with approximately $5.0 million in the same period of 2006, a 62.5%
      increase. The cost increase is consistent with the increase in net revenue.
      Although our overall gross margin of 49% is virtually unchanged from the
      September 2006 period to the September 2007 period, there were changes in gross
      margins of the different segments.




·
            The
                gross margin vehicle conversion kits segment, which accounted for
                41.5 %
                of sales in the September 2007 period, is 39%. Our principal cost
                of
                revenue is our manufacturing costs.




·
            Our
                gross margin for our non-standard pressure container segment increased
                from 23% to 42%. In the September 2007 period, we obtained, in addition
                to
                our traditional container orders, two orders for new products which
                generated a higher gross margin because of the specialized nature
                of the
                services we provided. One of these orders is for the manufacture
                of
                equipment for a bio-diesel facilities. The second is for the installation
                service of pressure container equipment.





·
            Our
                gross margin for the CNG station building consulting service decreased
                to
                64% in the September 2007 period from 70% in the September 2006 quarter.
                In the September 2007 period, all of our revenue related to the
                manufacture for CNG facilities and equipment and none of the revenue
                was
                generated by technical consulting services, which in the past have
                generated a significantly higher gross margin than the manufacture.
                We
                were able to realize the 64% margin in this segment, without providing
                consulting services, as a result of a change in the procurement process.
                In the past, we purchased the steel bottles, a key raw material for
                CNG
                stations and a key cost of revenue. During the September 2007 period,
                our
                customers provided the steel bottles.





*Operating
      Expenses.* Operating expenses were approximately $3.6 million in the September 2007 period,
      an increase of $2.0 million, or 127%, from the September 2006 period. The
      increase in operating expenses reflects the following factors:





·
            $1.2
                million of expenses relating to the our CNG station operation segment,
                as
                compared with $33,000 of such expenses in the September 2006 period.
                as
                more stations being under construction and more managing work in
                that
                segment in the 2007 period.




·
            $811,000
                of selling, general and administrative expenses associated with the
                vehicle conversion business in the September 2007 period. This segment
                commenced operations in 2007, and, as accordingly, there were no
                comparable expenses in the September 2006
                period.




·
            Our
                general and administrative expenses for the September 2007 period
                include
                $572,000 of non-cash expenses resulting from the grant of stock options
                and warrants during the September 2007 period, while there was no
                comparable expenses in the September 2006
                period.




*Income
      from Operations.* Income
      from operations was approximately $4.2 million for the nine months of 2007,
      compared with approximately $3.2 million in the same period of 2006 resulted
      from the above mentioned reasons.





*Interest
      Expense* .
      In the
      September 2006 period, the interest expense was $1.73 million, which includes
      a
      $1.594 million non-monetary expense resulting from the issuance of convertible
      notes issued in our June 2006 private placement. The interest expense in the
      September 2006 period, other than this non-monetary expense, was approximately
      $135,000. Our interest expense for the September 2007 period was $295,000,
      an
      increase of $160,000 from the interest expense exclusive of the non-monetary
      charge. This increase reflected a $11.6 million increase in short term bank
      loan
      which we incurred in connection with the expansion of our manufacture facilities
      as well as in increase in the average the interest rate from 6.67% to
      7.56%.




28





*Income
      Taxes.* Sinogas,
      Yuhan, and Wuhan Sinoenergy have received exemption from corporate income tax
      separately in September 2006 and in the beginning of 2007. As a result, we
      did
      not accrue any income tax in the September 2007 period. The income tax expense
      for the September 2007 period primarily represents income tax accrued by our
      newly acquired Lixun subsidiary. Lixun received an income tax exemption
      commencing August 2007.





*Net
      income* .
      As a
      result of the foregoing, we had net income of $3.6 million, or $0.14 per share
      (basic and diluted), for the nine months of 2007 as compared with net income
      of
      $2.3 million, or $ 0.16 per share (basic and diluted) for the same period of
      2006.





**Liquidity
      and Capital Resources**





At
      September 30, 2007, we had cash of approximately $4,547,000, an increase of
      approximately $3,959,000 from December 31, 2006. Our cash at September 30,
      2007
      included restricted cash of $1,225,000,
      representing a deposit for a bill of exchange in the same amount which was
      issued in connection with a material purchase by us. At
      September 30, 2007, we had working capital of approximately $24.7 million and
      stockholders’ equity of approximately $32.7 million, compared with a negative
      working capital of approximately $2,883 and stockholders’ equity of
      approximately $16.0 million at December 31, 2006.





For
      the
      September 2007 period, we generated cash of approximately $5.2 million from
      our
      operations, and we used approximately $25.2 million for investments, consisting
      of payments of approximately $16.8 million for the purchase of property, plant
      and equipment, including the purchase of land use rights, and approximately
      $8.4
      million to purchase a portion of the minority interest in some of our
      subsidiaries.





We
      generated approximately $11.3 million cash from the sale of common stock upon
      the exercise of warrants, and approximately $11.7 from short term bank loans,
      which, as of September 30, 2007, were in the aggregate principal amount of
      approximately $23 million.





At
      September 30, 2007, we had a note receivable of $29.6 million, representing
      the
      net proceeds from our issuance on September 28, 2007 of $16 million principal
      amount of guaranteed senior notes and $14 million principal amount of guaranteed
      senior convertible notes. Although the notes were issued at a closing on
      September 28, 2007, the funds were received on October 8, 2007.





We
      believe that our working capital, together with cash flow generated from our
      operations, will provide us with the funds necessary to continue to develop
      our
      business, which, because of efforts to develop the CNG station business, is
      very
      cash intensive. We will continue to incur capital expenditures for this business
      segment in future. Because the CNG business in the PRC is a relatively new
      industry, it is necessary for us to plan, construct and equip each CNG station
      before we can generate any revenue.




29





Our
      agreement relating to the issuance of $16 million principal amount of guaranteed
      senior notes and $14 million principal amount of guaranteed senior convertible
      notes have covenants which could impair our ability to raise additional funds
      if
      we require the funds either to develop or expand our present businesses,
      primarily the CNG station business, or to make acquisitions. These covenants
      include the following:




·
            We
                cannot incur any debt unless,
                after giving effect to the borrowing, (i) the fixed charge coverage
                ratio
                would be greater than 2.75 to 1.00 for the first year and 3.5 to
                1.0 if
                the debt is incurred thereafter, and (ii) the leverage ratio would
                not
                exceed 4.25 to 1.00 for the first year and 3.75 to 1.00 if the debt
                is
                incurred thereafter, provided, that the certain subsidiaries may
                continue
                to maintain debt under credit facilities of not more than $15,000,000
                for
                the first year and $10,000,000 thereafter, and may incur purchase
                money
                indebtedness. The fixed charge coverage ratio is the ratio of the
                Company’s earnings before interest, taxes, depreciation and amortization,
                which is generally known as EBITDA, to consolidated interest expense,
                as
                defined. Leverage ratio means the ration of outstanding debt to EBITDA,
                with the interest component being the consolidated interest expense,
                as
                defined.




·
            We
                must maintain, as of the last day of each fiscal quarter, (i) a fixed
                charge coverage ratio of 1.75 to 1.00 for the first six months, 2.75
                to
                1.00 for the next six months and 3.0 to 1.00 thereafter, (ii) a leverage
                ratio of 7.5 to 1.00 through March 31, 2008, 5.0 to 1.00 from April
                1,
                2008 to September 30, 2008, and 4.5 to 1.00 thereafter, and (iii)
                a
                consolidated subsidiary debt to consolidated net tangible asset ratio
                of
                not more than 0.2 through September 30, 2008 and 0.15
                thereafter.;




·
            Sinogas
                cannot incur debt under its credit facilities except to the extent
                that
                such debt does not exceed $15.0 million through September 28, 2008
                or
                $10.0 million thereafter.




·
            We
                are subject to restriction in paying dividends, purchasing its own
                securities or those of our subsidiaries, prepaying subordinated debt,
                and
                making any investment other any investments in itself and its subsidiaries
                engaged in our business and certain other permitted
                investments.




·
            We
                are subject to restrictions on incurring
                liens.




In
      connection with this financing, we paid the lenders a fee of
      $160,000.




**Commitments**




When
      we
      formed Yuhan with Kantai, we had a 55% interest in Yuhan. We have since acquired
      an additional 35% for $1,500,000, of which, at September 30, 2007, we had paid
      $1.2 million and owed $300,000. **** We
      have the
      right
      to acquire the remaining 10% interest in Yuhan during the first six months
      of
      2008 for approximately $640,000.





On
      March
      23, 2007, we and Hong Kong China New Energy Development Investment Co. Ltd
      (“New
      Energy”), formed Hubei Gather Eenergy Gas Co., Ltd (“Hubei Gather”) to construct
      and operate natural gas process plants with expected annual processing capacity
      of 100-300 million cubic meters in Hubei Province. The registered capital is
      $5
      million of which we will contribute $2,750,000 as 55% equity owner and New
      Energy will contribute $2, 250,000 for a 45% interest. The term of the business
      of Hubei Gather is from March 23, 2007 to March 22, 2027. As of September 30,
      2007, $752,710 has been invested in Hubei Gather by us and New Energy, and
      at
      that date our commitment for future funding was $2,336,010.




In
      July,
      2007, we and Shanghai CNPC Enterprise Group (CNPC Enterprise) signed an
      agreement pursuant to which we would purchase 70% of Xuancheng Sinoenergy Gas
      owned by CNPC Enterprises for $1,797,412. On November 11, 2007 Xuancheng
      Sionenergy received a new business license and we received our equity in CNPC
      Enterprise. As of December 20, 2007, we had paid to CNPC Enterprise $732,279
      on
      account.




30




Anhui
      Gagher was incorporated on March 23, 2007, with Hong Kong China New Energy
      Development Investment Co. Ltd owning 55% equity and Tianjin Green Fuel owning
      45% equity. On July 4, 2007, we purchased the 45% equity of Anhui Gagher, which
      had been owned by Green Fuel, for $2,750,000, of which $844,330 would be paid
      to
      Green Fuel for capital injection and to reimburse Green Fuel for its costs
      incurred in obtaining the right to receive 200 million cubic meters natural
      gas
      quota from Sinopec, and $1,905,670 would be paid to Anhui Gagher as unpaid
      capital. As of September 30, 2007, we had paid $844,330 to Green Fuel. We are
      to
      pay the remaining $1.9 million to Anhui Gagher according to requirement of
      PRC
      government.




During
      the September 2007 period, we purchased the land use right for the real property
      on which our facilities are located from Beijing Sanhuan, which may be deemed
      a
      related party. The initial purchase price was $12.3 million. Based on increased
      expenses incurred by Beijing Sanhuan as well as the increased value of the
      land,
      the price was increased to $18.6 million. As of September 30, 2007 and December
      20, 2007, we had paid $15.4 million to Beijing Sanhuan. The rest is payable
      if
      we sell the property.





On
      August
      28, 2007, we entered into a purchase agreement to acquire 100% of the equity
      of
      Qingdao Jingrun General Machinery Company (“Jingrun”). Under the terms of the
      agreement, Jingrun’s shareholder will receive cash consideration of
      approximately $8 million, for all of the assets of Jingrun, including the
      company’s land and workshop. Jingrun’s most valuable asset is its 645,000 square
      foot plot of land, which is located in the new development zone of Qingdao
      City,
      Shandong province, China. Upon payment of the purchase price, Jingrun will
      become our wholly owned subsidiary and, through the subsidiary, we will own
      the
      property rights to the land. As of September 30, 2007, we had paid $4,087,175
      of
      the purchase price.





In
      addition, in the normal course of our business we issue purchase orders for
      equipment for our CNG stations and well as for components for our products.
      As
      of September 30, 2007, we had outstanding purchase orders totaling approximately
      $14.28 million, of which approximately $8.82 million had been paid on
      account and $5.46 million remained outstanding. These outstanding balances
      will
      become due during the fiscal year ended September 30, 2008.





During
      September 2007 period, our subsidiary, Wuhan Sinoenergy, entered into leases
      for
      13 locations in Wuhan City for its CNG station. The leases have terms of between
      10 and 20 years with total annual rental of $341,600. Wuhan Sinoenergy has
      also
      purchased the land use right for a location in Wuhan City for a CNG station,
      for
      $116,000 of which $37,000 has been paid.




**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 and other
      receivables, the valuation and costing of inventory, depreciation of property,
      plant and equipment, impairment of long-lived assets, 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.




31




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





Inventories
      comprise 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
      from
      the time when the assets are in service. 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 at least 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.





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.





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 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, and 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.




32





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 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.





**New
      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. 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.




33





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.





In
      December 2007, the FASB issued FASB 141(R), “Business Combinations” of which the
      objective is to improve the relevance, representational faithfulness, and
      comparability of the information that a reporting entity provides in its
      financial reports about a business combination and its effects. , the new
      standard requires the acquiring entity in a business combination to recognize
      all (and only) the assets acquired and liabilities assumed in the transaction;
      establishes the acquisition-date fair value as the measurement objective for
      all
      assets acquired and liabilities assumed; and requires the acquirer to disclose
      to investors and other users all of the information they need to evaluate and
      understand the nature and financial effect of the business
      combination.




34




In
      December 2007, the FASB issued FASB 160 “Noncontrolling Interests in
      Consolidated Financial Statements—an amendment of ARB No.51” of which the
      objective is to improve the relevance, comparability, and transparency of the
      financial information that a reporting entity provides in its consolidated
      financial statements by establishing accounting and reporting standards by
      requiring all entities to report noncontrolling (minority) interests in
      subsidiaries in the same way—as equity in the consolidated financial statements.
      Moreover, Statement 160 eliminates the diversity that currently exists in
      accounting for transactions between an entity and noncontrolling interests
      by
      requiring they be treated as equity transactions.




Both
      FASB
      141(R) and FASB 160 are effective for fiscal years beginning after December
      15,
      2008, we do not believe that adoption of these standards will have any 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





**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




35




**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
            
            38
            
            Chief
                executive officer and directorTianzhou
                Deng
            
            52
            
            Chairman
                and directorQiong
                (Laby) Wu
            
            33
            
            Chief
                financial officerYanying
                Liu
            
            43
            
            SecretaryRobert
                I. Adler
            
            73
            
            DirectorRenjie
                Lu
            
            73
            
            DirectorGreg
                Marcinkowski
            
            47
            
            DirectorBaoheng
                Shi
            
            70
            
            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.





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 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
      of
      Australia, 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.




36





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. He retired in 1973 from a position as investment
        advisor with UBS Financial Services, where he had been employed for the prior
        year. 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. Recently he taught financial English for a semester in Shanghai
        University of Finance and Economics. Mr. Adler obtained a B.A. degree from
        Swarthmore College and studied at New York University School of Business
        Administration. He is a member of Institute of Chartered Financial Analysts
        and
        the New York Society of Security Analysts. Mr. Adler is also a director of
        China
        Medicine Corporation, a company that markets and distributes medicine products
        in the PRC, and Precision Aerospace Components, Inc., a stocking distributor
        of
        precision fasteners based in New York City.





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.





**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.




37





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 fiscal year ended September
        30, 2007, the following officers, directors and 10% stockholders were late
        in
        their filings: Mr. Huang, Mr. Deng and Ms. Wu were each 72 days late in filing
        a
        Form 4. Mr. Lu and Mr. Shi were each 272 days late in filing a Form 3 and
        19
        days late in filing a Form 4. JLF Offshore Fund Ltd was a day late in filing
        a
        Form 3. Jeff Feinberg was a day late in filing a Form 3. JLF Partners I,
        L.P.
        was late in filing a Form 3.


**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 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 commencing
      in
      2007. Tianzhou Deng is our chairman. He received an annual salary of
      $36,000 **.** He
      is
      eligible for the grant of options pursuant to our 2006 long term incentive
      plan.




The
      following table sets forth information as to compensation paid to our directors
      who are not listed in the Summary Compensation Table during the nine months
      ended September 30, 2007.




Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
            
            Option
              Awards
                ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Change
                in Pension Value and Nonqualified Deferred Compensation Earnings
            
            All
                Other Compensation
              ($)
            
            Total
              ($)Tianzhou
                Deng
            
            
            
            
            $
            0
            
            
            62,000
            
            $
            0
            
            $
            0
            
            $
            0
            
            
            62,000Robert
                Adler
            
            
            
            
            
            0
            
            
            10,500
            
            
            0
            
            
            0
            
            
            0
            
            
            10,500Renjie
                Lu
            
            
            
            
            
            0
            
            
            10,500
            
            
            0
            
            
            0
            
            
            0
            
            
            10,500Greg
                Marcinkowski
            
            
            
            
            
            0
            
            
            10,500
            
            
            0
            
            
            0
            
            
            0
            
            
            10,500Baoheng
                Shi
            
            
            
            
            
            0
            
            
            10,500
            
            
            0
            
            
            0
            
            
            0
            
            
            10,500




38




We
      granted Mr. Deng a five-year option to purchase 100,000 shares of common stock
      at an exercise price of $2.00 per share. We granted Mr. Adler, Mr. Lu, Mr.
      Marcinkowski and Mr. Shi options to purchase 5,000 shares at an exercise price
      of $2.03, and to purchase 30,000 shares at an exercise price of $0.65 pursuant
      to the automatic grant provisions of our 2006 long-term incentive plan.





**Executive
      Officers’ Compensation**





The
      following table is the compensation to our chief executive officer and chief
      financial officer during 2007 and 2006. No officer received compensation of
      $100,000 or more.





**Summary
      Compensation Table**





Name
                and principal position
            
            Fiscal
                Year
            
            Salary
                ($)
            
            Option
                Awards ($)
            
            Total
                ($)Bo
                Huang, Chief Executive Officer
            
            
            2007
            
            $
            24,000
            
            $
            31,000
            
            $
            55,0002006
            
            
            12,000
            
            
            0
            
            
            12,000Qiong
                (Laby) Wu, Chief Financial Officer
            
            
            2007
            
            
            25,000
            
            
            31,000
            
            
            56,0002006
            
            
            16,000
            
            
            0
            
            
            16,000





**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.




**Outstanding
      Equity Awards at Fiscal Year End**




During
      the nine months ended September 30, 2007, we did not issue any stock awards.
      The
      following table sets forth information as to options held by the officers named
      in the Summary Compensation Table.





Name
            
            Number
                of Securities Underlying Unexercised Options (#) Exercisable
            
            Number
                of Securities Underlying Unexercised Options (#) Unexercisable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options (#)
            
            Option
                Exercise Price ($)
            
            Option
                Expiration DateBo
                Huang
            
            
            50,000
            
            
            50,000
            
            
            0
            
            $
            2.00
            
            
            5/8/2012Qiong
                (Laby) Wu
            
            
            50,000
            
            
            50,000
            
            
            0
            
            $
            2.00
            
            
            5/8/2012





39




**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 November 30, 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
            
            
            20.3
            %Bo
                Huang
              45
                Jinghua Road
              Qingdao,
                Shandong, China
            
            
            6,396,923.5
            
            
            20.3
            %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
            
            
            45.1
            %




*  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 November 30, 2007.





Mr.
      Deng
      and Mr. Huang each owns 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.
      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 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 was
      still
      the legal representative of Beijing Sanhuan before July 2007. During 2005,
      Sinogas signed an agreement to acquire the land use right for the land on which
      Sinogas’ offices and manufacturing facilities are located with initial transfer
      price of $12.3 million, of which $5.0 million was paid during 2005 and $4.1
      million was paid in 2006. In May 2007, the purchase price for the land use
      right
      was increased to $18.6 million pursuant to an amendment to the sales agreement,
      as a result of increased costs and an increase in the value of the land use
      right. Pursuant to the amendment, the increase was conditioned upon Beijing
      Sanhuan providing the Company with a special purpose audit report to support
      the
      increased cost, and the management is to engage third party independent
      professionals to provide a report for the land use right valuation. In May
      2007,
      the Company received the land use right certificate. Upon the grant, the land
      use right will have a term of 50 years from the date of approval. As of
      September 30, 2007, the Company has paid $15.4 million to Beijing Sanhuan.





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. ****




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.




41




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, the Company entered into an agreement to acquire the remaining 45% for
      $1,500,000, with payment due in installments.  The agreement, as amended,
      gives the Company the right to buy the remaining 10% interest in Yuhan during
      the first six months of 2008 on payment of the rest $640,000. As of September
      30, 2007, the Company owns 90% of Yuhan and paid a total of $524,000 and own
      $976,000.




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 September
      30,
      2007, the outstanding receivable was $145,595 **.** .




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.




**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. These four independent directors, 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
                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 plan1




42




10.7
            
            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)210.12
            
            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)210.14
            
            Letter
                of Intentto
                secure the supply of 200 million cubic meters of natural gas per
                year,
                dated May 14, 2007, amongHubei Gather Energy Gas Co, its 55% equity owned subsidiary,Sinopec
                Shanghai Petrochemical Company Limited (English translation)410.15
            
            Agreement
                of Natural Gas Sale and Purchase dated June 7, 2007, among China
                Petroleum
                and Chemical Corporation Natural Gas Branch and Anhui Gagher Energy
                Gas
                Co., Ltd. (English translation)410.16
            
            Agreement
                of Composite Note Purchase, dated September 1, 2007, among Sinoenergy
                Corporation,Abax
                Lotus Ltd. and CCIF Petrol Limited.410.17
            
            Agreement
                of Equity Interest Transfer dated August 28, 2007, among Junning
                International Industry Co. Ltd., Sinoenergy Holding Limited and Qingdao
                Guang An Industry Co. Ltd(English translation)410.18
            
            Indenture
                dated September 28, 2007, by and among the Company and DB Trustees
                (Hong
                Kong) Limited, as trustee, relating to the 3.0% Guaranteed Senior
                Convertible Notes due 2012410.19
            
            Indenture
                dated September 28, 2007, by and among the Company and DB Trustees
                (Hong
                Kong) Limited, as trustee relating to the 12.0% Guaranteed Senior
                Notes
                due 2012410.20
            
            Equity
                registration rights agreement dated September 28, 2007, by and among
                the
                Company, Abax Lotus Ltd. and CCIF Petrol Limited410.21
            
            Investor
                rights agreement dated September 28, 2007, by and among the Company,
                its
                subsidiaries, Mr. DENG Tianzhou and Mr. HUANG Bo, and Abax Lotus
                Ltd. and
                CCIF Petrol Limited410.22
            
            Information
                rights agreement dated September 28, 2007, from the Company to Abax
                Lotus
                Ltd. and CCIF Petrol Limited410.23
            
            Charge
                agreement over registered shares in Sinoenergy Holding Limited between
                the
                Company and DB Trustees (Hong Kong) Limited, as security agent410.24
            
            Composite
                non-competition covenant and agreement by Mr. DENG Tianzhou and Mr.
                HUANG
                Bo for the benefit of Abax Lotus Ltd. and CCIF Petrol Limited4




43




21.1
            
            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 2002.232.1
            
            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 statements 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 as follows:




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




On
      December 11, 2006, we engaged Schwartz Levitsky Feldman LLP (“Schwartz
      Levitsky”) as our registered independent accounting firm. We
      were
      billed by Schwartz Levitsky during the nine months ended September 30, 2007
      and
      the year ended December 31, 2006, as follows:




Description
                of services
            
            2007
            
            2006Audit
                fees
            
            
            173,000
            
            $
            78,000Audit
                related fees
            
            
            -0-
            
            
            27,500Tax
                fees
            
            
            -0-All
                other fees
            
            
            -0-173,000
            
            
            105,500




44




*Audit
      fees.* Audit
      fees represent fees for professional services performed by Schwartz Levitsky
      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. There is no audit related fee for the nine months
      ended September 30, 2007




*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.* Schwartz Levitsky did not perform 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:
              December 27, 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
            
            December
                27, 2007Bo
                Huang
            
            and
                Director (Principal Executive Officer)s/
                Qiong (Laby) Wu
            
            Chief
                Financial Officer
            
            December
                27, 2007Qiong
                (Laby) Wu
            
            (Principal
                Financial and Accounting Officer)s/
                Tianzhou Deng
            
            Director
            
            December
                27, 2007Tianzhou
                Dengs/
                Robert I. Adler
            
            Director
            
            December
                27, 2007Robert
                I. Adlers/
                Renjie Lu
            
            Director
            
            December
                27, 2007Renjie
                Lus/Greg
                Marcinkowski
            
            Director
            
            December
                27, 2007Greg
                Marcinkowskis/Baoheng
                Shi
            
            Director
            
            December
                27, 2007Baoheng
                Shi




46




**SINOENERGY
        CORPORATION AND SUBSIDIARIES**
  **Consolidated
        Financial Statements**
 **Nine
        months ended September 30, 2007 and 2006**
 
 **Index
        to Financial Statements**
 
 PageReports
                  of Independent Registered Public Accounting Firm
              
              F-2Consolidated
                  Balance sheets as of September 30, 2007 (audited) and December
                  31, 2006
                  (audited)
              
              F-3Consolidated
                  Statements of Operations for the nine months ended September 30,
                  2007
                  (audited) and 2006 (restated unaudited)
              
              F-4Consolidated
                  Statements of Changes in Stockholders’ Equity for the Nine Months Ended
                  September 30, 2007 and the year ended December 31, 2006
              
              F-5Consolidated
                  Statements of Cash Flows for the Nine Months Ended September 30,
                  2007
                  (audited) and 2006 (restated unaudited)
              
              F-6Notes
                  to the Consolidated Financial Statements
              
              F-7
                  to F-40
 
 F-1
  **Schwartz
        Levitsky Feldman llp**
 CHARTERED
        ACCOUNTANTS
 LICENSED
          PUBLIC ACCOUNTANTS
 TORONTO ·  MONTREAL
 REPORT
          OF
          INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
          the
          Board of Directors and Stockholders of Sinoenergy Corporation
 
 We
          have
          audited the accompanying consolidated balance sheets of Sinoenergy Corporation
          as at September 30, 2007 and December 31, 2006 and the related consolidated
          statements of operations, cash flows and changes in stockholders’ equity for the
          nine months transition period ended September 30, 2007. 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 audits .
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audits to obtain reasonable assurance about whether the
          consolidated financial statements are free of material misstatement. 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 audits provide a reasonable basis for our
          opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Sinoenergy Corporation
          as of
          September 30, 2007 and December 31, 2006 and the results of its operations and
          its cash flows for the nine months ended September 30, 2007 in conformity
          with
          generally accepted accounting principles in the United States of
          America.
 
 The
          consolidated statements of operations and cash flows for the nine months
          ended
          September 30, 2006 were unaudited.
   
 **/S/
                    SCHWARTZ LEVITSKY FELDMAN LLP**Toronto,
                  Ontario, Canada
                Chartered
                    AccountantsDecember
                  24, 2007
                Licensed
                    Public Accountants
  1167
        Caledonia RoadToronto,
        Ontario M6A 2X1
 Tel:
        416
        785 5353
 Fax:
        416
        785 5663
  F-2
  **Sinoenergy
        Corporation and Subsidiaries**
 **Consolidated
        Balance Sheets**
 **(In
        thousands of United States dollars)**
  Notes
              
              September
                  30, 2007
              
              December
                  31, 2006**ASSETS**
              
              
              
              Audited
              
              AuditedCURRENT
                  ASSETSCash
              
              
              
              3,322
              
              588Restricted
                  cash
              
              
              3
              
              
              1,225
              
              
              -Accounts
                  receivable (net)
              
              
              4-Related
                  party
              
              
              
              
              
              169
              
              
              594-Third
                  party
              
              
              
              
              
              5,827
              
              
              3,777Other
                  receivables
              
              
              5-Related
                  party
              
              
              
              
              
              332
              
              
              1,220-Third
                  party
              
              
              
              
              
              33,594
              
              
              1,176Deposits
                  and prepayments-third party
              
              
              6
              (1)
              
              2,795
              
              
              -Deferred
                  expenses
              
              
              
              
              
              58
              
              
              4Inventories
              
              
              7
              
              
              2,901
              
              
              937TOTAL
                  CURRENT ASSETS
              
              
              
              
              
              50,223
              
              
              8,296LONG
                  TERM ASSETSLong
                  term investments
              
              
              8
              
              
              1,592Property,
                  plant and equipment (net)
              
              
              9
              
              
              8,388
              
              
              3,556Intangible
                  assets
              
              
              10
              
              
              18,531
              
              
              12,114Other
                  long-term asset
              
              
              6
              (2)
              
              9,599
              
              
              3,187Goodwill
              
              
              11
              
              
              729
              
              
              676Long
                  term deferred tax asset
              
              
              
              
              
              4
              
              
              4TOTAL
                  ASSETS
              
              
              
              
              
              89,066
              
              
              27,833**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**CURRENT
                  LIABILITIESShort
                  term bank loan
              
              
              12
              
              
              14,843
              
              
              3,160Accounts
                  payable-
                  Related party
              
              
              
              
              
              -
              
              
              452-
                  Third party
              
              
              
              
              
              3,166
              
              
              211Notes
                  payable
              
              
              
              
              
              799
              
              
              -Other
                  payables
              
              
              13-
                  Related party
              
              
              
              
              
              3,679
              
              
              4,073-
                  Third party
              
              
              
              
              
              1,502
              
              
              2,359Accrued
                  expenses
              
              
              
              
              
              319
              
              
              176Warranty
                  accrual
              
              
              
              
              
              76
              
              
              40Advances
                  from customers
              
              
              14
              
              
              1,035
              
              
              701Income
                  taxes payable
              
              
              15
              
              
              119
              
              
              7TOTAL
                  CURRENT LIABILITIES
              
              
              
              
              
              25,538
              
              
              11,179LONGTERM
                  LIABILITIES12%
                  guaranteed senior notes
              
              
              16
              
              
              15,622
              
              
              -3%
                  guaranteed senior convertible notes
              
              
              16
              
              
              13,823
              
              
              -TOTAL
                  LONG TERM LIABILITIES
              
              
              
              
              
              29,445
              
              
              -Minority
                  interests
              
              
              17
              
              
              1,363
              
              
              614Commitments
              
              
              24STOCKHOLDERS’
                  EQUITYCommon
                  stock- par value$.001 per share; Issued and Outstanding- 31,418,065
                  shares
                  at September 30, 2007, 14,636,472 shares at December 31, 2006
              
              
              21
              
              
              31
              
              
              15Series
                  A convertible preferred stock-$0.001 Par Value -none at September
                  30,
                  2007, 5,692,307 shares at December 31, 2006
              
              
              21
              
              
              -
              
              
              6Additional
                  paid-in capital
              
              
              21
              
              
              22,000
              
              
              9,935Capital
                  surplus
              
              
              
              
              
              20
              
              
              20Statutory
                  surplus reserve fund
              
              
              19
              
              
              1,140
              
              
              1,140Retained
                  earnings
              
              
              
              
              
              8,217
              
              
              4,576Accumulated
                  other comprehensive income
              
              
              
              
              
              1,312
              
              
              348Total
                  stockholders’ equity
              
              
              
              
              
              32,720
              
              
              16,040TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              
              
              
              
              89,066
              
              
              27,833
  The
        accompanying notes are an integral part of these financial
        statements.
  F-3
  **Sinoenergy
        Corporation and Subsidiaries**
 **Consolidated
        Statements of Operations**
 **(In
        thousands of United States dollars except per share
        information)**
  Nine
                  Months Ended September 30,Notes
              
              2007
              
              2006(restated)Audited
              
              UnauditedNET
                  REVENUE
              
              
              
              
              
              15,923
              
              
              9,764COST
                  OF REVENUE
              
              
              
              
              
              (8,090
              )
              
              (4,978
              )GROSS
                  PROFIT
              
              
              
              
              
              7,833
              
              
              4,786OPERATING
                  EXPENSESSelling
                  expenses
              
              
              
              
              
              234
              
              
              190General
                  and administrative expenses
              
              
              
              
              
              3,329
              
              
              1,396TOTAL
                  OPERATING EXPENSES
              
              
              
              
              
              3,563
              
              
              1,586INCOME
                  FROM OPERATIONS
              
              
              
              
              
              4,270
              
              
              3,200OTHER
                  INCOME(EXPENSES)Other
                  non-operating income
              
              
              
              
              
              10
              
              
              31Interest
                  expense
              
              
              
              
              
              (295
              )
              
              (1,725
              )Other
                  expenses
              
              
              
              
              
              (14
              )
              
              (146
              )OTHER
                  EXPENSES, NET
              
              
              
              
              
              (299
              )
              
              (1,840
              )INCOME
                  BEFORE INCOME TAXES
              
              
              
              
              
              3,971
              
              
              1,360Income
                  tax
              
              
              15
              
              
              (188
              )
              
              1,011INCOME
                  BEFORE MINORITY INTEREST
              
              
              
              
              
              3,783
              
              
              2,371Minority
                  interest
              
              
              
              
              
              (142
              )
              
              (39
              )NET
                  INCOME
              
              
              
              
              $
              3,641
              
              $
              2,332Other
                  comprehensive incomeForeign
                  currency translation adjustments
              
              
              
              
              $
              964
              
              $
              257COMPREHENSIVE
                  INCOME
              
              
              
              
              
              4,605
              
              
              2,588Earnings
                  Per Share -Basic
              
              
              22
              
              $
              0.14
              
              $
              0.16Weighted
                  Average Shares Outstanding- Basic
              
              
              
              
              
              25,551,566
              
              
              14,417,851Earnings
                  Per Share-Diluted
              
              
              
              
              $
              0.14
              
              $
              0.16Weighted
                  Average Shares Outstanding- Diluted
              
              
              
              
              
              26,727,828
              
              
              14,459,553
  The
        accompanying notes are an integral part of these financial
        statements.
  F-4
  **Sinoenergy
        Corporation and Subsidiaries**
 **Consolidated
        Statements of Changes in Stockholders’ Equity**
 **(In
        thousands of United States dollars)**
 
 Number
                  of Common Shares Issued
              
              Par
                  Value Common Stock
              
              Par
                  Value Series A Preferred
                Stock
              
              Additional
                  Paid in Capital
              
              Statutory
                  Surplus Reserve Fund
              
              Accumulated
                  Other Comprehensive Income
              
              Retained
                  Earning
              
              Capital
                  Surplus
              
              Total
                  Stock-
                holder’s
                  equityBalance,
                  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
              
              
              16,040Issuance
                  of common stock on conversion of series A preferred stock
              
              
              5,692,307
              
              
              6
              
              
              (6
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0Issuance
                  of common stock on exercise of warrants
              
              
              11,089,286
              
              
              10
              
              
              
              
              
              11,316
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,326Amortizable
                  discount of 3% guaranteed senior convertible notes
              
              
              
              
              
              
              
              
              
              
              
              176
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              176Issuance
                  of warrants for service
              
              
              
              
              
              
              
              
              
              
              
              65
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              65Grant
                  of stock options
              
              
              
              
              
              
              
              
              
              
              
              508
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              508Net
                  income for the period
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,641
              
              
              
              
              
              3,641Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              964
              
              
              
              
              
              
              
              
              964**Balance,
                  September 30, 2007**
              
              
              31,418,065
              
              
              31
              
              
              -
              
              
              22,000
              
              
              1,140
              
              
              1,312
              
              
              8,217
              
              
              20
              
              
              32,720
 
 The
        accompanying notes are an integral part of these financial
        statements.
  F-5
  **Sinoenergy
        Corporation and Subsidiaries**
 **Consolidated
        Statements of Cash Flows**
 **(In
        thousands of United States dollars)**
  Nine
                  Months ended September 30, 2007
              
              Nine
                  Months Ended September 30, 2006 (restated unaudited)CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              
              3,641
              
              
              2,332Contribution
                  from minority shareholders
              
              
              607
              
              
              -Issurance
                  warrants for service
              
              
              65
              
              
              1,594Discount
                  of convertible notes issued
              
              
              176
              
              
              -Grant
                  of options
              
              
              508
              
              
              -Minority
                  interest
              
              
              142
              
              
              39Depreciation
              
              
              417
              
              
              231Amortization
                  of intangible assets
              
              
              367
              
              
              233Provision
                  for doubtful accounts
              
              
              220
              
              
              4Deferred
                  tax debit
              
              
              -
              
              
              (15
              )Changes
                  in operating assets and liabilities:(Increase)
                  in accounts receivable
              
              
              (1,805
              )
              
              (941
              )Decrease
                  /(Increase)/ in other receivables, deposits and
                  prepayments
              
              
              164
              
              
              (4,098
              )(Increase)/decrease
                  in inventories
              
              
              (1,964
              )
              
              532Increase
                  in accounts payable
              
              
              3,302
              
              
              143Increase/
                  in accrued expenses
              
              
              179
              
              
              139Increase/(decrease)
                  in advances from customers
              
              
              334
              
              
              (1,348
              )(Decrease)/increase
                  in other payables
              
              
              (1,251
              )
              
              335Increase
                  /(decrease)in income tax payable
              
              
              112
              
              
              (1,054
              )Net
                  cash (used in ) operating activities
              
              
              5,214
              
              
              (1,874
              )CASH
                  FLOWS FROM INVESTING ACTIVITESPayment
                  for purchase of property, plant and equipment
              
              
              (5,249
              )
              
              (231
              )Prepayment
                  for long term assets
              
              
              (4,780
              )Payment
                  for purchase of land use right
              
              
              (6,784
              )
              
              -Payment
                  for minority interest in subsidiaries
              
              
              (8,414
              )Net
                  cash used in investing activities
              
              
              (25,227
              )
              
              (231
              )CASH
                  FLOWS FROM FINANCING ACTIVITESCash
                  received from bank loan
              
              
              11,682
              
              
              312Cash
                  received from capital contribution
              
              
              
              
              
              3,301Cash
                  received from warrants exercise
              
              
              11,326
              
              
              -Cash
                  paid for other financing activities
              
              
              -
              
              
              (427
              )Net
                  cash provided in financing activities
              
              
              23,008
              
              
              3,186Effect
                  of changes in exchange rate
              
              
              964
              
              
              217Net
                  increase in cash
              
              
              3,959
              
              
              1,298Cash
                  at beginning of the year
              
              
              588
              
              
              334Cash
                  at end of the year
              
              
              4,547
              
              
              1,632Supplementary
                  Cash flow disclosure:Tax
                  paid
              
              
              -
              
              
              924Interest
                  Paid
              
              
              295
              
              
              131
  The
        accompanying notes are an integral part of these financial
        statements.
  F-6
  **Sinoenergy
        Corporation and Subsidiaries**
 **Notes
        to the consolidated financial statements**
 (Information
        for the nine months ended September 30, 2006 is unaudited)
 
 **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 owned foreign enterprise (“WOFE”)
                  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 Company
                  issued and sold, for $3,700,000, its 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 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 was 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.
        The
        accounting for the acquisition is identical to that resulting from a reverse
        acquisition, and accordingly 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-7
  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.
 
 At
        September 30, 2007, all of the shares of Series A Preferred Stock had been
        converted into common stock.
 
 **(b)
        Issuance of Convertible Notes and Senior Notes**
 
 On
        September 1, 2007, we entered into a note purchase agreement (the “Note Purchase
        Agreement”) with Abax Lotus Ltd. and CCIF Petrol Limited pursuant to which, on
        September 28, 2007, the investors purchased the Company’s 12% Guaranteed Senior
        Notes due 2012 in the principal amount of $16,000,000 and 3.0% Guaranteed
        Senior
        Convertible Notes due 2012 in the principal amount of $14,000,000. These
        notes
        and the related agreements are described in Note 16 As of September 30, 2007,
        the Company has not received the proceeds. On October 8, $29,839,985 was
        received by the Company for the notes issued. The funds are held in a separate
        bank account which require three signatures - the Company’s chief executive
        officer, the Company’s chairman and a senior officer of one of the investors.
 
 **(c)
        Change of Fiscal Year**
 
 In
        late
        September 2007, we changed our fiscal year to the year ended September 30.
        The
        change in our fiscal year will be effective commencing with the fiscal year
        beginning January 1, 2007 and from October 1, 2007 thereafter.
 
 **(d)
        History of the Company**
 
 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, the Company acquired all of the issued and outstanding equity interests
        of Sinoenergy Holding Ltd. (“Sinoenergy Holding”), from Skywide
        Capital Management Limited, 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. Pursuant to that exchange agreement, the Company issued
        14,215,385 shares of common stock to
        Skywide and Eastpride.
 
 After
        the
        acquisition, the Company continued the operations of Sinoenergy Holding.
        Sinoenergy Holding owns all of the capital stock of Qingdao
        Sinogas General Machinery Limited Corporation (“Sinogas”).
  As
        at
        September 30, 2007, Sinogas and Sinoenergy Holding together own 90% of the
        equity of Wuhan Sinoenergy Gas Company, 90% of the equity of Qingdao Sinogas
        Yuhan Chemical Equipment Co., Ltd. (“Yuhan”), 90% of the equity of Pingdingshan
        Sinoenergy Gas Company (“Pingdingshan Sinoenergy”), and 30% of the equity of
        Xuancheng Sinoenergy Vehicle gas Company (“Xuancheng Sinoenegy”), 70% of the
        equity of Jiaxing Lixun Automotive Electronic Co, Ltd (“Lixun”), 55% equity
        of Hubei Gather Energy Company (“Hubei Gather”), and we are a 45% equity owner
        of Anhui Gagher Energy Company (“Anhui Gagher”). We are purchasing the remaining
        70% of Xuancheng Sinoenergy, subject to government approval of the
        purchase.
  F-8
 
 **(e)
        Subsidiaries of the Company**
 
 *Siongas* was
        established in Qingdao China in October 29, 2004, and mainly engaged in the
        production of CNG facilities and equipment, technical consulting service
        to CNG
        filling station construction as well as manufacturing of CNG vehicle conversion
        kit system.
 
 *Yuhan* was
        established on May 25, 2005, mainly engaged in the manufacturing of customized
        pressure containers for different industries.
 
 *Wuhan
        Sinoenergy* was
        establish on August 2, 2006 with the business of manufacturing and sales
        of
        automobile conversion kits that enable a gasoline powered automobile to operate
        on compressed natural gas and the construction and operation of CNG stations.
 
 *Pingdingshan
        Sinoenergy* was
        established on December 4, 2006 with the business of manufacturing and sales
        of
        automobile conversion kits that enable a gasoline powered automobile to operate
        on compressed natural gas and the construction and operation of CNG
        stations.
 
 *Lixun* ,
        a
        Chinese company engages in the designing and manufactures of 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 production. On March 2007,
        the
        Company purchased a 60% interest in Lixun from its shareholders for
        approximately $390,000 and on July 27, the Company injected another $400,000
        capital to Lixun, and in turn totally owns 70% equity of Lixun.
 
 *Hubei
        Gather* was
        established on March 23, 2007 with the business scope of constructing and
        operating natural gas process plants with expected annual processing capacity
        of
        100-300 million cubic meters, of which the company owns 55% equity and Hong
        Kong
        China New Energy Development Investment Co. Ltd owns 45% equity.
 
 *Anhui
        Gagher*  Anhui
        Gagher was incorporated on March 23, 2007, with Hong Kong China New Energy
        Development Investment Co. Ltd owning 55% equity and Tianjin Green Fuel owning
        45% equity. On July 4, 2007, we purchased the 45% equity of Anhui Gagher,
        which
        had been owned by Green Fuel, for $2,750,000, of which $844,330 would be
        paid to
        Green Fuel for capital injection and to reimburse Green Fuel for its costs
        incurred in obtaining the right to receive 200 million cubic meters natural
        gas
        quota from Sinopec, and $1,905,670 would be paid to Anhui Gagher as unpaid
        capital. As of September 30, 2007, we had paid $844,330 to Green Fuel. We
        are to
        pay the remaining $1.9 million to Anhui Gagher according to requirement of
        PRC
        government .
 
 **(f)
        The business of the Company**
  The
        Company manufactures non standard pressure containers and CNG storage and
        transportation products, we provide technical consulting service for LPG/CNG
        station construction; we operate natural gas process plants and CNG vehicle
        filling stations. It also manufactures CNG conversion kits which permit gasoline
        engines to use CNG.
  **(i)**  **Non-standard
        pressure container business:**
 
 The
        manufacture and sale of non-standard equipment and pressure container has
        been
        conducted by the Sinogas since its organization. This business 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.
  F-9
  ·
              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 technical consulting service for CNG
        station construction (“CNG Station Facilities and
        Construction”)**
 
 (1)
        CNG
        storage and transportation products manufacturing, which include the following
        products:
 
 ·
              CNG
                  trailers
 
 ·
              CNG
                  deposited system for gas station usage
 
 ·
              CNG
                  compressor skid
 
 ·
              Some
                  other CNG facilities and equipment
                  fittings
 
 (2)
        Technical consulting service for LPG/CNG station construction
  ·
              Designing
                  for LPG./CNG stations
 
 ·
              Technical
                  consulting for equipment choosing and
                  matching
 
 ·
              CNG
                  station running adjusting
  **(iii)**  **CNG
        station operation**
  (1)
        Construction and operation of CNG station
  In
        June
        2006, we developed a plan to develop and operate of natural gas filling stations
        and build and operate natural gas process plants in Central and East China.
        This
        business is currently our principal business. The Company is planning to
        operate
        CNG stations in Wuhan City of Hubei Province, Pingdingshan City of Henan
        Province and Xuancheng City of Anhui Province.
  (2)
        Wholesale distribution of natural gas
  Both
        Hubei Gather and Anhui Gagher have been licensed to do the natural gas
        processing and wholesale business. In May 2007, both Hubei Gather and Anhui
        Gagher signed 20 years natural gas purchase agreement with Sinopect to secure
        200 million cubic meters of natural gas resources each from the main pipeline
        of
        Sinopec respectively.
  The
        secured natural gas quota is the guarantee of our natural gas process and
        whole
        sale business. As of the end of September 2007, both Hubei Gather and Anhui
        Gagher are under development stage.
  These
        natural gas quotas are not a guarantee of delivery and are subject to
        negotiation as to amount and price, and, a significant portion of our quota
        is
        dependent upon the timely completion of a national natural gas transportation
        pipeline that is currently under construction.
  **(** **iv** **)
        Vehicle fuel conversion equipment**
  ·
              Design
                  and sale customized automotive alternate fuel (CNG/LPG) electronic
                  device
  F-10
  ·
              CNG
                  vehicle conversion kits installation and sale;
  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. Further, the Company is subject to price
        controls on both the price at which it purchases natural gas and the price
        at
        which it can sell natural gas.
 
 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.
 
 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.
  F-11
  **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 (“GAAP”).
 
 Principles
        of consolidation
  The
        accompanying consolidated financial statements include the financial statements
        of Sinoenergy Corporation and its wholly owned subsidiaries and majority
        owned
        subsidiaries. All significant inter-company transactions and balances have
        been
        eliminated in consolidation.
 
 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 and other receivables, impairment, valuation of warrants and options,
        inventory, accruals etc.. 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 and Jiaxing 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
        September 30, 2007 and December 31, 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-12
 
 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 ,
        technical know-how acquired and land use right, are stated at cost less
        accumulated amortization and impairment losses. Amortization is calculated
        on
        the straight-line method over the estimated useful lives of the assets. .
 
 Impairment
        of Assets
 
 In
        accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
        "Accounting for Impairment or Disposal of Long-Lived Assets", Impairment
        of
        assets is monitored on a continuing basis, and is assessed based on the
        undiscounted cash flows generated by the underlying assets. In the event
        that
        the carrying amount of assets exceeds the undiscounted future cash flows,
        then
        the carrying amount of such assets is adjusted to their fair value.
 
 Long-Term
        Investments
 
 Investments
        in which the Company owns less than 50%
        and
        over 20% of the investee companies and does not have the ability to control
        but
        have the ability to exert significant influence are stated at equity
        method.
  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, and
        collectibility is probable.
  F-13
 
 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,
        and
        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.
 
 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.
 
 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
        statements.
 Advertising,
          shipping and handling costs
 
 Advertising,
          shipping and handling costs, if any, are expensed as incurred.
 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 from RMB to US
        dollars using the closing exchange rate in effect at the balance sheet date
        and
        operating accounts are translated from RMB to US dollars 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.
  F-14
 
 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 a subsidiary which is not owned
        by
        the Company. The Company eliminates the minority interest portion of any
        related
        profits and losses in consolidation.
 
 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. 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.
 
 Concentration
        of Credit Risk
 
 Financial
        instruments that potentially subject the Company to significant concentrations
        of credit risk consist primarily of trade accounts receivable. The Company
        performs ongoing credit evaluations with respect to the financial condition
        of
        its debtors, but does not require collateral. In order to determine the value
        of
        the Company’s accounts receivable, the Company records a provision for doubtful
        accounts to cover probable credit losses. Management reviews and adjusts
        this
        allowance periodically based on historical experience and its evaluation
        of the
        collectibility of outstanding accounts receivable.
 
 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 or convertible notes, which is calculated under if-converted
        method, and common stock issuable upon exercise of stock options granted
        and
        warrants, which is calculated on Treasury Stock Method.
 
 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.
  F-15
 
 The
        Company’s only component of other comprehensive income (loss) is foreign
        currency translation gain of $990,000 and $224,000 for the nine months ended
        September 30, 2007 and 12 months ended December 31, 2006, 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.
 
 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.
  F-16
 
 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 SFAS 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.
 
 In
        December 2007, the FASB issued FASB 141(R), “Business Combinations” of which the
        objective is to improve the relevance, representational faithfulness, and
        comparability of the information that a reporting entity provides in its
        financial reports about a business combination and its effects. The new standard
        requires the acquiring entity in a business combination to recognize all
        (and
        only) the assets acquired and liabilities assumed in the transaction;
        establishes the acquisition-date fair value as the measurement objective
        for all
        assets acquired and liabilities assumed; and requires the acquirer to disclose
        to investors and other users all of the information they need to evaluate
        and
        understand the nature and financial effect of the business
        combination.
  In
        December 2007, the FASB issued FASB 160 “Noncontrolling Interests in
        Consolidated Financial Statements—an amendment of ARB No.51” of which the
        objective is to improve the relevance, comparability, and transparency of
        the
        financial information that a reporting entity provides in its consolidated
        financial statements by establishing accounting and reporting standards by
        requiring all entities to report noncontrolling (minority) interests in
        subsidiaries in the same way—as equity in the consolidated financial statements.
        Moreover, Statement 160 eliminates the diversity that currently exists in
        accounting for transactions between an entity and noncontrolling interests
        by
        requiring they be treated as equity transactions.
  Both
        FASB
        141(R) and FASB 160 are effective for fiscal years beginning after December
        15,
        2008. We do not believe that adoption of these standards will have any impact
        on
        our financial statements.
 
 **3.
        Restricted Cash**
 
 The
        balance as at September 30, 2007, represents deposit of $1,225,000 on bills
        of exchange issued by the Company for inventory purchases.
  F-17
 
 **4** **.
        Accounts Receivable and Allowance for Doubtful Receivables**
 
 Details
        of allowance for doubtful receivables deducted from accounts receivable are
        as
        follows (dollars in thousands):
 
 September
                  30, 2007
              
              December
                  31, 2006Audited
              
              AuditedAccounts
                  receivable-Related
                  party
              
              $
              169
              
              $
              594-Third
                  party
              
              
              6,105
              
              
              3,874Less:
                  allowance for doubtful receivables
              
              
              278
              
              
              97Balance
              
              $
              5,996
              
              $
              4,371
  (1)
              Accounts
                  Receivable from Related Party
 
 The
        balance as at September 30, 2007 and December 31, 2006, represents receivables
        from Kangtai, the minority shareholder of Yuhan, for sales made by Kangtai
        on
        behalf Yuhan in the amount of $169,030 and $593,821 respectively.
 
 (2)
        Accounts Receivable from Third parties
 
 Of
        the
        balance as at September 30, 2007, $1,417,958 represents receivables balance
        from
        Wuhan Fukang Automotive Cleaning Energy Company for sales of conversion kits;
        $679,907 represents the receivable balance for $1.9 million CNG deposit and
        transportation equipment sales to a petrochemical company in Shanghai; $785,535
        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; $355,643 receivable balance for sales of truck
        trailers to a CNG filling stations company in Inner Mongolia.
 
 Of
        the
        balance at December 31, 2006, $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.
 
 **5.
        Other Receivables**
 
 September
                  30, 2007
              
              December
                  31, 2006Audited
              
              AuditedOther
                  receivables-Related
                  party
              
              $
              332
              
              $
              1,220-Third
                  party
              
              
              33,640
              
              
              1,183Less:
                  allowance for doubtful receivables
              
              
              46
              
              
              7Balance
              
              $
              33,926
              
              $
              2,396
  (1)
        Other
        Receivables from Related Party
  F-18
 
 The
        balance as at September 30, 2007 represents $186,431 from an unsecured loan
        due
        from Kangtai, the minority shareholder of Yuhan and $145,595 rental fee
        receivable from Kangtai.
 
 The
        balance as at December 31, 2006 represents $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.
 
 (2)
        Other
        Receivables from Third Party
 
 The
        other
        receivables with third party as at September 30, 2007 mainly represent the
        net
        proceeds of $15,752,485 from the $16,000,000 12% guaranteed senior notes
        issued
        and the net proceeds of $13,823,344 from the $14,000,000 3.0% guaranteed
        senior
        convertible notes issued (see Note 16). All of the funds were received by
        the
        Company on October 8, 2007; $1,946,530 unsecured loan to Qingdao Jingrun
        General
        Machinery Company (“Jingrun”), which has been paid back on November 29, 2007;
        $532,566 due from CNPC Xingxing Energy for unsecured demand loan.
 
 The
        other
        receivables from third party as at December 31, 2006, 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.
 
 **6(1).
        Deposits and Prepayments**
 
 The
        balance as at September 30, 2007 mainly represents a $2,795,000 prepayment
        to a
        raw material suppliers and service providers for routine manufacturing and
        CNG
        stations operating.
  **6(2).
        Other long-term assets**
  The
        balance at September 30, 2007 represents prepayments for long-lived assets.
        The
        balance mainly represents the following:
  (a)
              $3,962,701
                  prepayments for CNG station equipment from overseas. This equipment
                  will
                  be used to construct CNG filling stations as long-term fixed assets.
 
 (b)
              $4,087,175
                  prepayment for acquisition of 100% of the equity of
                  Jingrun;
 
 (c)
              $750,000
                  prepayments to Hong Kong China New Energy Development Investment
                  Co. Ltd
                  as an advance for the purchase of 400 million cubic meters natural
                  gas
                  quota from Sinopec commencing in 2009.
 
 (d)
              $732,278
                  prepayment to Shanghai CNPC Enterprises for 70% equity purchase
                  of
                  Xuancheng Sinoenergy Vehicle Gas
                  Company;
 
 (e)
              $66,570
                  prepayment to Mr.Fuqing Zhu for his five years consulting service
                  to the
                  Company from April 2007 to April
                  2012;
  The
        third
        party balances as at December 31, 2006 includes $3,187,000 advance payments
        to
        overseas suppliers for CNG station equipment purchase by the
        Company.
  F-19
  **7.
        Inventories**
  Inventories
        at September 30, 2007 and December 31, 2006 are summarized as follows (dollars
        in thousands):
  September
                  30, 2007
              
              December
                  31, 2006Raw
                  materials
              
              $
              1,936
              
              $
              339Work
                  in progress
              
              
              538
              
              
              483Finished
                  goods
              
              
              426
              
              
              115Low
                  value consumables
              
              
              1
              
              
              -Total
              
              $
              2,901
              
              $
              937
 
 **8.
        Long-term investments**
 
 On
        July
        4, 2007, the Company purchased 45% of the equity of Anhui Gagher owned by
        Green
        Fuel for $2,750,000. As of September 30, 2007, the Company had paid $1,192,594
        for the equity purchase to Green Fuel. As of September 30, 2007, Anhui Gagher
        is
        in early development stage and has not yet commenced operations.
 
 On
        March
        26, 2007, the Company and Shanghai CNPC incorporated Xuancheng Sinoenergy,
        of
        which the Company paid $399,425 for a 30% equity interest and Shanghai CNPC
        paid
        $931,991 for a 70% equity interest. On November 6, 2007, the Company purchased,
        subject to the completion of obtaining necessary approvals, the 70% equity
        interest in Xuancheng Sinoenergy from Shanghai CNPC Enterprises, which, upon
        completion of the transfer, would give the Company a 100% interest in Xuancheng
        Sinoenergy. As at September 30, 2007, the Company has recorded the 30% equity
        holding in Xuancheng Sinoenergy under the equity method.
 
 **9** **.
        Property, Plant and Equipment**
 
 As
        of
        September 30, 2007 and December 31, 2006, property, plant and equipment consist
        of the following (dollars in thousands):
 
 September
                  30, 2007
              
              December
                  31, 2006**Cost**Buildings
                  and facility
              
              $
              7,052
              
              $
              2,736Machinery
                  and equipment
              
              
              1,501
              
              
              2,137Motor
                  vehicles
              
              
              621
              
              
              153Office
                  equipment and others
              
              
              180
              
              
              70$
              9,354
              
              $
              5,096**Accumulated
                  depreciation**Buildings
                  and facility
              
              
              489
              
              $
              379Machinery
                  and equipment
              
              
              407
              
              
              1,139Motor
                  vehicles
              
              
              39
              
              
              8Office
                  equipment and others
              
              
              31
              
              
              14$
              966
              
              $
              1,540**Carrying
                  value**Buildings
                  and facility
              
              $
              6,563
              
              $
              2,357Machinery
                  and equipment
              
              
              1,094
              
              
              998Motor
                  vehicles
              
              
              582
              
              
              145Office
                  equipment and others
              
              
              149
              
              
              568,388
              
              
              3,556
  F-20
  The
        total
        depreciation in the nine months ended September 30, 2007 and twelve months
        ended
        December 31, 2006 was $417,118 and $336,000, respectively.
 
 Included
        in the cost of buildings and facility as of September 30, 2007, $3,879,000
        represents construction-in-process relating the construction of CNG stations
        by
        Wuhan and Pingdingshan Sinoenergy, which commenced in August and December
        2006
        respectively.
 
 Included
        in the cost of buildings and facility as of December 31, 2006, $97,101
        represents construction-in-process relating the construction of CNG stations
        by
        Wuhan and Pingdingshan Sinoenergy, which commenced in August and December
        2006,
        respectively.
 
 **10.
        Intangible Assets**
 
 September
                  30, 2007
              
              December
                  31, 2006**Cost**Patent,
                  technology know-how
              
              $
              350
              
              
              290Land
                  use right
              
              
              18,856
              
              
              12,294Total
              
              
              19,206
              
              $
              12,584Accumulated
                  amortization
              
              
              (675
              )
              
              (470
              )Carrying
                  value
              
              $
              18,531
              
              $
              12,114
 
 Patent
        and technology know-how
 
 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 are approximately $29,000 each year.
  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. The Company recorded the land use right as an intangible
        asset. The land use right is amortized within 50 years term from the time
        when,
        in substance, the Company owns the land
 
 The
        land
        use right was purchased by the Company from Beijing Sanhuan. The Company
        has an
        agreement with Beijing Sanhuan, a former affiliate of the Company, pursuant
        to
        which Beijing Sanhuan agreed 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 was initially approximately $12.3 million. In May 2007, the
        purchase price for the land use right was increased to $18.6 million pursuant
        to
        an amendment to the sales agreement, as a result of increased costs and an
        increase in the value of the land use right.
 
 In
        May
        14, 2007, the Company received the land use right title deed, which has a
        term
        of 50 years from May 14, 2007 to May 13, 2057. As of September 30, 2007,
        Sinogas
        has paid $15.4 million to Beijing Sanhuan and the balance is due at such
        time as
        the land is sold for commercial developing, and the Company receives the
        sales
        proceeds.
  The
        amortization of land use right for next five years are $380,000 annually.
  F-21
  **11.
        Goodwill**
 
 The
        goodwill consolidated to the financial statement as at September 30, 2007
        and
        December 31, 2006 are as follow:
 
 Transactions
              
              September
                  30, 2007
              
              December
                  31, 2006Purchase
                  of an additional 35% interest in Yuhan
              
              $
              676
              
              $
              676Purchase
                  of a 60% equity in Jiaxin Lixun
              
              
              53
              
              
              -Total
              
              $
              729
              
              $
              676
 
 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, the Company 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, the Company had paid a total of $503,000 and owed $997,000. The agreement,
        as amended, gives the Company 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.
 
 On
        March
        2007, the Company purchased a 60% interest in Jiaxing Lixun Automotive
        Electronic Co, Ltd (“Lixun”) from its shareholders, with the total cash
        payment of $310,310. The consolidated balance sheet reflects good will of
        $52,385, which represents the excess of the purchase over the tangible assets
        of
        Lixun at date of acquisition.
 
 The
        Company monitors the impairment of goodwill on a continuous basis. As of
        September 30, 2007, there were no indications that the carrying amount of
        the
        goodwill was higher than the undiscounted future cash flows of the above
        mentioned assets.
 
 **12.
        Short Term Bank Loan**
 
 The
        following table summarizes the contracted short-term borrowings between the
        banks and the Company as at September 30, 2007 (dollars in
        thousands):
 
 Bank
                  Name
              
              Purpose
              
              Borrowing
                  Date
              
              Borrowing
                  Term
              
              Annual
                  Interest Rate
              
              AmountShenzhen
                  Development Bank
              
              
              Working
                  Capital
              
              
              27-Nov
                  -2006
              
              
              One
                  year
              
              
              5.58
              %
              $
              863CITIC
                  Bank
              
              
              Working
                  Capital
              
              
              29-March-2007
              
              
              One
                  year
              
              
              7.02
              %
              
              666Bank
                  of Communication
              
              
              Working
                  Capital
              
              
              30-April-2007
              
              
              One
                  year
              
              
              6.39
              %
              
              2,662Bank
                  of Communication
              
              
              
              
              
              14-Aug-2007
              
              
              One
                  year
              
              
              7.29
              %
              
              5,326Bank
                  of Communication
              
              
              Working
                  Capital
              
              
              9-Sep-2007
              
              
              One
                  year
              
              
              7.29
              %
              
              5,326Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              14,843
 
 The
        following table summarizes the contracted short-term borrowings between the
        banks and the Company as at December 31, 2006 (dollars in
        thousands):
 
 Bank
                  Name
              
              Purpose
              
              Borrowing
                  Date
              
              Borrowing
                  Term
              
              Annual
                  Interest Rate
              
              AmountAgriculture
                  Bank of China
              
              
              Working
                  Capital
              
              
              6-April-2007
              
              
              One
                  year
              
              
              7.56
              %
              $
              1,900Shenzhen
                  Development Bank
              
              
              Working
                  Capital
              
              
              27-Nov
                  -2006
              
              
              One
                  year
              
              
              5.58
              %
              $
              1,260Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              3,160
  F-22
  **13.
        Other Payables**
 
 (1)
              Other
                  Payables to Related Party:
 
 Other
        payables at September 30, 2007, represent $3,235,671 payables to Beijing
        Sanhuan
        for balance of the purchase price of the land use right; $310,664 payable
        to
        Kangtai for the unpaid part of the 35% acquisition of the equity of Yuhan
        by the
        Company; $44,895 payables to Xuancheng Sinoenergy for unsecured loan; $67,000
        for know how fee payable to Beijing Sanhuan $1,331 due to Mr. Guiqiang Shi
        who
        is a stockholder of Kangtai; and $19,128 from Mr. Tanzhou Deng, the chairman
        of
        the Company.
 
 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
 
 Within
        the balance as at September 30, 2007, $145,500 payables to SLF for the audit
        fee
        accrual [does this present an independence issue?]; $928,166 payables for
        VAT,
        business tax and other surtax, of which there are some time gap between accrual
        and payment.
 
 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 was repaid by the proceeds received
        from capital market in the first half of 2007. As of December 31, 2006, the
        Company owed VAT and business tax of $412,000 and $265,000, respectively,
        which
        were accrued for the revenues recorded.
 
 **14.
        Advances from Customers**
 
 Advances
        from customers at September 30, 2007 were mainly the advances received for
        routine sales orders we accepted according to our sales policy.
 
 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 the contract amount as down-payment before product
        manufacturing.
 
 **15.
        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.
 
 As
        PRC
        subsidiaries that qualify as wholly foreign owned manufacturing enterprises,
        Sinogas, Yuhan and Jiaxing Lixun were granted tax preference. Sinogas and
        Yuhan
        are entitled to 100% enterprise income tax exemption for calendar years 2006
        and
        2007 and a 50% enterprise income tax exemption for the following three years
        (2008 through 2010). Jiaxing Lixun is entitled to 100% tax exemption for
        September 2007 to calendar year end of 2008 and 50% enterprise income tax
        exemption for the following three calendar years (2009 through
        2011). The
        income tax expenses for the nine months ended September 30, 2007 primarily
        represent income tax accrued by our newly acquired Lixun subsidiary, which
        received an income tax exemption commencing August 2007.
  F-23
  Under
        the
        current tax laws of the PRC, the Company’s other PRC subsidiaries, Wuhan
        Sinoenergy and, Pingdingshan Sinoenergy will each get two-year 100% tax
        exemption followed by a three years 50% exemption once they become profitable.
 
 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 taxable income in the United States or the British
        Virgin
        Island for both the nine months ended September 30, 2007 and the 12 months
        ended
        December 31, 2006.
 
 Reconciliation
        between the income tax computed at the United States statutory tax rate and
        the
        Company’s provision for income tax is:
 2007
                
                2006U.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
                
                
                (28
                %)
                
                (33
                %)5
                %
                
                -Prior
                    year provision reversed due to tax holiday and relief
                
                
                -
                
                
                1,011
  **16.
        Long term notes payable**
 
 On
        September 1, 2007, the Company entered into a note purchase agreement (the
        “Purchase Agreement”) with Abax Lotus Ltd. and CCIF Petrol Limited (the
“investors”) pursuant to which the investors purchased, on September 28, 2007,
        the Company’s 12% Guaranteed Senior Notes due 2012 in the principal amount of
        $16,000,000 (the 12% Notes) and 3.0% Guaranteed Senior Convertible Notes
        due
        2012 in the principal amount of $14,000,000 (the Convertible Notes). The
        Convertible Notes will be convertible into the Company’s common stock at an
        initial conversion price of $3.17 per share at any time since the effective
        date
        of the note being issued.
 
 On
        September 28, 2007, the
        Company entered into:
 ·
                An
                    indenture for the 12% Notes,
  ·
              An
                  indenture for the Convertible
                  Notes,
  ·
              An
                  investor rights agreement,
  ·
              A
                  registration rights agreement covering the shares of common stock
                  issuable
                  upon conversion of the convertible
                  notes,
  ·
              An
                  information rights agreement, and
 
 ·
                A
                    charge share agreement whereby the Company granted the investors
                    a charge
                    on the Company’s shares of Sinoenergy Holding Limited, a British Virgin
                    Island corporation and wholly-owned subsidiary of the Company.
  In
        addition, Bo Huang, chief executive officer and a director of the Company,
        and
        Tianzhou Deng, chairman and a director of the Company, executed non-competition
        agreements with the Company. The Company also paid the investors an arrangement
        fee of $160,000.
  F-24
  The
        Convertible Notes were issued pursuant to an indenture between the Company
        and
        with DB Trustees (Hong Kong) Limited, as trustee. These Convertible Notes
        are
        due in September 2012 and bear interest at the stated interest rate of 3%
        per
        annum. The holders of the Convertible Notes have the right to convert their
        notes into common stock at a conversion price of $3.17 per share. The provisions
        for adjustment in the conversion price include adjustments for the
        following.
  ·
              A
                  stock distribution or dividend, a reverse split or combination
                  of shares
                  and the distribution of shares, warrants, assets or indebtedness
                  of the
                  Company to the Company’s stockholders; <?xml:namespace prefix = o ns =
                  "urn:schemas-microsoft-com:office:office"
                  />
  ·
              A
                  sale of common stock at a price, or the issuance of options, warrants
                  or
                  other convertible securities with an exercise or conversion price,
                  which
                  is less than the conversion price at the time;
                  and
  ·
                An
                    adjustment based on the volume weighted average price of the
                    common stock
                    on September 28, and March 28, of each year during the term of the
                    notes, commencing March 28, 2008, such that if the volume weighted
                    average
                    price of the common stock for the 15 trading days preceding the
                    applicable
                    September 28 or March 28 is made is less than the conversion
                    price then in
                    effect, then the conversion price is reduced to the greater of
                    the volume
                    weighted average price or $2.10 per share;
                    and
  ·
                An
                    adjustment based on the failure of the Company to have consolidated
                    net
                    income, as defined in the indenture, of $7.5 million for calendar
                    year
                    2007, $14.0 million for calendar year 2008 and $22.5 million
                    for calendar
                    year 2009, or the equivalent in RMB.
  If
        the
        Company’s consolidated net income does not reach the stated level for any of
        calendar year 2007, 2008 or 2009, the conversion rate, which is the number
        of
        shares of common stock issuable upon conversion of $100,000 principal amount
        of
        Convertible Notes, adjusted in accordance with the following
        formula.
  Conversion
        rate then in effect + [(A x B)/ C], where
  A
        = the
        total number of shares of common stock issued and outstanding on a fully-diluted
        basis at the date of determination of such adjustment;
  B
        = 3%
        expressed as a decimal; and
  C
        =  the
        aggregate principal amount of the Notes issued on the Issue Date divided
        by
        $100,000.
  The
        conversion price is determined by dividing $100,000 by the conversion rate.
        The
        initial conversion rate is 31,546 shares of common stock for each $100,000
        principal amount of Convertible Notes.
  Net
        income, for purposes of this computation, is defined to mean “net income”
determined in accordance with GAAP consistently applied, after deducting
“income
        tax expense” and the amount, if any, for minority interest that may arise, but
        without adding any “other comprehensive income” or any extraordinary income;
        provided that the calculation of “net income” for the purposes of this
        definition shall not include any non-cash expense incurred at any time in
        connection with the issuance of shares of Common Stock pursuant to (i) non-cash
        charges associated with any original issue discount on the Notes or the
        potential issuance of shares of common stock pursuant to the terms of the
        indenture, (ii) the additional payments that are due if the common stock
        is not
        listed on the Nasdaq Global Market or Nasdaq Capital Market by September
        19,
        2008, (iii) any adjustment resulting from a reduction in the conversion price
        as
        a result of the volume weighted average price or the failure to meet the
        earnings targets, and (v) the Company’s stock option plans and employee stock
        purchase plans and which have been approved by the Company’s board of directors
        so long as such issuances in the aggregate do not exceed five percent (5%)
        of
        the common stock of the Company issued and outstanding immediately prior
        to such
        issuance or grants.
  F-25
  If
        the
        Company’s common stock is not listed on the Nasdaq Global Market or the Nasdaq
        Capital Market by September 19, 2008, the Company is required to pay by
        September 28, 2008, an additional payment on each Convertible Note in the
        amount
        of 3.3% of the principal amount of such note.
  The
        indenture also requires the Company to pay additional interest as
        follows:
 ·
                At
                    the rate of 3.0% per annum if the Company has not obtained a
                    listing of
                    its common stock on the Nasdaq Global Market or the Nasdaq Capital
                    Market
                    by September 19, 2008 and maintained such listing continuously
                    thereafter
                    as long as the notes are
                    outstanding.
  ·
                At
                    the rate of 1.0% for each 90-day period in which the Company
                    has failed to
                    comply with the registration obligations under the registration
                    rights
                    agreement.
  If
        the
        Convertible Notes are not redeemed or converted or purchased and cancelled
        by
        the maturity date, the Company shall redeem the Convertible Notes at the
        repurchase amount, which is an amount which results in a yield to maturity
        of
        13.8% per annum, net of interest previously received, plus any interest accrued
        on overdue principal (and, to the extent lawful, on overdue interest) and
        premium, if any, at a rate which is 3% per annum in excess of the rate of
        interest then in effect.
  If
        any of
        the following designated events occurs, the Company must offer the holders
        of
        the Convertible Notes the right to require the Company to purchase the notes
        at
        the repurchase amount:
 ·
                The
                    occurrence, at any time after the common stock is listed on the
                    Nasdaq
                    Global Market or the Nasdaq Capital Market of any transaction
                    or event in
                    connection with which all or substantially all of the common
                    stock shall
                    be exchanged for, converted into, acquired for or constitutes
                    solely the
                    right to receive, consideration which is not all or substantially
                    all
                    common stock, depositary receipts, ordinary shares or other certificates
                    representing common equity interests that are (or, upon consummation
                    of or
                    immediately following such transaction or event, will be) listed
                    on a
                    United States national securities exchange or approved (or, upon
                    consummation of or immediately following such transaction or
                    event, will
                    be approved) for quotation on the Nasdaq Capital Market, Nasdaq
                    Global
                    Market, Nasdaq Global Select Market or any similar United States
                    system of
                    automated dissemination of quotations of securities
                    prices.
  ·
                The
                    occurrence, at any time after the common stock is listed on the
                    Nasdaq
                    Global Market or the Nasdaq Capital Market of a condition that
                    the common
                    stock is neither listed for trading on a United States national
                    securities
                    exchange, listed for trading on a United States national or regional
                    securities exchange nor approved for trading on any of the Nasdaq’s
                    Capital Market, Global Market or Global Select Market, or (ii)
                    trading in
                    the Company’s common stock on any such exchange or market has been
                    suspended for ten or more consecutive trading
                    days.
  The
        Senior Notes mature on September 28, 2012. The Company is required to make
        mandatory prepayments on the Senior Notes on the following dates and in the
        following amounts:
  Date
              
              Principal
                  AmountMarch
                  28, 2010
              
              $
              2,000,000September
                  28, 2010
              
              $
              2,000,000March
                  28, 2011
              
              $
              4,000,000September
                  28, 2011
              
              $
              4,000,000March
                  28, 2012
              
              $
              2,000,000
  F-26
 Commencing
        September 28, 2008, the Company may redeem the Senior Notes at a the following
        percentage of the principal amount:
 
  Twelve
                    Months Commencing September 28,
                
                Percent
                    of Principal2008
                
                108.0%2009
                
                106.0%2010
                
                104.0%2011
                    and thereafter
                
                100.0%
 The
        indentures for both the Convertible Notes and the 12% Notes include the
        following covenants:
  ·
              The
                  Company cannot incur any debt unless,
                  after giving effect to the borrowing, (i) the fixed charge coverage
                  ratio
                  would be greater than 2.75 to 1.00 for the first year and 3.5 to
                  1.0 if
                  the debt is incurred thereafter, and (ii) the leverage ratio would
                  not
                  exceed 4.25 to 1.00 for the first year and 3.75 to 1.00 if the
                  debt is
                  incurred thereafter, provided, that the certain subsidiaries may
                  continue
                  to maintain debt under credit facilities of not more than $15,000,000
                  for
                  the first year and $10,000,000 thereafter, and may incur purchase
                  money
                  indebtedness. The fixed charge coverage ratio is the ratio of the
                  Company’s earnings before interest, taxes, depreciation and amortization,
                  which is generally known as EBITDA, to consolidated interest expense,
                  as
                  defined. Leverage ratio means the ration of outstanding debt to
                  EBITDA,
                  with the interest component being the consolidated interest expense,
                  as
                  defined.
  ·
              The
                  Company must maintain, as of the last day of each fiscal quarter,
                  (i) a
                  fixed charge coverage ratio of 1.75 to 1.00 for the first six months,
                  2.75
                  to 1.00 for the next six months and 3.0 to 1.00 thereafter, (ii)
                  a
                  leverage ratio of 7.5 to 1.00 through March 31, 2008, 5.0 to 1.00
                  from
                  April 1, 2008 to September 30, 2008, and 4.5 to 1.00 thereafter,
                  and (iii)
                  a consolidated subsidiary debt to consolidated net tangible asset
                  ratio of
                  not more than 0.2 through September 30, 2008 and 0.15
                  thereafter.;
  ·
              Sinogas
                  cannot incur debt under its credit facilities except to the extent
                  that
                  such debt does not exceed $15.0 million through September 28, 2008
                  or
                  $10.0 million thereafter.
  ·
              The
                  Company is subject to restriction in paying dividends, purchasing
                  its own
                  securities or those of our subsidiaries, prepaying subordinated
                  debt, and
                  making any investment other any investments in itself and its subsidiaries
                  engaged in our business and certain other permitted
                  investments.
  ·
              The
                  Company is subject to restrictions on incurring
                  liens.
  ·
              If
                  the Company sells assets and does not reinvest the proceeds in
                  its
                  business within 180 days (270 days in the case of a sale of real
                  property), to the extent that such proceeds not so reinvested exceed
                  $5,000,000, the Company is required to offer the holders of the
                  notes the
                  right to have the Company use such excess proceed to purchase their
                  notes.
  F-27
   ·
              If
                  there is a change of control, the Company is required to offer
                  to
                  repurchase the notes at 103% of the principal of the note, plus
                  accrued
                  interest. A change of control will occur if Bo Huang or Tianzhou
                  Deng own
                  less than 25% of the voting power of the Company’s voting stock or, with
                  certain exceptions, a merger or consolidation or sale of substantially
                  all
                  of the Company’s and its subsidiaries’
assets.
  As
        of
        September 30, 2007, after net receivable from the issuance of the notes,
        net of
        the $160,000 arrangement fee and other cost of the issuance, was $29,445,155.
        This amount is reflected as long term notes payable outstanding, together
        with
        the same amount of receivables due to the proceeds of the notes issued were
        paid
        in October 8, 2007. The proceeds from the notes are maintained in a separate
        account which require the signatures of our chief executive officer, our
        chairman and one senior officer of one of the lenders.
  The
        Company also entered into an investor rights agreement, pursuant to which,
        as
        long as an investor holds at least $2,000,000 principal amount of notes or
        at
        least 3% of the issued and outstanding stock:
 ·
                The
                    investor has the right to approve the Company’s annual budget, and the
                    Company cannot deviate by more than 15% of the amount in the
                    approved
                    budget.
  ·
                The
                    Company and its subsidiaries cannot replace or change the substantive
                    responsibilities of the chief executive officer except in the
                    event of his
                    incapacity, resignation or
                    retirement.
  ·
                The
                    Company and its subsidiaries cannot take any action that would
                    result in a
                    change of control, as defined in the
                    indentures.
  ·
                The
                    Company and its subsidiaries cannot change the number of board
                    members or
                    the composition or structure of the board or board committees
                    or delegate
                    powers to a committee or change the responsibilities and powers
                    of any
                    committee.
  ·
                The
                    Company shall, by April 1, 2008, have appointed an independent
                    public
                    accountant from a list of 16 firms provided by the investors,
                    failing
                    which the Company shall pay the investors the sum of $2,500,000
                    on April 1
                    of each year in which this condition is not met, and the Company
                    shall not
                    terminate the engagement of such auditor without prior investor
                    approval.
  ·
                The
                    investors have a right of first refusal on future financings
                    by the
                    Company and proposed transfers, with limited exceptions, by Mr.
                    Huang and
                    Mr. Deng. The investors also have a tag-along right in connection
                    with
                    proposed sales by Mr. Huang and Mr.
                    Deng.
  Mr.
        Huang
        and Mr. Deng are also prohibited from transferring any shares, with limited
        exceptions, until the investors shall have sold, singly or in the aggregate,
        more than 5% of the total outstanding equity of the Company on a fully-diluted
        basis.
  From
        the
        closing date and as long as long
        as
        Abax continues to hold more than 5% of the outstanding shares of c ommon
        stock on
        an
        as-converted basis, (i) Abax shall be entitled to appoint up to 20% of the
        voting members (or the next higher whole number if such percentage does not
        yield a whole number) of the Company’s board of directors, and (ii) if the
        Company fails to meet the net income requirements under the indenture for the
        Convertible Notes, Abax has he right to appoint an additional director. The
        Abax
        director shall be entitled to serve on each committee of the board, except
        that,
        the Abax director shall not serve on the audit committee unless it is an
        independent director. Mr. Huang and Mr. Deng have agreed to vote their shares
        for the election of the Abax directors. The Company is required to amend
        its
        by-laws to provide that a quorum for action by the board shall include at
        least
        one Abax director.
  Management
        completed its review of the accounting for the transactions and has concluded
        that the conversion option does not constitute an embedded derivative under
        FAS
        133. However, it qualifies for beneficial conversion treatment under EITF
        98-5
        and 00-27, and the total beneficial conversion features of $176,656 has been
        charged to the Company’s Additional Paid in Capital and will be amortized
        through the conversion period.
  F-28
  As
        of
        September 30, 2007, neither the Notes nor the Common Stock issuable upon
        conversion of the Convertible Notes have been registered under the U.S.
        Securities Act of 1933, as amended.
  **17.
        Minority Interests**
  The
        activities of the minority interests’ equity during the nine months ended
        September 30, 2007 is summarized as follows (dollars in thousands):
 
 Beginning
                  balance (January 1, 2007)
              
              
              614Minority
                  interests in income
              
              
              142Add:
                  Contribution from minority stockholders
              
              
              607Balance,
                  September 30,2007
              
              
              1,363
 
 **18.**  **Related
        Party Relationships and Transactions**
  The
        principal related companies and related parties with which the Company had
        transactions in the nine months ended September 30, 2007 and the year ended
        December 31, 2006, are as follows:
 
 Name
                  of related party
              
              RelationshipBeijing
                  Sanhuan Technology Development Co., Ltd (Beijing Sanhuan)
              
              Parent
                  company of a subsidiary before November 8, 2005. Legal representative
                  of
                  Beijang Sanhuan is the Company’s CEO before July 2007.****Qingdao
                  Kangtai Machinery Equipment Manufacture Co. Limited (Kangtai)
                Xuancheng
                  Sinoenegy Vehicle Gas Company (Xuancheng Sinoenegy)
                Name
                  of Related Party
                Mr.
                  Guili Shi
                Mr.
                  GuiQiang Shi
                Mr.
                  Tanzhou Deng
              
              Minority
                  shareholder of a subsidiary (Yuhan) from May 2005
                30%
                  equity owner as at September 30, 2007
                
                
                Shareholder
                  of Kangtai
                Shareholder
                  of Kangtai
                Chairman
                  of the Company
  Significant
        transactions between the Company and its related parties during the three
        and
        nine months ended September 30, 2007 and 2006 are as follows:
 
 (1)
              Sales
                  and purchase transactions with related
                  parties
 Name
                  of the Company
              
              For
                  the nine months ended September 30,2007
              
              2006
                  (unaudited)Beijing
                  Sanhuan
              
              -Grant
                  CNG station technology know-how license$170,000
              
              Grant
                  CNG station technology know-how license $339,000Kangtai
              
              —
              
              Sales
                  with amount of $1,519,049
  F-29
  Kangtai
        is the predecessor company of Yuhan. Kangtai purchases products from Yuhan
        to
        fill 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 prevailing market prices into
        consideration.
 
 (2)
              Related-company
                  receivables
 
 Name
                  of the Company
              
              September
                  30, 2007 (Audited)
              
              December
                  31, 2006(Audited)Kangtai
              
              -$186,431
                  inter-company loan
                -
                  $169,030 sales receivable on behalf of the Company
                -
                  $145,595 rental fee receivables
              
              -
                  $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)
              Related-company
                  and related party payables
 
 Name
                  of the Company
              
              September
                  30, 2007 (Audited)
              
              December
                  31, 2006(Audited)Beijing
                  Sanhuan
              
              -$3,235,671
                  payables to Beijing Sanhuan for balance of the purchase price of
                  the land
                  use right
                -$67,000
                  for know how using of CNG station system integration
              
              -
                  $3,112,071 payables for land use right
                -
                  $451,734 for know-how using of CNG station system
                  integrationKangtai
              
              -
                  $310,664 unpaid part for 35% equity purchase of Yuhan
              
              -
                  $811,061 payable for 35% equity purchase of Yuhan;Xuancheng
                  Sinoenergy
              
              -$44,895
                  unsecured loanMr.Tianzhou
                  Deng
              
              -
                  $19,128
              
              -
                  $129,073Mr.
                  Guili Shi
              
              —
              
              -
                  $18,966Mr.
                  GuiQiang Shi
              
              -
                  $1,331
              
              -
                  $1,264
 
 The
        amounts due from and to related parties are interest free, unsecured and
        have no
        fixed terms.
 
 **19.
        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.
  F-30
 
 **20.
        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. At September
        30, 2007, the Company has four 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 ( iv )
        CNG
        vehicle conversion kits, and at September 30, 2006, it has the three segments
        listed in ( i )
        (ii)
        and ( ii i).
  As
        all
        businesses of the Company are carried out in the PRC, the Company is deemed
        to
        operate in one geographical area.
  The
        following tables set forth information relating to our business segments
        for the
        nine months ended September 30, 2007 (dollars in thousands).
 
 Nine
                  months ended September 30, 2007
              
              Non-standard
                  pressure containers
              
              CNG
                  station facilities and construction
              
              CNG
                  station Operation
              
              Vehicle
                  conversion kits
              
              TotalNet
                  revenue
              
              $
              3,250
              
              $
              6,064
              
              
              -
              
              $
              6,609
              
              $
              15,923Cost
                  of revenues
              
              
              1,873
              
              
              2,176
              
              
              -
              
              
              4,041
              
              
              8,090Gross
                  profit
              
              
              1,377
              
              
              3,888
              
              
              -
              
              
              2,568
              
              
              7,833Gross
                  margin
              
              
              42
              %
              
              64
              %
              
              
              
              
              39
              %
              
              49
              %Operating
                  expenses:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0Selling
                  expenses
              
              $
              100
              
              $
              23
              
              
              -
              
              $
              111
              
              $
              234General
                  and administrative expenses
              
              
              529
              
              
              970
              
              
              1,130
              
              
              700
              
              
              3,329Total
                  operating expense
              
              
              629
              
              
              993
              
              
              1,130
              
              
              811
              
              
              3,563Income
                  (loss) from operations
              
              $
              748
              
              $
              2,895
              
              
              ($1,130
              )
              $
              1,757
              
              $
              4,270
  F-31
  Nine
                  months ended September 30, 2006 (unaudited)
              
              Non-standard
                  pressure containers
              
              CNG
                  station facilities and construction
              
              CNG
                  station Operation
              
              TotalNet
                  revenue
              
              $
              4,361
              
              $
              5,403
              
              
              -
              
              $
              9,764Cost
                  of revenues
              
              
              3,353
              
              
              1,625
              
              
              -
              
              
              4,978Gross
                  profit
              
              
              1,008
              
              
              3,778
              
              
              -
              
              
              4,786Gross
                  margin
              
              
              23
              %
              
              70
              %
              
              
              
              
              49
              %Operating
                  expenses:Selling
                  expenses
              
              $
              152
              
              $
              38
              
              
              -
              
              $
              190General
                  and administrative expenses
              
              
              455
              
              
              908
              
              
              33
              
              
              1,396Total
                  operating expense
              
              
              607
              
              
              946
              
              
              33
              
              
              1,586Income
                  (loss) from operations
              
              $
              401
              
              $
              2,832
              
              
              ($33
              )
              $
              3,200
  **21.
        Capital Stock**
 
 (a)
              Common
                  stock issued on conversion of series A preferred stock and exercise
                  of
                  warrants
 
 As
        part
        of the June 2006 private placement, the Company issued (i) notes in the
        aggregate principal amount of $3,700,000, which were automatically converted
        into 5,692,307 shares of series A preferred stock in September 2006, (ii)
        390,087 shares of common stock and (iii) 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 $1.75
        warrants expired unexercised on December 31, 2006. The $0.85 warrants and
        the
        $1.20 warrants expire in June 2011.
 
 At
        December 31, 2006, all of the shares of series A preferred stock and all
        of the
        $0.85 warrants and $1.20 warrants were outstanding. During the nine months
        ended
        September 30, 2007:
  ·
              5,692,307
                  shares of common stock were issued upon conversion of series A
                  preferred
                  stock.
  ·
              5,657,143
                  shares of common stock were issued upon exercise of $0.85 warrants,
                  from
                  which the Company received
                  $4,808,571.
  ·
              5,432,143
                  shares of common stock were issued upon exercise of $1.20 warrants,
                  from
                  which the Company received
                  $6,518,572.
  F-32
  (b)
        Warrants
 
 Number
                  of shares issuable on exercise of warrants$0.85
                  Warrants
              
              $1.20
                  Warrants
              
              $1.75
                  Warrants
              
              $2.10
                  Warrants for service outsourced
              
              TotalBalance
                  at December 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issued
                  during the year
              
              
              6,342,858
              
              
              6,342,858
              
              
              6,342,858
              
              
              -
              
              
              19,028,574Exercised
                  in the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -Expired
                  in the year
              
              
              -
              
              
              -
              
              
              (6,342,858
              )
              
              -
              
              
              (6,342,858
              )Balance
                  at December 31, 2006
              
              
              6,342,858
              
              
              6,342,858
              
              
              -
              
              
              -
              
              
              12,685,716Issued
                  during the period
              
              
              -
              
              
              -
              
              
              -
              
              
              150,000
              
              
              150,000Exercised
                  in the nine months
              
              
              5,657,143
              
              
              5,432,143
              
              
              -
              
              
              -
              
              
              11,089,286Balance
                  at September 30, 2007
              
              
              685,715
              
              
              910,715
              
              
              -
              
              
              150,000
              
              
              1,746,430Proceeds
                  from warrant exercise
              
              $
              4,808,571
              
              $
              6,518,572
              
              
              -
              
              
              -
              
              $
              11,327,143
 
 As
        at
        September 30, 2007, the average exercise price for the above mentioned warrants
        is $1.14. The exercise prices of the warrants are subject to reduction if
        our
        consolidated pre-tax income for the year ended December 31, 2007, as defined,
        is
        less than $0.353 per share on a fully-diluted basis, then the exercise price
        of
        the warrants shall be reduced by the percentage shortfall, up to a maximum
        of
        40%. Thus, the maximum reduction would reduce the exercise price of the $0.85
        warrants to $0.51 and the exercise price of the $1.20 warrants to
        $0.72.
  F-33
  **(c)
        Stock options**
 
 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. 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. Pursuant to the automatic grant provisions of the
        plan, in June 2006, the Company issued to its independent directors, options
        to
        purchase an aggregate of 120,000 shares of common stock at $0.65 per share,
        being the fair market value on the date of grant.
 
 Pursuant
        to the 2006 long-term incentive plan, each independent director are to be
        granted stock option to acquire 5,000 shares of common stock on first trading
        day in April of each calendar year at market price. On April 1, 2007, the
        four
        independent directors were granted 20,000 stock options at an exercise price
        of
        $2.03 per share, being the fair market value on the date of grant.
 
 On
        April
        9, 2007, pursuant to 2006 long-term incentive plan, the stock option committee
        of the board of directors granted five year options to its senior managers
        and
        key management to acquire 1,180,000 shares of common stock at $2.00 per
        share, being the fair market value on the date of grant. These options vest
        as
        to 50% of the underlying shares of common stock on August 3, 2007 and as
        to the
        remaining 50% on August 3, 2008.
 
 Shares
                  subject to options
              
              Weighted
                  average exercise price
              
              Remaining
                  contractual lifeOptions
                  outstanding at December 31, 2006
              
              
              120,000
              
              $
              0.65
              
              
              3.75
                  yearsOptions
                  granted during the period
              
              
              20,000
              
              $
              2.03
              
              
              4.5
                  yearsOptions
                  granted during the period
              
              
              1,180,000
              
              $
              2.00
              
              
              4.
                  5 yearsOptions
                  outstanding at September 30, 2007
              
              
              1,320,000
              
              $
              1.88
              
              
              4.43
                  yearsOptions
                  exercisable at September 30, 2007
              
              
              650,000
              
              $
              0.94
              
              
              4.43
                  years
 
 The
        fair
        value of options granted is estimated on the date of grant using the
        Black-Scholes option price model with the weighted average assumptions shown
        in
        the following table:
 
 Stock
                  options granted on April 9, 2007
              
              Stock
                  options granted on April 1, 2007
              
              Stock
                  options granted on June 2, 2006Expected
                  volatility
              
              
              26.39
              %
              
              35.16
              %
              
              50
              %Risk-free
                  rate
              
              
              4.64
              %
              
              4.64
              %
              
              4.64
              %Expected
                  term (years)
              
              
              5
              
              
              5
              
              
              3Dividend
                  yield
              
              
              0.0
              %
              
              0.0
              %
              
              0.0
              %Weighted
                  average fair value per share
              
              $
              0.62
              
              $
              0.60
              
              $
              0.25
 
 (d)
        Additional paid in capital
  F-34
  
 The
        activities of the additional paid in capital during the nine months ended
        September 30, 2007 is summarized as follows (dollars in
        thousands):
 
 Balance,
                  December 31, 2006
              
              $
              9,935Issuance
                  of common stock on exercise of warrants
              
              
              11,316Amortizable
                  discount of 3% guaranteed senior convertible notes
              
              
              176Issuance
                  of warrants for service
              
              
              65Grant
                  of stock options
              
              
              508**Balance,
                  September 30, 2007**
              
              **$**
              **22,000**
 
 **22.
        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 earnings per share is based upon the weighted average
        number
        of shares of common stock outstanding during the period. Diluted earnings
        per
        share is based on the assumption that all dilutive convertible shares and
        stock
        options were converted or exercised. The number of shares included in
        determining diluted earnings per share 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),
        with the funds obtained thereby being used to purchase common stock at the
        average market price during the period.
  F-35
 
 The
        breakdown for the fully diluted outstanding shares for the nine months ended
        September 30, 2007 and twelve months ended December 31, 2006 is as
        follows:
 
 Nine
                  months ended September 30, 2007
              
              12
                  months ended December 31, 2006Weighted
                  average common stock outstanding during period
              
              
              25,551,566
              
              
              14,462,268Common
                  stock issuable upon conversion of series A preferred stock
              
              
              14,614
              
              
              1,017,680Common
                  stock issuable pursuant to $0.85 warrants
              
              
              442,858
              
              
              2,196,185Common
                  stock issuable pursuant to $1.20 warrants
              
              
              455,358
              
              
              1,569,216Common
                  stock issuable pursuant to $2.10 warrants
              
              
              15,453
              
              
              -Common
                  stock issuable upon transfer of convertible notes
              
              
              32,355
              
              
              -Common
                  stock issuable upon exercise of options outstanding during the
                  period
              
              
              215,624
              
              
              41,553Total
                  diluted outstanding shares
              
              
              26,727,828
              
              
              19,286,902
  **23.
        Restatement and reclassification for the comparative figure of nine months
        ended
        September 30, 2006**
 
 The
        statement of operations for the nine months ended September 30, 2006 did
        not
        include an accrual for (i) the amortization of the land use rights of $183,000,
        which is included in general and administrative expenses, or (ii) a know-how
        fee
        of $452,000 to an affiliated party, which is included in cost of revenue.
        The
        following table summarized the result before and after restatement. Also
        the
        statement of operations’ accrual for the cost of convertible note was $1,282,000
        less than it should be according to EITF0027.




In
      addition, certain comparative figures have been
      reclassified to conform with current years presentation.




F-36





The
        following table summarized the result before and after restatement (in thousand
        of US dollars)




Nine
                months ended
              September
                30, 2006As
                previously reported
            
            RestatedNet
                revenue
            
            
            9,764
            
            
            9,764Cost
                of revenue
            
            
            (4,526
            )
            
            (4,978
            )Gross
                profit
            
            
            5,238
            
            
            4,786Operating
                expensesSelling
                expenses
            
            
            190
            
            
            190General
                and administrative expenses
            
            
            1,212
            
            
            1,396Total
                operating expenses
            
            
            1,402
            
            
            1,586Income
                from operations
            
            
            3,836
            
            
            3,200Other
                income (expenses)Other
                non-operating income
            
            
            31
            
            
            31Interest
                expense
            
            
            (443
            )
            
            (1,725
            )Other
                expenses
            
            
            (146
            )
            
            (146
            )Other
                income (loss) net
            
            
            (558
            )
            
            (1,840
            )Income
                (loss) before income taxes
            
            
            3,278
            
            
            1,360Income
                tax
            
            
            1,011
            
            
            1,011Income
                (loss) before minority interest
            
            
            4,289
            
            
            2,371Minority
                interest
            
            
            (39
            )
            
            (39
            )Net
                income
            
            
            4,250
            
            
            2,332Earnings
                per share -basic
            
            
            0.05
            
            
            0.03Weighted
                average shares outstanding- basic
            
            
            14,306,730
            
            
            14,417,851Earnings
                per share -diluted
            
            
            0.05
            
            
            0.03Weighted
                average shares outstanding- diluted
            
            
            14,306,730
            
            
            14,459,533





**24.
      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)
      The
      Company has a purchase order with Fornovo Gas S.r.l of Italy for the purchase
      of
      36 compressor units and 60 high capacity dispensers for a total purchase price
      of $9.6 million.





(b)
      The
      Company has a purchase order with LOVATO for the purchase of fittings of
      conversion kits with the total price of $0.5 million.




F-37





(c)
      The
      Company has a purchase order with NK Co., Ltd (a Korea company) for the purchase
      of steel bottles with total price of $1.14million.





At
      September 30, 2007, the Company has paid a total of $6.32 million for the
      purchase, and $3.77 million goods have been delivered to the Company for the
      above mentioned purchase orders in paragraphs (a), (b) and (c) .




(d)  The
      Company has a purchase order with Bejing Boken CNG Vehicle Equipment Co., Ltd
      (Boken) for the purchase of natural gas compressors with the total price of
      $1.84 million. As of September 30, 2007, $1.3 million downpayment has been
      paid.





(e)  The
      Company has an opened purchase order with Yangzhou Chengde Steel Tube Co.,
      Ltd
      (Chengde Steel Tube) for the purchase of raw material of truck trailers. As
      of
      September 30, 2007, $1.2 million down payment for the first batch of purchase
      has been paid to Chengde Steel Tube.





(f)
      During the nine months, Wuhan Sinoenergy, the subsidiary of the Company, has
      leased 13 lands in Wuhan City for its CNG station. The lease terms are from
      10
      year to 20 years with annual rental fee about $341,600 . Wuhan Sinoenergy has
      purchased a land use right for land located in Wuhan City for its CNG station
      at
      a price of $116,000. As of reporting date, $36,842 has been paid.




(g)
      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.  The agreement, as amended, gives the
      Company the right to buy the remaining 10% interest in Yuhan during the first
      six months of 2008 on payment of the rest $640,000. As of September 30, 2007,
      the Company owns 90% of Yuhan and paid a total of $524,000 and own $976,000.




(h)
      On
      April 20, 2007, the Company and Tianjin Green Fuel Company (“Green Fuel”) signed
      equity purchase agreement, pursuant to which the Company will purchase the
      45%
      equity of Anhui Gagher owned by Green Fuel for the price of $2,750,000 including
      $344,330 register capital paid by Green Fuel and $500,000 for the cost to obtain
      200 million cubic meters natural gas quota from Sinopec. On July 4, 2007, Anhui
      Gagher received PRC government approval for the transfer of the stock interest
      and its business license was updated accordingly. As of September 30, 2007,
      the
      Company had paid $1,692,594 to Green Fuel. The Company is to pay the remaining
      $1,057,406 to Anhui Gagher according to requirement of PRC government.





(i) On
      March
      23, 2007, the Company and Hong Kong China New Energy Development Investment
      Co.
      Ltd (“New Energy”), incorporated Hubei Gather Eenergy Gas Co., Ltd (“Hubei
      Gather”) to construct and operate natural gas process plants with expected
      annual processing capacity of 100-300 million cubic meters in Hubei Province.
      The registered capital is $5 million of which Sinoenergy Holding Ltd will
      contribute $2,750,000 as 55% equity owner and New Energy will contribute $2,
      250,000 owing 45% interest. The term of the business of Hubei Gather is from
      March 23, 2007 to March 22, 2027. As of September 30, 2007, $752,710 has been
      invested in Hubei Gather by the Company and New Energy.





(j)
      On
      April 20, 2007, the Company and Shanghai CNPC Enterprise Group (CNPC Enterprise)
      signed equity purchase agreement, pursuant to which the Company would purchase
      70% of Xuancheng Sinoenergy Gas owned by CNPC Enterprises for $1,797,412. As
      at
      September 30, 2007, the Company has paid to CNPC Enterprise $732,279 on account
      for that transaction.





( k)
      On
      August 28, 2007, the Company entered into an Equity Purchase Agreement to
      acquire 100% of the equity of Qingdao Jingrun General Machinery Company
      (“Jingrun”) (“Equity Purchase Agreement” or “the agreement”). Under the terms of
      the agreement, Jingrun’s shareholder will receive cash consideration of
      approximately $8 million, for all of the assets of Jingrun, including the
      company’s land and workshop. As of September 30, 2007, the assets to be sold
      under the agreement are under negotiation and government approval is pending.
      Consequently the down payment of $4 million for the Equity Purchase Agreement
      was recorded as prepayment.




F-38





(l)
      The
      Company has purchased the land use right for the real property on which the
      Company’s facilities are located from Beijing Sanhuan. The initial purchase
      price was $12.3 million. Based on increased expenses incurred by Beijing Sanhuan
      as well as the increased value of the land, the price was increased to $18.6
      million. As of September 30, 2007, the Company has paid $15.4 million to Beijing
      Sanhuan.





(n)
      Under
      the commercial practice of the PRC, the Company paid **** 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 expensed as a period
      expense if and when a determination has been made by the taxing authorities
      that
      a penalty is due.




**25.
      Retirement Benefits**




The
      full-time contracted employees of the Company are entitled to welfare benefits,
      including medical care, labor injury insurance 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 $79,979 and $81,161 for the nine months ended September 30, 2007
      and 2006, respectively, and was 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.





From
      time
      to time, the Company may hire some part time workers or short term workers
      to
      satisfy the peak season labor requirement. Those workers have the right to
      terminate their work to the Company at any time. For those part time
      non-contracted workers, it is difficult for the Company to accurately record
      the
      working time, total wages and the accrual of welfare benefits. So based on
      the
      common practice, the Company treats those workers as probationers, and does
      not
      accrue welfare benefit for them. Although the Company believes the common
      treatment is acceptable under these circumstances, there may exist a possibility
      that government may require the Company to accrue the welfare benefit and may
      arises penalty for the under accrual.





**26.
       Significant Concentrations**




The
      Company grants credit to its customers, generally on an open account basis.
      The
      Company’s customers are all located in the PRC. The Company performs ongoing
      credit evaluations with respect to the financial condition of its debtors,
      but
      does not require collateral. In order to determine the value of the
      Company’s accounts receivable, the Company records a provision for doubtful
      accounts to cover probable credit losses. Management reviews and adjusts this
      allowance periodically based on historical experience and its evaluation of
      the
      collectibility of outstanding accounts receivable.





In
      nine
      months ended September 30, 2007, there are two customers accounting for in
      excess of 10% of consolidated sales as 24.3% and 13.1% of consolidated sales
      respectively, or an aggregate of 37.5% of consolidated sales.





In
      nine
      months ended September 30, 2006, there is one customer accounting for in excess
      of 10% of consolidated sales as 33% of consolidated sales.




F-39





As
      at
      September 30, 2007 and 2006, approximately 28.8% and 7% of accounts receivable
      were from trade transactions with the aforementioned customers.




Interest
      Rate Risk – Bank loans
      are
      subject to fluctuations in interest rate.




**27.
      Subsequent Events**





(1)
      Xuancheng Sinoenergy was established on March 26, 2007 and is the business
      of
      manufacturing and sales of automobile conversion kits that enable a gasoline
      powered automobile to operate on compressed natural gas and the construction
      and
      operation of CNG stations. During its corporation, Shanghai CNPC owned 70%
      interest and Sinogas owned 30% interest. On July 26, 2007 the Company and
      Shanghai CNPC singed an equity purchase agreement (the agreement). Pursuant
      to the agreement, the Company would acquire 70% equity from Shanghai CNPC.
      On
      November 6, 2007, the acquisition was completed and the Company wholly owns
      100%
      of Xuancheng Sinoenergy.





(2)
      On
      August 28, 2007, the Company entered into an Equity Purchase Agreement to
      acquire 100% of the equity of Qingdao Jingrun General Machinery Company
      (“Jingrun”). Under the terms of the agreement, Jingrun’s shareholder will
      receive approximately $8 million, for all of the assets of Jingrun, the
      principal asset being Jingrun’s land use right and workshop. As of September 30,
      2007, the assets to be sold under the agreement are under negotiation and
      government approval is pending. Consequently the $4 million down payment for
      the
      equity purchase was recorded as a prepayment. On December 15, 2007, PRC
      government approved the acquisition and issued a new business license to
      Jinrun.






F-40