U.S.
Securities and Exchange Commission







Form
10-K





x ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year
ended September 30, 2008




o TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition
period from ________ to _________




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: 011 86-10-84928149


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





Title of
Each Class: Common Stock, $ 0.001 par value.





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes oNo x





Indicated
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes oNo x





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
past 90 days. Yes xNo o





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





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




Large
Accelerated Filer oAccelerated Filer o  
Non-Accelerated Filer o   Smaller
Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x





As of December 8, 2008, there
were15,942,336shares of Common Stock
outstanding.







Documents
incorporated by reference




None




Table of Contents




INDEX






PagePART
      IITEM
      1.
            Business
            3ITEM
      1A.
            Risk Factors
            10ITEM
      1B.
            Unresolved Staff Comments
            22ITEM
      2.
            Properties
            22ITEM
      3.
            Legal Proceedings
            23ITEM
      4.
            Submission of Matters to a Vote of Security
      Holders....
            23PART
      IIITEM
      5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            23ITEM
      6.
            Selected Financial Data
            24ITEM
      7.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            24ITEM
      7A
            Quantitative
      and Qualitative Disclosure About Market Risk
            36ITEM
      8.
            Financial Statements and Supplemental
    Data
            36ITEM
      9.
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            36ITEM
      9A.
            Controls and Procedures
            36ITEM
      9B.
            Other Information
            38PART
      IIIITEM
      10.
            Directors, Executive Officers and Corporate
      Governance
            39ITEM
      11.
            Executive Compensation
            41ITEM
      12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            45ITEM
      13.
            Certain Relationships and Related Transactions, and
      Director Independence
            47ITEM
      14.
            Principal Accounting Fees and Services
            48PART
      IVITEM
      15.
            Exhibits and Financial Statement
    Schedules
            50





SIGNATURES


FINANCIAL
STATEMENTS




- 1
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Forward-Looking
Statements




This
annual report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. 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 prospectus, including
the risks described under “Risk Factors,” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in this annual
report. In addition, such statements could be affected by risks and
uncertainties related to the ability to conduct business in the PRC, product
demand, including the demand for CNG and our conversion kits, our ability to
develop, construct and operate a CNG station business, our ability to raise any
financing which we may require for our operations, competition, government
regulations and requirements, pricing and development difficulties, our ability
to make acquisitions and successfully integrate those acquisitions with our
business, as well as general industry and market conditions and growth rates,
and general economic conditions as well as economic conditions that affect the
natural gas industry. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Our expectations are as of the
date this annual report is filed, and we do not intend to update any of the
forward-looking statements after the date this annual report is filed to conform
these statements to actual results, unless required by law.





Availability
of SEC Filings




We file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy and information statements and amendments to reports filed or
furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended. The public may read and copy these materials at the Securities
and Exchange Commission’s (“SEC”) Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding the Company and other
companies that file materials with the SEC electronically. These reports are
also available on our website at http://www.sinoenergycorporation.com/c2465/c2721/default.html.





Currency
References




Since our
business is conducted in China, using RMB, the currency of China, and our
financial statements are presented in United States dollars.  In this
annual report, we refer to obligations, commitments and liabilities, as well as
items from our financial statements in United States dollars.  These
dollar references are based on the exchange rate of RMB to United States
dollars, determined as of a specific date.  Changes in the exchange
rate will affect the amount of our obligations and the value of our assets in
terms of United States dollars which may result in an increase or decrease in
the amount of our obligations (expressed in dollars) and the value of our
assets, including accounts receivable (expressed in dollars) The information for
the fourth quarter of 2008 reflects prices through December 9,
2008.




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PART
I




ITEM 1.   BUSINESS.




Summary





We are
engaged in four operating segments:





•
            The
      manufacture of customized pressure containers and compressed natural gas
      (CNG) facilities and equipment, which has until recently been our
      principal business.  In this segment, we design and manufacture
      pressure containers which are used in a number of industries, including
      the petroleum and chemical, metallurgy and electricity generation, and the
      brewing industries using technology acquired from a former related
      party.


•
            The
      manufacture of CNG storage and transportation products and the
      construction of CNG stations for third parties. In this segment we
      manufacture and install CNG trailers, which are used to transport CNG to a
      filling station, CNG deposit systems for use in CNG gas stations, and
      other products used in the CNG business.   We also design
      and construct CNG stations and install CNG station equipment and related
      systems.


•
            The
      operation of CNG filling stations, which involves the design, construction
      and operation of CNG stations.  As of December 10, 2008, we were
      operating sixteen CNG stations, of which eleven are located in Wuhan, two
      in Pingdingshan and three in Xuancheng.  An additional three
      stations are in the final stages of construction located in
      Wuhan.


•
            Vehicle
      fuel conversion equipment, which involves the manufacture of kits which
      are used to enable a gasoline-powered vehicle to operate using
      CNG.




CNG is
gas, principally methane, that has been compressed. Natural gas is compressed
during transportation and storage and, thus, requires pressurized
containers.





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. We and Sinoenergy Holding are holding companies and
our business is operated by our subsidiaries.  At the time of our
acquisition of Sinoenergy Holding, we were a blank check corporation which was
not engaged in any business activities.  Sinoenergy Holding Limited
was the sole stockholder Qingdao Sinogas General Machinery Limited Corporation
(“Sinogas”), a wholly foreign-owned enterprise (“WFOE”) registered under laws of
the People’s Republic of China (“China” or 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 the
Company and the business of Sinogas became the business of the
Company.





Under
generally accepted accounting principles, both acquisitions described above are
considered to be capital transactions in substance, rather than business
combinations.  The acquisitions are equivalent to the issuance of
stock by Sinogas for the net monetary assets of Sinoenergy Holding, and the
issuance of stock by Sinoenergy Holding for the net monetary assets of
Sinoenergy. Each transaction was, in essence, a recapitalization, and was
accounted for as a change in capital structure. The accounting for the
acquisitions is identical to that resulting from a reverse acquisition, and no
goodwill is recorded. Under reverse takeover accounting, the comparative
historical financial statements for periods prior to June 2, 2006, are those of
the “accounting acquirer,” which is Sinogas.





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During 2008, we sold a 24.95% interest in
Sinogas.  Sinogas operates the customized pressure container and CNG
station facilities and construction and owns 75% of the subsidiary that
operations the vehicle conversion kit segment.  The only segment that
is wholly-owned by us is the CNG station operation.





All of
our operations are conducted in China.  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.  Our
website is located at www. Sinoenergycorporation.com. Information on our website
and any other website does not constitute a portion of this annual
report.





Change
of Fiscal Year





Effective
October 1, 2007, we changed our fiscal year from December 31 to September 30.
Accordingly, this annual report includes audited financial statements for the
year ended September 30, 2008 and the transitional nine-month period from
January 1, 2007 to September 30, 2007.





Reverse
Split





We
amended our articles of incorporation on June 17, 2008 by a certificate of
change. The certificate of change effected a one-for-two reverse split of the
common stock and reduced our authorized shares of common stock from 100,000,000
shares to 50,000,000 shares without changing the par value. This reverse stock
split became effective on July 9, 2008. All share and per share information in
this prospectus retroactively reflects the reverse split for all periods
presented.





Our
Business





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 the need to reduce air pollution,
among other factors, is creating a growing demand and increasing market for CNG powered vehicles,
notwithstanding the recent decline in the worldwide price of oil. 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
thisneed, and are engaged in the
construction and equipping of CNG stations that are both Company owned and
operated as well as owned and operated by third parties. We opened our first CNG
filling station in October 2007.As of December 10, 2008, we were
operating sixteen CNG stations, of which
eleven are located in Wuhan, two in Pingdingshan and three in
Xuancheng.  An additional three stations are in the final stages of
construction located in Wuhan, and fivewere in the preliminary planning stage
in Wuhan.  In
addition, since the second quarter of 2007, we have been manufacturing and
selling electronic device to enable a vehicle to use CNG, which allow a standard
gasoline powered vehicle to operate using natural
gas.





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We are
engaged in four business segments:





(i)
Customized pressure containers





Historically,
our business has been the manufacture of pressure containers and compressed
natural gas (CNG) facilities and equipment.  Our customized equipment
and pressure container business is the business originally conducted by our
subsidiary, Qingdao Sinogas General Machinery Limited Corporation (“Sinogas”),
prior to the reverse acquisition in June 2006.  This business includes
design and manufacturing of various types of pressure containers.




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





Our CNG
station construction business includes:





•
            The
      manufacture, sale and installation of CNG vehicle and gas station
      equipment, which we provide to other companies that operate CNG
      stations.




•
            The
      construction of CNG stations, for which we design the CNG station
      construction plans, construct CNG stations, and install CNG station
      equipment and related systems.





(iii)
CNG station operations





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





We
manufacture CNG vehicle conversion kits and electronic control devices that
enable vehicles manufactured for gasoline to operate on CNG.





These
segment operations are further explained below.





Customized
pressure containers





We
manufacture and sell customized pressure containers to companies in a wide range
of industries, including the petroleum, chemical, metallurgy, electricity
generation, beverage and other industries requiring customized
containers.  We do not maintain an inventory of these products,
rather, we manufacture them pursuant to purchase orders which set forth the
customers specifications.





The principal raw materials for
customized containers are steel and steel vessels.  In the past, we
have purchased the
steelvesselsprincipallyfrom an Italian supplier. Commencing in
May 2007, we also began purchasing 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 believe we have adequate
supply sources, both domestic and foreign, to fulfill our production needs for
the foreseeable future. We are not dependent upon any single supplier, although
the steel vessels are available from a small number of suppliers.


Since our
products are, in general, designed and manufactured pursuant to purchase orders
for a specific products to be manufactured in accordance with the customer’s
specification, our revenue from this segment 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 fulfill our customer’s orders, there is generally little
ongoing business from one period to the next with any customer.





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In
marketing our pressure containers, we rely primarily on an internal sales force,
that directly contacts and builds relationship with end user customers, and we
sell to the end users. We market our products through business connections,
trade shows and conferences. We believe that the advanced equipment that we
offer, our technology and our ability to produce high value added pressure
containers help us market our products in the Chinese market.





CNG
Station Facilities and Construction




In this
segment, we manufacture, sell and install CNG vehicle and gas station equipment,
including the following:





•
            CNG
      trailers for mobile distribution•
            CNG
      deposited system for gas station usage•
            CNG
      compressor skid•
            CNG
      dispenser (retail measurement
system)





We
provide these products for third party companies that operate fixed and/or
mobile CNG filling stations.





The
second aspect of this business is the CNG station construction service
business.  We design the CNG station construction plans, construct CNG
stations, and install CNG station equipment and related systems.





These
products and services are designed to meet the customer
specifications.  Our revenue in this segment 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.  Although we do not have a long history of operations in this
business, we anticipate that our major customers will vary from period to
period.  In both the year ended September 30, 2008 and the nine months
ended September 30, 2007, two customers of our station facilities and
construction segment each accounted for more than 10% of our total
sales.  These customers, who purchased CNG truck trailers, accounted
for approximately 32.0% of total sales in the year ended September 30, 2008 and
approximately 37.5% of sales for the nine months ended September 30, 2007,
which, in each year, represented most of our revenue from this
division.  At September 30, 2008 and September 30, 2007, approximately
71.0% and 28.8% respectively of our accounts receivable were from these
customers.  The following table sets forth information as to the
revenue generated from each of these customers for the year ended September 30,
2008 and the nine months ended September 30, 2007 (dollars in
thousands):





Name
            
            Year Ended September 30,
    2008
            
            
            Nine Months Ended
              September 30, 2007Dollars
            
            
            Percent
            
            
            Dollars
            
            
            PercentXuancheng
      Anjie Gas Transportation Co.,
            
            
            4,260
            
            
            
            10.4
            %
            
            
            *
            
            
            
            *Wuhan
      Lvneng Gas Transportation Co.,
            
            
            8,824
            
            
            
            21.6
            %
            
            
            *
            
            
            
            *Wuhan
      Fukang Company
            
            
            *
            
            
            
            *
            
            
            
            29,562
            
            
            
            24.3
            %Dafeng
      Xinxing Energy Co.,
            
            
            *
            
            
            
            *
            
            
            
            15,936
            
            
            
            13.1
            %





*  Less
than 10%





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In
marketing these services, we rely primarily on our internal salesmen, who
directly contact and build relationship with customers. We market our products
through personal contact, as well as business connections, trade shows and
conferences.




We are
aware of two companies which may be considered as competitors of us in the
manufacture of CNG deposit and transportation equipment – Shijiazhuang Enric Gas
Equipment and Handan Xinxing Petrochemical Equipment.





CNG
station operations




In 2006,
we entered the CNG station business, which involves the design, construction and
equipping CNG stations and operating those stations.  As of December
10, 2008, we were operating sixteen CNG stations, of which eleven are located in
Wuhan, two in Pingdingshan and three in Xuancheng.  An additional
three stations are in the final stages of construction located in
Wuhan.  We anticipate that these stations could be operational by the
end of December 2008.  However, we need government approval before we
can open a station, and the procedure for obtaining government approval may
delay the opening of one or more of these stations.  In the past, we
have not opened stations on schedule because additional time was required for us
to obtain government approval.  Each of our stations has four filling
outlets, and is open 24 hours a day, seven days a week.




We
believe that there is a large and expanding market for CNG in
Wuhan.  Wuhan is the capital of Hubei Province and the biggest city in
Central China, with a population of more than 9 million people. We have
scheduled the opening of an additional 25 stations in Wuhan during calendar
2009.  The construction and opening of these stations is subject to
weather conditions, the timely receipt of government approval, and other factors
beyond our control.




We have agreements to form two joint
ventures with China New Energy Development Investment Co., Inc., an unaffiliated
party, to operate natural gas processing plants.  These plants are the
mother stations that supply
CNG to our stations.  We have a 55% interest in the joint venture for
Wuhan and a 45% interest in joint venture that is located in
Wuhu City.  We have entered into agreements with China New Energy
pursuant to which we exchanged a 25% interest in the WuhuCity joint venture for an additional 25%
interest in the Wuhan joint venture.  Upon completion of the exchange
in September2008, we owned an 80%
interest in the Wuhan joint venture (Hubei Gather) and a 20% interest in the
Wuhu City joint venture (Anhui Gather).


Natural
gas is available from a limited number of suppliers, principally China Petroleum
and Chemical Corporation, known as Sinopec and PetroChina or affiliated
companies of PetroChina. These companies supply the natural gas and operate the
pipeline which is the only commercially reasonable way to deliver the natural
gas.




Each of
the joint ventures has an agreement with Sinopec. The agreements provide for an
initial annual volume of 50 million cubic meters per year, increasing to not
more than 200 million cubic meters per year.  The service is subject
to the completion of a natural gas pipeline between Sichuan and Shanghai, which
is expected to occur in the first half of 2009. The sales volume is subject to
annual natural gas purchase agreements and the price is subject to future
determination. We also have a supply agreement with PetroChina, which provides
us with 88 million cubic meters of natural gas per year.  We will
continue to purchase our natural gas from PetroChina until Sinogas’ Sichuan –
Shanghai pipeline is completed and operational.  The success of our
CNG station business is dependent upon our ability to have a continuous supply
of natural gas at our stations.  We are dependent upon Sinogas and
PetroChina to provide us with sufficient CNG to enable us to operate our CNG
filling stations.  If, for any reason, we are unable to obtain a
reliable supply of natural gas, including the failure of Sinopec to complete its
pipeline on time, we will be unable to generate revenue from this
business.




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The
construction of the CNG filling stations and the storage, transportation and
distribution of CNG, are subject to PRC regulations, and the price at which we
both buy and sell CNG is subject to government price controls, and the suppliers
of CNG are government-owned companies. The price controls over
the purchase and sale of CNG limits our potential profit from the sale of CNG as
our gross margin is effectively dependent upon the government’s pricing
policies.




The procedure for obtaining the land use
rights as well as the right to use the land for the construction and operation
of a CNG station involves a lengthy and labor intensive process, involving numerous steps through the
municipal government, including satisfying environmental, hazardous chemical,
noise abatement, soil suitability, health and other regulations.  Most
of these processes involve an application, an on-site inspection andthe performance of any necessary
remediation before a permit is granted, whichcantakenineandtwelvemonths.  Most recently, as a
result of both our experience in navigating through the regulatory procedure and
our record in successfully opening CNG stations in accordance with the terms
of our applications, we have been able to reduce the time to betweensixandninemonths.  While the need to
meet all the required regulations can be considered a barrier to entry into the
CNG station business, we
believe that our success in meeting our obligations will help us as we compete
with other potential competitors in seeking locations and permits for new
stations.


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 their own
natural gas distribution networks.





We are
aware of two companies which may be considered to be direct competitors in the
business of CNG station business: Xin’ao 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 we are constructing or plan
to construct CNG stations.





We have
two direct competitors in Wuhan – Jiang Han Petro Drill Corp., which as eight
stations, and Da Loong Investment Corp, which has two stations.  In
Pingdingshan, one gas company has one station.  There are no other
companies that sell CNG in Xuancheng.  None of these companies are
considered major companies, and we believe that we are considered the leading
CNG company in the three cities in which we have stations.




Our CNG
stations compete with gasoline stations as well as other CNG stations. The
ability of CNG stations to operate profitably is largely dependent upon the
acceptance of CNG by individual drivers as well as taxis and buses. We expect
that our principal customers, at least initially, will be taxis and bus
companies, which are presently the largest users of CNG.  As more
companies seek to fill the need for CNG stations, our competition will
increase.  Since the prices that we charge are fixed by the
government, competition is based on factors other than price, including the
location and appearance of the stations, the reliability of the stations and the
quality of service provided by our employees.  We believe that our
stations are located in well-travelled roads so that drivers can have easy
access to our stations.




PetroChina,
China’s largest oil and gas producer by capacity and our present supplier of
natural gas, has recently announced its intention to enter the CNG distribution
business in the next couple of years.  These plans may present a
competitive threat to companies such as us.  We cannot assure you that
we will be able to compete successfully with PetroChina as PetroChina enters the
markets in which we operate CNG stations.  PetroChina presently
delivers natural gas to the cities, and companies, such as ours, purchase the
natural gas from PetroChina or another suppliers, such as Sinopec, and sell the
natural gas in the city.  Because of PetroChina’s size, it may be in a
better position than we to enter into contacts with the city governments to
supply natural gas to those cities.




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Vehicle
fuel conversion equipment




We
believe that, with the government of the PRC encouraging the use of CNG as a
method of reducing pollution, there is market for a device that enables a
vehicle to use CNG.  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 an additional $400,000 to
increase our equity ownership in Lixun to 70%, and in April 2008 we acquired the
remaining 30%.  Our interest in Lixun is owned 75% by Sinogas, a
75.05% owned subsidiary, and 25% by us.  Through Lixun, we design and
manufacture 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.




We sell
these conversion kits primarily to manufacturers in the PRC who use the kits on
an OEM basis and to companies that market these products for sale in the
aftermarket. We develop and service those customers by our internal salesmen who
market the products through business connections, trade show and
conferences.   We also plan to market the conversion kits at our
CNG stations.




We are
aware of three Italian companies are the competitors in vehicle gas conversion
business -- 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.





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. The
license agreementhas a
ten-year term commencingJanuary 1, 2006.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
devices, Lixun has applied for a 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.




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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, and the cost of the services is included in cost of sales.




Employees




On September 30, 2008, we hadapproximately
883full-time employees, of
whom 97 are in executive and administrative positions, 83 employees are in
marketing and sales, 123 are technical engineers in pressure container and CNG
deposit and transportation manufacturing, quality control as well as
CNG station construction, 405 persons are manufacturing personnel and 175
are operating our retail GNC station business. We believe that our employee
relations are good.


ITEM 1A.   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 annual 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.




RISKS
ASSOCIATED WITH COMPANIES CONDUCTING BUSINESS IN THE PRC





Because
the scope of our business license is limited and subject to review, we may need
government approval to continue or expand our business.




A
business in China can only conduct business within its approved business scope,
which appears on the business license. Our licenses permit us to engage in our
present businesses. Our licenses are subject to the inspection by the government
agencies of our facilities. The 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. Any change in 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.  We cannot
provide any assurance that we may be able to maintain our present licenses or
that we will be able to obtain any additional licenses that may be required if
we seek to expand the scope of our business.





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




We intend
to expand our business both by increasing our product range, operating CNG
stations, entering into joint ventures 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:




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•
            levying
      fines;




•
            revoking
      our business and other licenses;
and




•
            requiring
      that we restructure our ownership or
operations.




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 that reduces or eliminates any benefits from its present
policies of economic reform. The recent worldwide economic slowdown, which
affected China, may affect government policies as they relate to the industries
which we serve, which relate to the purchase or capital equipment and the
purchase and sale of natural gas.  In addition, a substantial portion
of productive assets in the PRC remains government-owned. For instance, all land
is 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
expand our CNG business. The government of the PRC also exercises significant
control over China’s economic growth through the allocation of resources,
controlling payment of foreign currency and providing preferential treatment to
particular industries or companies. Uncertainties may arise with changing of
governmental policies and measures. In addition, changes in laws and
regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency, the nationalization or other expropriation of private
enterprises, as well as adverse changes in the political, economic or social
conditions in the PRC, could have a material adverse effect on our business,
results of operations and financial condition.





Price
controls may affect both our revenues and net income.




The laws
of the PRC provide for the government to fix and adjust prices. In connection
with our operation of CNG 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.  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 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. We cannot assure you that one
of the government’s responses to the economic downturn will not be to increase
the adoption of price controls on other segments of our business.





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




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




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




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




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




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




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




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




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




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




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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 have limited 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
manufacturing 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.




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 RMB, the currency of the PRC, 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 RMB, especially with respect
to foreign exchange transactions. Because a significant component for many of
our customized pressure containers, the steel vessels, is manufactured outside
of the PRC, our inability to pay our foreign manufacturer may impair our ability
to manufacture our products.





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




We
conduct our business in RMB. 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.




The
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. Following a period of general economic growth, China, like the
rest of the world, has recently been subject to an economic
downturn.  There can be no assurance that the 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. Our
customized pressure container business and our CNG station facilities and
construction business are dependent upon our customers making significant
capital purchases, either for pressure containers or for new CNG
stations.  The availability of financing to our customers as well as
the capital requirements of our customers could significantly reduce the need
for these products and services.  Since our CNG station business is
dependent upon the development of a market for cars and trucks 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. The recent sharp decline in oil
and gasoline prices may affect the need for CNG stations or for conversion kits
to enable gasoline-powered vehicles to operate on CNG.




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 became effective January 1, 2008. This new income tax
unifies the corporate income tax rate of domestic enterprises 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 that 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. A significant portion of our net income is derived
from subsidiaries that 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.




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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 pay 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 the 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
we are dependent upon a small number of suppliers or customers in one or more of
our segments, the loss of a major supplier or customer could impair our ability
to operate profitably.




In
general, in our customized pressure container business and our CNG station
construction business, we do not have long-term contracts with our customers,
and major contracts with a small number of customers account for a significant
percentage of our revenue from these segments. 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.  Two customers of our station
facilities and construction segment accounted for approximately 32% of our total
sales in the year ended September 30, 2008 and approximately 37.5% of sales for
the nine months ended September 30, 2007.  Our failure to develop new
customers in this and our other segments could materially impair our ability to
operate these segments profitably.  We purchase our CNG from one of
two government-owned companies.  The failure or inability of these
companies to provide us with CNG could materially impair our ability to operate
CNG stations.




Our
CNG station business has risks that are different from our manufacturing and
construction/installation business.




We have
commenced and are planning the expansion of our CNG service station business.
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 limited experience in operating stations, and we cannot
assure you that we will be successful in operating CNG stations.




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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, we may require
additional financing to equip and construct our proposed CNG stations, and we
cannot assure you that we will be able to obtain any financing which we may
require, either for our CNG 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 are subject to PRC regulations, including the price at
which we both buy and sell CNG.  The price controls
over the purchase and sale of CNG 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.  Before we are able to open a
CNG filling, we must obtain government approval.  In the past, we have
had to postpone the opening of our CNG stations because of delays in obtaining
government approval.




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. The
current economic downturn could materially decrease the market for CNG vehicles.
Further, in order for a market to develop for CNG vehicles, there must be a
network of CNG stations on major highways throughout the PRC. The failure of
such a network to develop could hinder the development of a market for CNG
vehicles which would in turn limit the market for our CNG stations.




We must secure enough CNG resources
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. These agreements are subject to annual allocations
and a major pipeline which is expected to provide us with CNG.  The
pipeline is still under construction and it may not be ready when scheduled for
completion by early 2009 and its capacity may not be as great as the operator
anticipated when it agreed to provide us with CNG. Further, it is possible that
we may experience shortages, particularly in the winter months when gas demand
peaks.





Our natural gas process plants,
which will be operated by Hubei Gather, our majority-owned subsidiary, may not
open according to our schedule. We do not own or control any supply of
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
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
quantity 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 ability
to operate this business profitably, if at all.  The current economic
downturn may affect the timing of the completion of the pipeline and the
allocation of CNG scheduled to be delivered through the pipeline.  We
have no recourse against any party in the event that the pipeline is not
completed on schedule.





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We may not be able to meet our
scheduled station openings. We have already encountered delays in opening
our stations, and we cannot assure you that we will not encounter delays in the
future. These delays can result from a range of factors, including adverse
weather conditions, delays in obtaining government approvals, delays in receipt
of materials for the construction of the stations, and other causes which may or
may not be within our control. Any delays may impair our ability to operate this
business profitably.





Competition is increasing for CNG
distribution. Our CNG stations compete with gasoline stations as well as
other CNG stations. The ability of CNG stations to operate profitably is largely
dependent upon the acceptance of CNG by individual drivers as well as taxis and
buses. We expect that our principal customers, at least initially, will be taxis
and bus companies, which are presently the largest users of CNG. As more
companies seek to fill the need for CNG stations, our competition will increase.
PetroChina Co., China’s largest oil and gas producer by capacity and our present
supplier of natural gas, has recently announced its intention to enter the CNG
distribution business. These plans present a competitive threat to companies
such as us. Because of PetroChina’s size, it may be in a better position than we
to enter into contacts with the city governments to supply natural gas to those
cities. We cannot assure you that we will be able to compete successfully with
PetroChina if PetroChina enters the markets in which we operate CNG
stations.





We may face liability claims from
users of our products.





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




Our
CNG conversion kit business is subject to the development of a market for
products that can enable gasoline powered vehicles to operate on
CNG.





One
segment of our business is the manufacture and sale of conversion kits that
enable gasoline-powered vehicles to operate on CNG. The customers of these
products are both vehicle manufacturers and vehicle owners. Our ability to
operate this segment profitably is dependent upon a number of factors including
the development of a market for conversion kits, our ability to compete
successfully with other manufacturers or distributors of conversion kits, and
the ability of our products to work properly in a wide range of both old and new
vehicles.  The current economic downturn together with the recent
decline in oil and gasoline prices may have an effect on the market for
conversion kits.




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 chairman, Tianzhou Deng, who are also directors. We
do not have employment contracts with either Mr. Huang or Mr. Deng. The loss of
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
require additional qualified management and other key personnel for our CNG
station business.





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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.




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
effect 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, including government approval of the acquisition;
      and




•
            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 or not successful, resulting from actions of the
      acquired company prior to our
acquisition.




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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.




We do not
manufacture our customized pressure containers for inventory, but pursuant to a
specific contract, and our contract flow is not predictable. Similarly, products
and services from our manufacture of CNG storage and transportation products and
the construction of CNG stations segment are also made pursuant to specific
contracts, and after the completion of a project our services may no longer be
required by our customers. 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
expand our CNG station business and sell our CNG conversion kits, 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 annual report, you should not rely on period-to-period comparisons of our
results of operations as an indication of future performance.





Because
certain of our stockholders control a significant amount of our common stock,
they may have effective control over actions requiring stockholder
approval.




As of
December 8, 2008, approximately 40.0% 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.  In addition, Abax
Lotus, Ltd., of which Xiang Dong (Donald) Yang, one of our directors, has joint
voting and dispositive rights, holds shares or common stock and convertible
notes which, if converted at the current conversion rate, would result in Abax
and Skywide beneficially owning a total of approximately 46.1% of our common
stock which could give them the effective ability to approve any action
requiring stockholder approval.




We
may not be able to comply with the regulations relating to internal controls
over financial reporting.




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-K, 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 for the fiscal years ending after December 15, 2009. If we
are still a non-accelerated filer on September 30, 2009, the external audit
report on the effectiveness of internal controls will be required until fiscal
2010. In connection with the periodic evaluation of our disclosure controls our
chief executive officer and chief financial officer identified weaknesses
related to our accounting personnel’s ability to identify accounting and
disclosure issues, calculate accounting entries, and prepare financial
statements and footnotes in accordance with U.S. GAAP. These officers have
concluded that our disclosure controls and procedures are not effective at this
time. We cannot assure you that we will be successful in addressing these issues
and any other issues which may be raised. If we are unable to address these
issues, 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.




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The
terms on which we raised $30,000,000 capital have resulted in significant
dilution and may result in additional dilution, which could impair our stock
price.




On
September 28, 2007, we raised $30,000,000 through the sale of our convertible
notes in the principal amount of $14,000,000 and senior notes in the principal
amount of $16,000,000. If our consolidated net income, as defined, does not
reach the stated level for the years ending December 31, 2008 and 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 for both 2008 and 2009, (b) the number of fully-diluted shares of common
stock (other than shares issuable upon conversion of the convertible notes)
remains 18,308,247 throughout the period, 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.




Year
            Conversion Rate
              Beginning of
              Year*
            
            Conversion Price
              Beginning of
              Year
            
            Conversion Rate
              As Adjusted
            
            Conversion Price
              As Adjusted2008
            19,512
            
            $
            5.125
            
            24,021
            
            $
            4.1632009
            24,021
            
            $
            4.163
            
            28,665
            
            $
            3.489




* The conversion rate at the beginning of
the year for 2008 has been adjusted to reflect the adjustment made pursuant to
the indenture as supplemented by a supplemental indenture dated as of June 23,
2008, which resulted in a
reduction of the conversion price from $6.34 to $5.125.The
investors waived the right to any adjustment based on 2007 net income, in
consideration for which Skywide agreed to pay the investors $600,000 by December
1, 2008.  As of December 19, 2008, Skywide was in default of this
obligation.


The
financing agreement gives the investors certain rights relating to our business
which may affect our ability to develop our business.




The
investors in our September 2007 financing have the right of approval with
respect to our budgets in accordance with a schedule set forth in an investor
rights agreement. 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 a member. These rights may affect our
ability to develop our business and may have a negative impact on our stock
price.




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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 $4.20 per share. The conversion price has been adjusted
from $6.34 to $5.125 as a result of the implementation of that procedure
pursuant to a supplemental indenture dated June 23, 2008. Depending on the
market price of our common stock, there may be further downward
adjustments.




We may be required to pay liquidated
damages if we cannot fulfill the requirements of our $30,000,000
financing.




We were
required to have a registration statement covering the shares of common stock
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. As of September 30, 2008, we had
accrued additional interest in the amount of $420,000, which reflects the
estimated liquidated damages which we are required to pay since the registration
statement was not declared effective by December 9, 2008. Although we have filed
a registration statement covering the underlying shares, we may have to accrue
additional interest if the registration statement is declared effective by March
9, 2009.




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 $14,000,000 convertible notes or if
we are required to pay liquidated damages, the 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




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 1,000,000 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 5.9% of the outstanding common stock,
based on the presently outstanding shares of common stock.





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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, Beijing Sanhuan Technology
Development Co., Ltd (“Beijing Sanhuan”) with an initial purchase price of $12.3
million, which was increased to $18.6 million, of which $16.4 million was paid
as of September 30, 2008. We also license technology from Beijing Sanhuan for
$170,000, of which $97,000 was paid as of September 30, 2008, 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 $30,000,000 financing 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.




ITEM 1B.   UNRESOLVED STAFF COMMENTS




Not
applicable.




ITEM 2.  PROPERTIES




In China,
there is no private ownership of land. Rather, all real property is owned by the
government. The government issues a certificate of property right, which is
transferable, generally has a term of 50 years and permits the holder to use the
property.  All of our properties are suitable and adequate for the
purposes for which they are used in our business.




Address
            
            Size
      (square meters)
            Size
      (square feet)
            TermLand
      use right owned by Sinogas
            
            45#
      66# Jinhua Road, Qingdao, Shandong
            
            60,860
            655,100
            May
      2057Land
      use right owned by Jingrun
            
            HanNan
      Community, Hongdao Street, Qingdao, Shandong
            
            59,036
            635,460
            December
      2056Land
      use right owned by Xuancheng Sinoenergy
            
            XuanHu
      Road, Xuancheng, Anhui
            
            2,683
            28,880
            June
      2058Land
      use right owned by Qingdao Sinoenergy
            
            Jiaonan,
      Qingdao, Shandong
            
            100,000
            1,076,400
            Note
      1Land
      use right owned by Lixun
            
            BeiHuanSan
      Road North, DaQiao County, Jiaxing, Zhejiang
            
            8,130
            87,511
            June
      2058




Note 1:
These land use rights have not been transferred to us. We applied to the
applicable government agency and we are awaiting government approval. The
transfer will be made upon receipt of government approval. We believe that the
approvals will be obtained.





Except
for the land use right owned by Xuancheng Sinoenergy, we rent the land used by
our CNG stations.  As of November 30, 2008, we lease eight parcels of
land in Wuhan City and two parcels of land in Pingdingshan City for an aggregate
annual rental of approximately $375,800.  Except for one lease that
expires in 2010, one lease that expires in 2015 and one lease that expires in
2017, all of the leases expire in 2027 or later.





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Wuhan
Sinoenergy has an agreement to purchase the land use right for land located in
Wuhan City for a purchase price of approximately $1.28 million, of which
approximately $469,000 has been paid.





We
believe that our present facilities are sufficient to meet its current and near
term requirements.  In connection with the development of our CNG
stations, we will require additional land use rights as we develop and open new
CNG filling stations.





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
Price of Common Stock





Our common stock has been traded on the
Nasdaq Capital Market under the symbol SNEN since July 28, 2008. Prior to
February 6, 2007, there was no market for our common stock. From February 6,
2007 until July 25, 2008, our stock was traded on the OTC Bulletin Board. The following table
sets forth the high and low bid price of our stock by calendar quarter since
commencement of trading.  These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual
transactions.The
information is provided byNational Quotation
Bureau.




Closing Bid
              
              2007
              
              
              2008High
              
              
              Low
              
              
              High
              
              
              LowFirst
      quarter
              
              $
              4.78
              
              
              $
              3.18
              
              
              $
              8.50
              
              
              $
              4.80Second
      quarter
              
              
              5.48
              
              
              
              3.90
              
              
              
              5.98
              
              
              
              4.94Third
      quarter
              
              
              6.44
              
              
              
              4.32
              
              
              
              7.03
              
              
              
              4.53Fourth
      quarter
              
              
              10.16
              
              
              
              6.22
              
              
              
              5.01
              
              
              
              1.97






- 23
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The
information for the first quarter of 2007 commences on February 6, 2007 and the
information for the fourth quarter of 2008 reflects prices through December 17,
2008.





On
December 17, 2008, the last reported sales price for our common stock was $2.50
per share.




On
December 17, 2008, we believe we had approximately 1,000 beneficial owners of
our common stock.





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.





Equity
Compensation Plan Information





The
following table summarizes the equity compensation plans under which our
securities may be issued as of September 30, 2008.




Plan
      Category
            
            Number
      of securities to
              be
      issued upon exercise
              of
      outstanding options
              and warrants
            
            
            Weighted-average
              exercise
      price of
              outstanding
      optionsand
              warrants
            
            
            Number
      of securities
              remaining
      available for
              future
      issuance under
              equitycompensation
              plansEquity
      compensation plans approved by security holders
            
            
            845,000
            
            
            $
            4.39
            
            
            
            155,000Equity
      compensation plan not approved by security holders
            
            
            100,000
            
            
            
            5.15
            
            
            
            0




The 2006
long-term incentive plan is the equity compensation plan that was approved by
the stockholders.




The
equity compensation plan that was not approved by stockholders was the grant of
warrants to purchase 100,000 shares which were granted to an investment
relations firm pursuant to its engagement agreement.




ITEM 6.  Selected Financial Data





Not
Applicable





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





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




OVERVIEW





We
design, manufacture and market a range of pressurized containers for CNG.
Although our initial business involved the manufacturing of customized 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 manufacturing 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.





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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 and have
the capacity to design and manufacture various types of customized
equipment.





All of
our products and services are manufactured or 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, commencing in 2008 we began to
operate CNG stations. This aspect of our business is different from our other
business. The business of operating CNG stations requires a substantial capital
investment, and we raised approximately $30 million from the sale of our
convertible and fixed rate notes in September 2007. 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 manufacturing 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 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, 2008, our total
commitments under these agreements were approximately $5.0 million, of which we
had paid a total of approximately $2.4 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 that is presently under construction and 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
later.




In both
the year ended September 30, 2008 and the nine months ended September 30, 2007,
two customers of our station facilities and construction segment each accounted
for more than 10% of our total sales.  These customers, who purchased
CNG truck trailers, accounted for approximately 32% of total sales in the year
ended September 30, 2008 and approximately 37.5% of sales for the nine months
ended September 30, 2007, which, in each year, represented most of our revenue
from this division. We are continuing to make sales to these
customers.





In early
2007, we established a division to sell and manufacture CNG vehicle conversion
kits to OEM and sale in the aftermarket. 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 Lixun from its stockholders for $390,000. In July
2007, we paid an additional $400,000 to increase our equity ownership in
Lixun to 70%, and in April 2008 we acquired the remaining 30% for $1,145,000.
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 electronic parts for
vehicle conversion kits as well as producing conversion kits is reported as a
separate segment.




- 25
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Our CNG
vehicle and gas station equipment business include two product
lines:




•
            the
      manufacturing of equipment for CNG vehicles and gas stations
      and





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




Our original business was the
manufacture and sale of nonstandard equipment and pressure containers operated
by our subsidiary, Qingdao Sinogas Yuhan Chemical Equipment Co., Ltd.
(“Yuhan”), of which we had been a 55%
equity owner. During the
second half of 2006, we acquired an additional 35% equity interest and as a
result we became a 90% equity owner of Yuhan. In January 2008, we acquired the
remaining 10%, and became a 100% owner of Yuhan.As of September 30, 2008, the Company’s financial statements reflect a
75% ownership of Yuhan by Sinogas and a 25% ownership by
Sinoenergy.





Steel and
steel tubing are the major raw material used in manufacturing CNG facilities 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. Beginning in May 2007, we also began to purchase steel
tubes from 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. 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 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 annual report as a result of
fluctuations in the currency rates.





The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. Following a period of general economic growth, China, like the
rest of the world, has recently been subject to an economic
downturn.  There can be no assurance that the 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. Our
customized pressure container business and our CNG station facilities and
construction business are dependent upon our customers making significant
capital purchases, either for pressure containers or for new CNG
stations.  The availability of financing to our customers as well as
the capital requirements of our customers could significantly reduce the need
for these products and services.  Since our CNG station business is
dependent upon the development of a market for cars and trucks 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. The recent sharp decline in oil
and gasoline prices may affect the need for both CNG stations and conversion
kits that enable gasoline-powered vehicles to operate on
CNG.  Although the government of China has encouraged the use of CNG
as part of its effort to reduce pollution in China, the factors described above
may affect the development of the CNG industry in China.  We cannot
predict whether or how these factors will affect the market for CNG in the areas
in which we are constructing our CNG filling stations or the market for our
conversion kits.





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In
addition, we purchase CNG from government controlled
entities.  Through two joint venture subsidiaries, we have agreements
to purchase CNG from Sinopec through a natural gas pipeline which is not yet
completed.  If this pipeline is not completed on time, we may have
difficulty obtained adequate CNG for our stations. Further, although the
agreements provide for an initial annual volume of 50 million cubic meters per
year, increasing to not more than 200 million cubic meters per
year.  The service is subject to the completion of a natural gas
pipeline between Sichuan and Shanghai, which is expected to occur in the first
half of 2009. The sales volume is subject to annual natural gas purchase
agreements and the price is subject to future determination.





During
2008, we sold a 24.95% interest in Sinogas.  Sinogas operates the CNG
station facilities and construction and owns 75% of the subsidiaries that
operate the vehicle conversion kit segment and customized pressure container
segment.  The only segment that is wholly-owned by us is the CNG
station operation.





RESULTS
OF OPERATIONS





We are
engaged in four business segments:





(i)
Customized pressure container business:





Our
customized equipment and pressure container business is a traditional chemical
equipment manufacturing business with low profit margin. It includes design and
manufacturing of various types of pressure containers for industries such as the
petroleum and chemical, metallurgy, electricity generation and food and beverage
industries.




(ii)
CNG Station Facilities and Construction





Our CNG
station construction business represents:




▪
            The
      manufacture and installation of CNG vehicle and gas station equipment that
      is used in the transportation and storage of CNG and the operation of a
      CNG station. We provide these services for other companies that operate
      CNG stations.




▪
            CNG
      station construction service, which includes the design of CNG station
      construction plans, construction of CNG stations, and installation of CNG
      station equipment and related systems. 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 of our emergence into the CNG filling station business, we did not
      receive any CNG station construction service orders from the beginning of
      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.




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(iii)
CNG station operations




In 2006,
we entered the CNG station business, which involves the design, construction and
equipping of CNG stations and the operation of those stations.  As of
December 10, 2008, we were operating sixteen CNG stations, of which eleven are
located in Wuhan, two in Pingdingshan and three in Xuancheng.  An
additional three stations are in the final stages of construction located in
Wuhan.




(iv)
Vehicle fuel conversion equipment




We
manufacture conversion kits and electrical control devices that enable vehicles
that are designed to operate on gasoline to operate on CNG.





RESULTS
OF OPERATIONS





Year
ended September 30, 2008 and nine months ended September 30, 2007




In
September 30, 2007, we changed our fiscal year from a calendar year to a year
ending on September 30, commencing with the year ending September 30,
2008.  As a result, we are comparing the results of operations for the
year ended September 30, 2008 with the nine-month transitional period ending
September 30, 2007.  As a result, in each category of the statements
of operations, we will be comparing a twelve-month period with a nine-month
period.




The
information set forth below has been derived from our audited financial
statements for the year ended September 30, 2008, and nine-month transitional
period ended September 30, 2007.




Year Ended September 30,
      2008
                  ($
      `000)
            
            Customized
              pressure
              containers
            
            CNG
      station
              facilities
      and
              construction
            
            CNG
              station
              Operation
            
            Vehicle
              conversion
              kits
            
            TotalNet
      sales
            
            $
            9,692
            
            $
            16,237
            
            $
            3,246
            
            $
            11,765
            
            $
            40,940Cost
      of sales
            
            
            5,375
            
            
            9,470
            
            
            2,551
            
            
            8,194
            
            
            25,589Gross
      profit
            
            
            4,318
            
            
            6,77
            
            
            695
            
            
            3,571
            
            
            15,351Gross
      margin
            
            
            45
            %
            
            42
            %
            
            21
            %
            
            30
            %
            
            37
            %Operating
      expenses:Selling
      expenses
            
            
            275
            
            
            53
            
            
            150
            
            
            404
            
            
            881General
      and administrative expenses
            
            
            942
            
            
            1,591
            
            
            1,533
            
            
            822
            
            
            4,889Total
      operating expense
            
            
            1,217
            
            
            1,644
            
            
            1,683
            
            
            1,226
            
            
            5,770Income
      (loss) from operations
            
            $
            3,100
            
            $
            5,124
            
            $
            (988)
            
            $
            2,345
            
            $
            9,581Total
assets
            
            $
            41,075
            
            $
            45,441
            
            $
            28,654
            
            $
            17,177
            
            $
            132,347




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Nine months ended September 30,
      2007
                ($
    `000)
            
            Customized
              pressure
              containers
            
            
            
            CNG
      station
              facilities
      and
              construction
            
            
            
            CNG
      station
              operation
            
            
            
            Vehicle
              conversion
              kits
            
            
            TotalNet
      sales
            
            $
            3,250
            
            
            
            $
            6,064
            
            
            
            $
            -
            
            
            
            $
            6,609
            
            
            $
            15,923Cost
      of sales
            
            
            1,873
            
            
            
            
            2,176
            
            
            
            
            -
            
            
            
            
            4,041
            
            
            
            8,090Gross
      profit
            
            
            1,377
            
            
            
            
            3,888
            
            
            
            
            -
            
            
            
            
            2,568
            
            
            
            7,833Gross
      margin
            
            
            42
            %
            
            
            
            64
            %
            
            
            
            
            
            
            
            
            39
            %
            
            
            49
            %Operating
      expenses:Selling
      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
            
            
            $
            4,270Total
    assets
            
            $
            21,792
            
            
            
            $
            33,827
            
            
            
            $
            10,979
            
            
            
            $
            22,468
            
            
            $
            89,066





Net Sales. Net sales for the
year ended September 30, 2008 (“2008”) was approximately $40.9 million, an
increase of approximately $25.0 million, or 157%, from sales of approximately
$15.9 million for the nine month transitional period ended September 30, 2007
(the “September 2007 period”).  This increase resulted
from:




•
              An
      increase of approximately $6.4 million, or 198%, in sales from customized
      pressure containers, reflecting an increase in demand for these products,
      representing a fairly constant sales price per unit with an increase in
      the number of units sold.•
              An
      increase of approximately $10.2 million, or 168%, in sales from the CNG
      stations facilities and construction, resulting from the increased demand
      for the construction and equipping of CNG stations. Most of the sales from
      this segment came from two customers, from which we generated 32.0% of our
      total sales in 2008 and 37.5% of our sales in the September 2007 period.
      Our sales from other customers in this segment, both in terms of dollars
      and as a percentage of total sales, increased as we were able to expand
      this segment.•
              Sales
      of approximately $3.2 from the sale of CNG as we commenced operations in
      this business during 2008. We had no sales from CNG stations during the
      September 2007 period.•
              An
      increase of approximately $5.2 million, or 78%, from the sales of
      conversion kits. We commenced this business in April 2007. As a result, we
      only had six months of operations during the September 2007 period. The
      increase represents a gradual increase in sales of these products. Any
      continued increase in this business is likely to be affected by the
      willingness of consumers and taxi fleets to purchase these kits in view of
      the decrease in gasoline prices and the increased economic pressures.
      Since the price of gasoline and CNG is controlled by the government,
      gasoline prices have not fluctuated in China to the same extent that they
      did in the United States.
  For most
of 2008, China was in a period of economic growth, and the CNG businesses were
affected by both this period of growth as well as the policies of the government
to encourage the use of CNG as a method of reducing pollution.  We
cannot predict the effect of the economic downturn on our business in the near
future.




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Cost of Sales; Gross Margin.
The cost of sales for the 2008 was approximately $25.6 million, an increase of
approximately 216% from approximately $8.1 million for the September 2007
period. Our overall gross margin decreased significantly from 49% to 37% from
the September 2007 period to the 2008, because of the following
reasons:


•
              Our
      gross margin for the CNG station facilities and construction includes both
      construction and consulting, with the consulting services generating a
      higher gross margin. The sales from this segment in the September 2007
      period including consulting service, which we did not generate in 2008. As
      a result, our gross margin in this segment declined from 64% to
      42%.•
              Our
      gross margin for the operation of our CNG stations, which commenced during
      the December 2007 quarter, was approximately 21%, which lowered the
      overall gross margin. The gross margin for this segment reflects the
      effects of price controls, which cover both the price at which we buy and
      the price at which we sell CNG.•
              As
      the market for vehicle conversion kits matured, our gross margin in this
      segment decreased from 39% to 30%. It is possible that any downturn in
      this segment may also result in a reduction of our gross
      margin.


Selling
Expenses.  Selling expenses increased approximately $647,000,
or approximately 276%, from the September 2007 period to 2008.  A
significant portion of the increase relates to the CNG station segment, where we
had no selling expenses in the September 2007 period and selling expenses of
$150,000 in 2008. In addition, selling expenses for the vehicle conversion kits
segment increased $293,000 because of the expansion of our marketing efforts.
Selling expenses in the other segments generally reflect the increase in
sales.





General and Administrative
Expenses.  General and administrative expenses increased
approximately $1,560,000, or 47%.  This increase includes
pre-operational expenses for the CNG station operation segment of $1,071,600. Our general and administrative
expenses include, in addition to the management expensesand depreciation related to the
division, an allocation of corporate expenses, including expensesrelating to our status as a public
company, such as legal, audit and investor relations costs.  Non-cash
compensation expenses of $552,000 includes the valueof shares transferred to a former
officer by a principal stockholder, which is owned by our chief executive
officer and our chairman.Management overhead was allocated among
the segments based on the relative time devoted by management to the business ofthe
segments.




Interest
Expense.  Our interest expense for 2008 was approximately $1.8
million, as compared with $308,000 for the September 2007 period. Because of the
$30 million financing in the late September 2007, interest expense increased
accordingly.  Although the stated interest rate on the convertible
notes in the principal amount of $14 million is 3%, if the notes are not
converted by maturity, we are required to pay interest at the rate of 13.8% per
annum, less interest previously paid. Accordingly, we accrue interest at the
rate of 13.8% per annum, of which 3% is treated as current interest and 10.8% as
deferred interest. The registration rights agreement relating to the shares of
common stock issuable upon conversion of the convertible notes required the
registration statement to be declared effective by March 28,
2008.  The indenture relating to the convertible notes requires us to
pay additional interest of 1% of the principal amount for each 90-day period
thereafter during which we have failed to have the registration statement
declared effective. As a result, we incurred additional interest of $420,000 in
2008 as a result of our failure to have a registration statement relating to the
shares issuance upon conversion of the convertible notes declared effective
during three 90-day periods.  If the registration statement is not
declared effective by March 24, 2009, we will owe an additional $140,000 of
additional interest, representing an additional 1% of the principal amount of
the convertible notes.





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Other Income. During 2008, we
generated:


•
              Rental
      income of approximately $3.8 million, arising from the lump sum rental
      payment for our land use rights for our former manufacturing
      facility.•
              Gain
      of $5.8 million resulting from the sale by Sinogas, a subsidiary, of a
      24.95% interest in Sinogas for RMB124,760,000 (equivalent to $18,297,816
      at the balance sheet date exchange rate). In related transactions, Sinogas
      acquired the remaining 30% interest in Lixun from the former stockholder
      of Lixun and a company owned by the former stockholder of Lixun purchased
      a 3.95% interest in Sinogas.•
              Gain
      on the sale of a subsidiary of approximately $1.7 million, represents the
      gain on the sale of a subsidiary which was both acquired and sold during
      2008.


Income Taxes. Our income taxes increased from
$188,000in the nine months
period endedSeptember 30,2007periodto $1,309,000 in the year ended
September 30, 2008.  This increase reflects both an increase in income
before income taxes from approximately $4.0 million in the September 2007 period
to approximately $23.0 million in 2008.  In addition,
during 2007, two of our subsidiaries, Sinogas and Yuhan, had a 100% tax
exemption for 2007 and a 50% tax exemption in 2008 and 2009. The income tax
reflects a tax rate of 12.5%, which is 50% of the 25% tax rate, resulting is
$783,000 of income tax being accrued in
the year 2008.  These exemptions are based on a calendar year, so for
2008, we received the benefit of the 100% exemption for calendar 2007 for the
first three months of the fiscal
year. 
 Minority
Interest.The minority interest represents the
share of the income of our subsidiaries allocated to that portion of the
subsidiaries’equity owned by third
parties.  The increase from $142,000 inthe nine months period
ended September 30, 2007 to $1,082,000 in the year ended September 30,
2008 results both from increased income in the subsidiaries and from the sale by
Sinogas in 2008 of a 24.95% interestin its equity.
 
 Net
Income.As a result of the foregoing, we had net
income of approximately $16.2 million, or $1.02per share (basic) and $0.97(diluted) for 2008, as compared with
net income of approximately $3.6 million, or $0.28 per share (basic)
and $0.27 (diluted) for the
September 2007 period.
 
 Comprehensive
Income.Comprehensive income was approximately
$19.8million for 2008 as compared with
approximately $4.6 million for the September 2007 period.  The
comprehensive income in both periodsreflects foreign currency translation
adjustments resulting from changes in the currency rates between the RMB and theUnited Statesdollar, or approximately $3.6 million
in 2008 and approximately $1.0 million in the September 2007
period.


Liquidity
and Capital Resources




At September 30, 2008, we had cash of
approximately $9.4 million, an increase of approximately $4.9 million from
September 30, 2007. At September 30, 2008, we had working capital of
approximately $35.0million and shareholders’equityof approximately $55.2million, compared with working capital
of approximately $24.7 million and shareholders’equity of approximately $32.7 million
at September 30, 2007.
 
 For the year ended September 30, 2008,
net cash used in operating activities was $20.2million. The changes in working capital
for the year ended September 30, 2008, were primarily related to a $15.8 million
increase in accounts
receivable,a $18.4 million
increase of other receivables,a $4.4 million increase in inventories,
partially offset by a $3.6 million increase in accounts payable and a $1.5
million increase in other liabilities. Theincreaseinaccounts receivablereflects the nature ofthe competition,withcustomersseekinga longer periodto make the payment.


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We used approximately $27.0 million in
investing activities for the year ended September 30, 2008. This was due
primarily totheexpansion of ourCNG station operation segment,
principally for purchase of property, plant and equipment ($16.5 million) and
land use rights ($2.1 million).
  Net cash provided by financing activities
was $48.8million for the year ended September
30, 2008, primarily related to$29.8 million of net proceeds
fromnote subscription,$18.2 million from thesale by Sinogas of a
minority equity interest,
$15.6 million loans from domestic banks inChina,which wereoffset by the repayment of $14.8 million
in short-term borrowings from domestic banks in China.


For the
September 2007 period, we generated cash of approximately $5.2 million from our
operations, and we used approximately $25.2 million in investing activities,
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
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 the 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.





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 to
      September 28, 2008 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 to September 28,
      2008 and 3.75 to 1.00 if the debt is incurred thereafter, provided, that
      certain subsidiaries may continue to maintain debt under credit facilities
      of not more than $15,000,000 until September 28, 2008 and $10,000,000
      thereafter, and may incur purchase money indebtedness. The fixed charge
      coverage ratio is the ratio of our earnings before interest, taxes,
      depreciation and amortization, which is generally known as EBITDA, to
      consolidated interest expense, as defined. Leverage ratio means the ratio
      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 through March 31, 2008, 2.75 to 1.00
      from April 1, 2008 to September 30, 2008 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.
  - 32
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In
connection with this financing, we paid the lenders a fee of
$160,000.




As of September 30, 2008, the fixed
charge coverage ratio is 12 to 1 and the leverage ratio is 2 to
1.  Although we were in compliance with the covenants at September 30,
2008, our failure to meet these covenants in the future would be an event of
default under the notes, which could result in the noteholders exercising their
remedies under the notes, including the right to demand payment. In such event,
we may not be able to make payment, which failure could impair our ability to
continue in business if we are not able to amend the agreement or obtain
financing from other sources.




Commitments




We and Hong Kong China New Energy
Development Investment Co. Ltd (“New Energy”), formed Hubei Gather Energy 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
$4 million as an 80% equity owner and New Energy will contribute $1 million for
a 20% interest. The term of the business of Hubei Gather is from March 23, 2007
to March 22, 2027. As of September 30, 2008, our commitment for future funding
was $2,625,000.
  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.  At September 30, 2008, there were no significant
outstanding purchase orders.


We also
lease eight parcels of land in Wuhan City and Pingdingshan City for CNG
stations, the current annual rent under these leases is approximately
$462,600.





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The
following table set forth information as of September 30, 2008 as to our
contractual obligations (dollars in thousands).




Payments due by
      periodContractual
      obligations
              
              Total
              
              
              Less than 1
      year
              
              
              1-3 years
              
              
              3-5 years
              
              
              More than 5
      yearsLong-term debt
      obligations(1)
              
              $
              30,000
              
              
              $
              0
              
              
              $
              16,000
              
              
              $
              14,000
              
              
              $
              0Capital lease
      obligations
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Operating lease
      obligations
              
              
              8,737
              
              
              
              3,024
              
              
              
              1,574
              
              
              
              802
              
              
              
              3,337Purchase
      obligations(2)(3)
              
              
              12,100
              
              
              
              12,100
              
              
              
              0
              
              
              
              0
              
              
              
              0Investment obligations for joint
      ventures (3)
              
              
              2,625
              
              
              
              2,625
              
              
              
              0
              
              
              
              0
              
              
              
              0Obligations relating to
      acquisition of land use rights
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Other long-term liabilities
      reflected on the balance sheet
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              0Interest
      obligations
              
              
              9,919
              
              
              
              2,899
              
              
              
              4,680
              
              
              
              2,340
              
              
              
              0Total
              
              $
              63,381
              
              
              $
              20,648
              
              
              $
              22,254
              
              
              $
              17,142
              
              
              $
              3,337




(1)
            The
      total represents the total principal amount of our 12% senior notes in the
      principal amount of $16,000,000 and 3% senior convertible notes in the
      principal amount of $14,000,000.  The amounts in this table
      reflect the payments due with respect to these notes, and do not reflect
      the discounted value of the notes as reflected on the September 30, 2008
      balance sheet.




(2)
            We
      have purchase orders with several suppliers with aggregated amount of
      $28.84 million. At September 30, 2008, we had paid a total of $16.74
      million for the purchase, and goods costing $15.79 million have been
      delivered to us.





(3)
            These
      obligations have no specified payment period, and are treated as being due
      within one year.





We have
no off-balance sheet assets or liabilities.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES




Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States.





Use of
Estimates.In preparing financial statements in conformity
with accounting principles generally accepted in the United States of America,
we are required to make estimates, judgments and assumptions that affect the
reported amounts of assets, 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 the allowance for doubtful accounts and other receivables, asset impairment,
valuation of warrants and options and inventory valuation, and the determination
of revenue and costs for under the percentage of completion method of revenue
recognition.  We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from those estimates.





- 34
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Revenue
Recognition.We recognize revenue when the
significant risks and rewards of ownership have been transferred tothe customer, including factors such as
when persuasive evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable, and collectability is reasonably
assured.  We recognize product sales upon delivery.CNG station construction and revenue
related to building technical consulting service is recognized on the percentage
of completion basis. The percentage of completion method recognizes income as
work on a contract (or
group of closely related contracts) progresses.  The recognition of
revenues and profit is generally related to costs incurred in providing the
services required under the contract. Revenue is presented net of any sales tax
and VAT.
 
 Stock-Based
Compensation.We grant stock options and stock grants
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 share-based compensation. In
accordance with SFAS No. 123R, the fair value of stock options and warrants
issued to employees and non-employees is measured at the grant date.
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, whichis generally the vesting period. In
some cases, our principal stockholder, which is owned by our chief executive
officer and our chairman, both of whom are directors, provided or agreed to
provide stock to executive officers in connection with their employment.  These shares are
treated as if the shares were contributed to us and issued by us.  The
value of the shares is determined in accordance with SFAS No.
123R.


Foreign Currency
Translation.  Ourfunctional
currency is RMB, and our reporting currency is United States dollars. Our
balance sheet accounts are translated using the closing exchange rate in effect
at the balance sheet date and operating accounts are translated using the
average exchange rate prevailing during the year. Equity accounts are
translated using the historical rate as incurred. 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 statements of operations as
incurred.





Capitalization of
Interest.  We capitalize interest incurred in
connection with the construction of assets, principally our CNG stations, during
the construction period.  Capitalized interest is recorded as an
increase to construction in progress and, upon completion of the construction,
to property.  We capitalized approximately $1.8 million of interest
during 2008. We did not capitalize any interest during the September 2007
period.




NEW
ACCOUNTING PRONOUNCEMENTS




In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, “Defining Fair Value
Measurement” (“SFAS 157”), which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. As such,
the Company is required to adopt these provisions at the beginning of the fiscal
year beginning October 1, 2008. The Company is currently evaluating the impact
of SFAS 157 on its consolidated financial statements.
  In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”), which permits companies to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective for
financial statements issued for fiscal years beginning after November 15,
2007. As such, the Company is required to adopt these provisions at the
beginning of the fiscal year beginning October 1, 2008. The Company is currently
evaluating the impact of SFAS 159 on its consolidated financial
statements.





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In
December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations” (“SFAS No. 141(R)”).
SFAS No. 141(R) requires an entity to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date.  Subsequent
changes to the estimated fair value of contingent consideration will be
reflected in earnings until the contingency is settled. SFAS No. 141(R)
 also requires acquisition-related costs and restructuring costs to be
expensed as incurred rather than treated as part of the purchase price. The
adoption of SFAS No. 141(R) will change our accounting treatment
for business combinations on a prospective basis beginning October 1,
2009.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” to improve the relevance, comparability, and
transparency of financial information provided to investors by requiring all
entities to report noncontrolling (minority) interests in subsidiaries in the
same way as required in the consolidated financial statements. Moreover, SFAS
No. 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. SFAS No. 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. We are currently
evaluating whether the adoption of SFAS No. 160 will have a significant
effect on our consolidated financial position, results of operations or cash
flows.





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - an Amendment of FASB Statement
133.” SFAS No. 161 provides new disclosure requirements for an entity’s
derivative and hedging activities. SFAS No. 161 is effective for periods
beginning after November 15, 2008. We have not yet determined the impact on
our consolidated financial statements of adopting
SFAS No. 161.





In
April 2008, the FASB issued Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). This
position amends the factors an entity should consider when developing renewal or
extension assumptions used in determining the useful life over which to amortize
the cost of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.” FSP FAS 142-3 requires an entity to consider its own
historical experience in renewing or extending similar arrangements in
determining the amortizable useful life. Additionally, this position requires
expanded disclosure regarding renewable intangible assets. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. The guidance
for determining the useful life of a recognized intangible asset must be applied
prospectively to intangible assets acquired after the effective date. Early
adoption is prohibited. We expect to adopt FSP FAS 142-3 as of October 1,
2009.





ITEM 7A.  QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK





Not
Applicable





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL
DATA





The
financial statements begin on Page F-1.





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





On March
11, 2008, the audit committee of the board of directors of Sinoenergy
Corporation (the “Company”) accepted the resignation of Schwartz Levitsky
Feldman LLP (“Schwartz Levitsky”), and the audit committee of the Board of
Directors of the Company selected Grobstein, Horwath & Company LLP
(“Grobstein Horwath”) to serve as the Company’s independent registered
accounting firm for the year ending September 30, 2008. At no time since its
engagement has Grobstein Horwath had any direct or indirect financial interest
in or any connection with us or any of our subsidiaries other than as
independent accountant.
  Our
consolidated financial statements at September 30, 2007 and December 31, 2006,
for the period of January 1, 2007 through September 30, 2007 and the year ended
December 31, 2006, respectively, were audited by Schwartz Levitsky. The audit
report of Schwartz Levitsky report for these periods did not contain an adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. During the Company’s two most
recent fiscal periods and any subsequent interim period through the date of
resignation, there were no disagreements with Schwartz Levitsky on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Schwartz Levitsky, would have caused it to make reference to the subject matter
of the disagreements in connection with its reports.




ITEM 9A.  CONTROLS AND PROCEDURES




Management,
including our chief executive officer and chief financial officer, does not
expect that our disclosure controls and procedures or our internal control over
financial reporting will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.




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Conclusion Regarding Effectiveness
of Disclosure Controls and Procedures





Under the
supervision and with the participation of management, our chief executive
officer and chief financial officer have carried out an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended.  Based upon that evaluation, our chief executive officer and
chief financial officer concluded that there were material weaknesses in our
internal controls over financial reporting as of the end of the period covered
by this report.  In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the
Treadway Commission in Internal Control — Integrated Framework. Our management
concluded that, as of September 30, 2008, our internal control over financial
reporting was not effective based on these criteria.  Our chief
executive officer and chief financial officer identified weaknesses related to
our accounting personnel’s ability to identify various accounting and disclosure
issues, account for transactions that include an equity-based component, and
prepare financial statements and footnotes in accordance with U.S.
GAAP.  Until June 2006, we were a privately-owned company engaged with
all of our assets and operations located in China, and our financial statements
were prepared in accordance with PRC GAAP.  Since we became a
publicly-traded company, we have significantly expanded the scope of our
business, so that we presently have four business segments.  We have
also engaged in two financings, entered into joint ventures, acquired and
disposed of companies and assets, and granted equity-based
incentives.  All of these events presented complex accounting issues
which were new to our financial staff.  Furthermore, we do not have a
large accounting department and it has been difficult for us to hire qualified
personnel who understand English and Chinese and are familiar with both U.S.
GAAP and PRC GAAP.  We are addressing these issues by reviewing and
revising our internal accounting policies and procedures, expanding the
resources allocated to our accounting department, and hiring outside accounting
advisors.  We expect resolution of these matters may take several
months.  Accordingly, based on the foregoing, the certifying officers
have concluded that our disclosure controls and procedures are not effective at
this time.




The
conclusion of chief executive officer and chief financial officer regarding our
disclosure controls and procedures is based solely on management’s conclusion
that our internal control over financial reporting was not
effective.




Our
material weaknesses related to:




•
              an
      insufficient complement of personnel in our corporate accounting and
      financial reporting function with an appropriate level of technical
      accounting knowledge, experience, and training in the application of US
      GAAP commensurate with our complex financial accounting and reporting
      requirements and materiality thresholds.•
              Lack
      of internal audit function-the monitoring function of internal control is
      not well performed due to insufficient capable resources. In addition, the
      scope and effectiveness of internal audit function are yet to be
      developed.•
              Insufficient
      or lack of written policies and procedures relating to periodic review of
      current policies and procedures and their
  implementation.




Our
deficiency related to the lack of adequate training of employees, especially
those recently hired, on our accounting policies and our antifraud
programs.




Remediation
and Changes in Internal Control over Financial Reporting




The
Company has discussed the material weaknesses and deficiency in its internal
control over financial reporting with the audit committee of the board of
directors and is in the process of developing and implementing remediation plans
to address the material weaknesses and deficiency in our internal control over
financial reporting. During the fiscal year ended September 30, 2008, management
conducted a program to plan the remediation of all identified deficiencies using
a risk-based approach based on the “Internal Control — Integrated
Framework” issued by COSO. These plans contemplate various changes in process,
procedures, policy, training and organizational design, and are currently being
implemented. In addition, the Company intends to hire and/or appoint new
managers in the accounting area and/or engage accounting professionals from
external resources to address internal control weaknesses related to technical
accounting.




The
following specific remedial actions were currently in process, to address the
material weaknesses and deficiency in our internal control over financial
reporting described above:




•
              Reorganize
      and restructure our corporate accounting staff by:•
              revising
      the reporting structure and establishing clear roles, responsibilities,
      and accountability;•
              hiring
      additional technical accounting personnel to address our complex
      accounting and financial reporting requirements;•
              assessing
      the technical accounting capabilities at our subsidiaries to ensure the
      right complement of knowledge, skills, and training;
and•
              establishing
      internal audit functions,
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•
              Improve
      period-end closing procedures by:•
              ensuring
      that account reconciliations and analyses for significant financial
      statement accounts are reviewed for completeness and accuracy by qualified
      accounting personnel;•
              implementing
      a process that ensures the timely review and approval of complex
      accounting estimates by qualified accounting personnel and subject matter
      experts, where appropriate;•
              developing
      better monitoring controls for corporate accounting and at our
      subsidiaries,•
              documenting
      and implementing antifraud programs and controls as well as comprehensive
      risk assessment of procedures, programs and controls,
  and•
              making
      efforts to develop written policies and procedures, but the progress has
      been slowed due to limited resources and personnel
  changes.


Due to
lack of qualified personnel in the region, we were not able to hire sufficient
internal audit resources before the end of 2008. During 2008, we hired an
internal audit manager and, we will increase our efforts to hire qualified
personnel.  We anticipate that we will be able to complete the
remediation before September 30, 2009.




Other
than as described above, management does not believe that there have been any
other changes in our internal control over financial reporting, which have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.




The
certification of our chief executive and chief financial officer, which is
included as Exhibits 31.1 and 31.2 to this annual report on Form 10-K,
includes, in paragraph 4 of such certification, information concerning our
disclosure controls and procedures and internal control over
financial reporting. Such certification should be read in conjunction with
the information contained in this “Item 8A - Controls and Procedures” for a more
complete understanding of the matters covered by such
certification.





ITEM 9B.  OTHER INFORMATION




None




PART
III





ITEM 10. 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 directorShiao
      Ming Sheng
            
            59
            
            Chief
      financial officerAnlin
      Xiong
            
            29
            
            Vice
      president and secretaryCindy
      Ye
            
            33
            
            Financial
      controllerRobert
      I. Adler
            
            74
            
            DirectorRenjie
      Lu
            
            73
            
            DirectorGreg
      Marcinkowski
            
            48
            
            DirectorBaoheng
      Shi
            
            70
            
            DirectorXiang
      Dong (Donald) Yang
            
            42
            
            Director







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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.




Shiao
Ming Sheng has been chief financial officer since October 2008. From 2003 until
October 2008, Mr. Sheng served as a principal of Intelligent Genesis, which was
engaged in corporate consulting and venture formation, and from 1996 until 2002,
Mr. Sheng was founder and chief executive officer of Intelligent Paradigm, a
computer video technology developer. Mr. Sheng received a degree in biochemistry
from Dartmouth College and has authored numerous scientific papers and editorial
articles for trade journals and magazines.




Anlin
Xiong has been vice president in charge of financing and investment activities
since February 2008 and secretary since June 2008. Mr. Xiong was a senior
manager at BOE Technology Group Co., Ltd., a leading Chinese LCD (Liquid Crystal
Display) manufacturer listed on Shenzhen Stock Exchange, from October 2005 until
February 2008. From May 2005 until October 2005, Mr. Xiong was a senior engineer
at Alpha & Omega Semiconductor (Shanghai) Co. Ltd. in China. Mr. Xiong
received a MS in Electrical Engineering from the University of Illinois at
Urbana-Champaign in 2004, a MS in Physics from West Virginia University in 2003,
and a BS in Electronic Engineering from Tsinghua University in China in 2000.
Mr. Xiong also holds a Certificate of China Legal Professional, which is the
lawyer qualification certificate in China.




Cindy Ye
has been financial controller since June 2008. Ms. Ye was vice president in
charge of accounting activities from January to June 2008.  Ms. Ye was
a senior manager at Beijing Yongtuo Certified Public Accountants Co., Ltd. from
September 2001 until December 2007. Ms. Ye received an MS in international trade
from the Capital University of Economics and Business in China in 2001, and a BS
in material science from the Northwest Institute of Light Industry in China in
1998.




Robert I.
Adler has been a director since July 2006.  Mr. 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 been a director since July 2006.  Mr. Lu has more than 40 years of
working experience in the energy industry in China. As an industry veteran, he
currently is a senior member of the Advisory Council Committee of Shengli
Administration Bureau, SINOPEC (China Petroleum & Chemical Corp, a
NYSE-listed company). Mr. Lu was 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.


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Greg
Marcinkowski has been a director since July 2006.  Mr. 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 has been a director since July 2006.  Mr. Shi is a pioneer and a
top scientist/researcher in the Chinese clean energy area. Mr. Shi is a
professor at 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.





Xiang
Dong (Donald) Yang has been a director since
May 2008.  Mr. Yang has been president of Abax Global Capital, a Hong
Kong based investment firm of which Mr. Yang is a founding partner, focused on
Pan-Asian public and private investments with a particular emphasis on Greater
China and South East Asia.  From 2000 to 2007, Mr. Yang was a managing
director and head of Hong Kong and China Debt Capital Market at Merrill Lynch.
 Mr. Yang holds an MBA degree from the Wharton School of Business and a BA
degree from Nankai University in China.  Abax Lotus Ltd., an
affiliate of Abax Global Capital, is the lead investor in our $30,000,000 note
financing which closed in September 2007, having purchased $10,700,000 principal
amount of our 12% Guaranteed Senior Notes due 2012 and $9,300,000 principal
amount of our 3% Guaranteed Senior Convertible Note due 2012. Pursuant to an
investor rights agreement, Abax has the right to appoint up to 20% of the
members of our board of directors and Mr. Tianzhou Deng, our chairman of the
board of directors, and Mr. Bo Huang, our chief executive officer, have agreed
to vote the shares of common stock beneficially owned by them in favor of the
election of the Abax nominees for director at each annual or special meeting of
shareholders at which an election of directors is held or pursuant to any
written consent of the shareholders.





Our
directors are elected for a term of one year or until their successors are
elected and qualified. There is no family relationship between any of our
officers and directors.





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 and they, together
with Mr. Tianzhou Deng, our chairman, comprise the compensation
committee.  Mr. Deng is not an independent
director.  Because of his affiliation with Abax Global Capital, Mr.
Yang is not deemed to be an independent director.





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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.





Our board
of directors has three committees - the audit committee, the compensation
committee and the corporate governance/nominating 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 and Baoheng Shi, with Mr. Lu as chairman.
The nomination committee is comprised of Robert I. Adler, Greg Marcinkowski,
Renjie Lu, Baoheng Shi, with Mr. Shi as chairman. Our 2006 long-term incentive
plan is administered by the compensation committee.





Our audit
committee is 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.





The
nomination committee will be involved evaluating the desirability of and
recommending to the board any changes in the size and composition of the board,
evaluation of and successor planning for the chief executive officer and other
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, 2008, the following officers, directors and 10% stockholders were late in
their filings: Mr. Huang and Mr. Deng were each late in filing two Form 4s. Mr.
Lu and Mr. Shi were each late in filing a Form 3 and were each late in filing
two Form 4s. JLF Offshore Fund Ltd was late in filing a Form 3. Jeff Feinberg,
JLF Offshore Fund Ltd. and JLF Partners I, L.P. were each late in filing a Form
3. Ms. Qiong (Laby) Wu, a former chief financial officer, was late in filing a
Form 4. Ms. Lan Gu, a former chief financial officer, failed to file one Form 3
and one Form 4.  Greg Marcinkowski was late in filing one Form
4.





ITEM 11.  EXECUTIVE COMPENSATION





Compensation
Discussion and Analysis





Compensation
for our executive officers is determined by our compensation committee, which is
comprised solely of independent directors.  Our philosophy is to
provide a compensation package that attracts and retains executive
talent.  We strive to provide our named executive officers, who are
the officers listed in the summary compensation table, with a competitive base
salary that is in line with their roles and responsibilities when compared to
peer companies of comparable size in similar
locations.  Of the three named executive officers, only one, our chief
executive officer, is continuing as an executive officer.  The other
two named executive officers, both of whom served as chief financial officer
during part of the year ended September 30, 3008, resigned from their
positions.  Our chief executive officer and our chairman (who is not
an executive officer) are our founders and they are the sole stockholders of
Skywide, which is our largest stockholder.





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Although
the principal method of providing compensation to our named executive officers
is a salary, we also have adopted the 2006 long term incentive plan, which
permits the grant of stock options, stock grants and other forms of equity-based
compensation.  The plan is administered by the compensation
committee.  Our executive officers are eligible for grants pursuant to
the plan.  Although no options were granted to our chief executive
officer during the year ended September 30, 2008, we previously granted to each
of our chief executive officer and our chairman options to purchase 50,000
shares of common stock at an exercise price of $4.00 per share, which is the
fair market value on the date of grant.





Our
present chief financial officer was hired subsequent to the end of the fiscal
year.  The compensation provided to the new chief financial officer
contains provisions for a base salary, a bonus and equity in the form of stock
options to be granted under the 2006 long-term incentive plan and stock grants
to be transferred to the chief financial officer by Skywide.




Although
the principal compensation of our executive officers will be salary, we may
provide officers with equity-based incentives.  The base salary level
and the nature and amount of equity-based incentives is established and reviewed
by the compensation committee based on the level of responsibilities, the
experience and tenure of the individual and the current and potential
contributions of the individual. In determining base salary, we give
consideration to persons holding similar positions within comparable peer
companies and consideration is given to the executive’s relative experience in
his or her position.  Base salaries are reviewed periodically and at the
time of promotion or other changes in responsibilities.





Executive
Officers’ Compensation





The
following table is the compensation to our chief executive officer and chief
financial officer during the year ended September 30, 2008 and the nine month
transitional period ended September 30, 2007. No officer received compensation
of $100,000 or more.





Summary
Compensation Table


Name
      and principal position
              
              Fiscal
      Year
              
              Salary
                ($)
              
              
              Stock
      Awards ($)
              
              
              Option
      Awards ($)
              
              
              Total
                ($)Bo
      Huang, chief executive officer
              
              2008
              
              $
              50,000
              
              
              $
              —
              
              
              $
              —
              
              
              $
              50,0002007
              
              
              24,000
              
              
              
              —
              
              
              
              31,000
              
              
              
              55,000Qiong
      (Laby) Wu, chief financial officer
              
              2008
              
              
              27,000
              
              
              
              120,600
              
              
              
              —
              
              
              
              147,6002007
              
              
              25,000
              
              
              
              —
              
              
              
              31,000
              
              
              
              56,000Lan
      Gu, chief financial officer
              
              2008
              
              
              15,000
              
              
              
              —
              
              
              
              —
              
              
              
              15,000


Ms. Wu
was chief financial officer during 2007 and during a portion of 2008, and Ms. Gu
was chief financial officer during a portion of 2008.  Neither Ms. Wu
nor Ms. Gu is currently an officer.





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The stock
awards to Ms. Wu represent the value of 20,000 shares of common stock
transferred to Ms. Wu by Skywide on July 18, 2008, our principal stockholder
which is owned by Mr. Huang and Mr. Deng.





Employment
Agreements




Except
for an employment agreement with Shiao Ming Sheng, we have no employment
agreements with any of our executive officers, and none of our executive
officers have any severance arrangements.




On
October 20, 2008, we entered into an employment agreement with Mr. Sheng to
serve as our chief financial officer, for an initial term of three years.
Pursuant to the agreement, Mr. Sheng shall receive compensation of $5,000 per
month during the term of the agreement. Mr. Sheng shall also receive a $5,000
bonus on each anniversary of the effective date. In addition, Mr. Sheng shall
receive an aggregate of 30,000 shares of common stock of the Company during the
initial term of the agreement as follows. Mr. Sheng will not receive any shares
until he has been employed for one year, at which time he is to receive 10,000
shares. Thereafter, his shares will vest at the rate of 833 shares per month
over the remaining two years of the initial term. The shares of common stock
issuable to Mr. Sheng shall be transferred by Skywide, our principal stockholder
which is owned by Mr. Tianzhou Deng and Mr. Bo Huang.




Pursuant
to the employment agreement, Mr. Sheng will also receive options to purchase up
to 150,000 shares of common stock, of which 50,000 shares shall be granted on
each anniversary of the effective date during the initial term. The options will
be immediately excisable upon grant and will terminate upon termination of Mr.
Sheng’s employment under the terms of the employment agreement. After
completing one full year of employment, the second and third option grants
covering 50,000 shares of common stock per year will be adjusted in direct
proportion to the length of his employment. The exercise price of the options
granted shall be equal to the intraday market price of our common stock on the
date the options are granted. Mr. Sheng is also to receive certain
performance-based compensation in the form of an increase in number of shares
underlying the options to be granted to him, depending on our stock price
performance at the end of Mr. Sheng’s first full employment year. Pursuant to
this provision, Mr. Sheng may receive additional options equivalent to 50% of
the margin of increase of our stock price at the end of first full employment
year. For the second and third years of employment, the additional amount of
options granted to Mr. Sheng will be directly proportional to the percentage
increase in our stock price. Thus, if the stock price increases by 100% during
Mr.Sheng’s first year, the number of shares subject to options will increase by
50%.  During the second and third years, the number of shares subject
to options for each year will increase by the same percentage as the increase in
the stock price.




Mr.
Sheng’s employment may be terminated at any time, with or without cause. In the
event that Mr. Sheng’s employment is terminated by us without cause, Mr. Sheng
is entitled to a severance payment of two months salary.





2006 Long-Term Incentive
Plan





In 2006,
we adopted the 2006 long-term incentive plan covering 1,000,000 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. The plan is presently administered by the
compensation committee.  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 15,000 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 2,500
shares of common stock on April 1st of each year, commencing April 1, 2007.





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Outstanding
Equity Awards at Fiscal Year End




During
the year ended September 30, 2008, we did not grant any options or stock awards
to the officers named in the summary compensation table.  The
following table sets forth information as to options held at September 30, 2008
by the officers named in the Summary Compensation Table.




Name
            
            Number ofSecurities
              UnderlyingUnexercised
              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
            
            0
            
            0
            
            $
            4.00
            
            5/8/2012Qiong
      (Laby) Wu
            
            
            50,000
            
            0
            
            0
            
            $
            4.00
            
            5/8/2012Lan
      Gu1






1
              During
      the year ended September 30, 2008, Lan Gu was entitled to a grant of
      30,000 shares of common stock and options to purchase 75,000 shares of
      common stock at $5.72 per share.  The stock grant and options
      were cancelled upon her resignation in October
  2008.




No
options were exercised by any officer named in the summary compensation
table.  The following table sets forth information as to stock awards
granted during the year ended September 30, 2008.





Name
            
            Number
      of Shares
              Acquired
      on Vesting
            
            
            Value
      Realized
              onVestingBo
      Huang
            
            
            0
            
            
            $
            0Qiong
      (Laby) Wu
            
            
            20,000
            
            
            
            120,600Lan
      Gu
            
            
            0
            
            
            
            0





The
shares acquired by Ms. Wu were transferred to her by Skywide.





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 15,000 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 2,500 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.




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The
following table sets forth information as to compensation paid to our directors
who are not listed in the Summary Compensation Table during the year ended
September 30, 2008.




Director
      CompensationName
            
            FeesEarned
              or
      Paidin
      Cash
            
            
            Option
              Awards
            
            
            All
      Other
              Compensation
            
            
            TotalTianzhou
      Deng
            
            $
            39,500
            
            
            $
            -
            
            
            $
            -
            
            
            $
            39,500Robert
      Adler
            
            
            15,500
            
            
            
            10,500
            
            
            
            -
            
            
            
            26,000Renjie
      Lu
            
            
            15,500
            
            
            
            10,500
            
            
            
            -
            
            
            
            26,000Greg
      Marcinkowski
            
            
            15,500
            
            
            
            10,500
            
            
            
            -
            
            
            
            26,000Baoheng
      Shi
            
            
            15,500
            
            
            
            10,500
            
            
            
            -
            
            
            
            26,000Xiang
      Dong (Donald) Yang
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -





On April 1, 2008, we granted Mr. Adler, Mr. Lu,Mr. Marcinkowski and Mr.
Shi options to purchase 2,500 shares at an exercise price of $4.06 pursuant to
the automatic grant provisions of our 2006 long-term incentive
plan.


ITEM
12. 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, 2008 by:




•
            Each
      director;




•
            Each
      current 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, at least 5% of our common stock;
      and




•
            All
      directors and officers as a group.




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Name
            
            Shares of
      Common
              Stock
              Beneficially Owned
            
            
            PercentTianzhou
      Deng
              1603-1604,
      Tower B Fortune Centre Ao City
              Beiyuan
      Road, Chaoyang District,
              Beijing,
      China 100107
            
            
            3,188,551
            
            
            
            20.0
            %Bo
      Huang
              1603-1604,
      Tower B Fortune Centre Ao City
              Beiyuan
      Road, Chaoyang District,
              Beijing,
      China 100107
            
            
            3,188,551
            
            
            
            20.0
            %Xiang
      Dong (Donald) Yang
              c/o
      Abax Global Capital (Hong Kong) Ltd.
              Suite
      6708, 67/F Two Int’l Finance Center
              Hong
      Kong
            
            
            1,849,384
            
            
            
            10.4
            %Abax
      Lotus Ltd.
              Suite
      6708, 67/F Two Int’l Finance Center
              Hong
      Kong
            
            
            1,849,384
            
            
            
            10.4
            %Robert
      I. Adler
            
            
            18,750
            
            
            
            *Greg
      Marcinkowski
            
            
            18,750
            
            
            
            *Renjie
      Lu
            
            
            18,750
            
            
            
            *Baoheng
      Shi
            
            
            18,750
            
            
            
            *Anlin
      Xiong
            
            
            -
            
            
            
            -Shiao
      Ming Sheng
            
            
            -
            
            
            
            -Cindy
      Ye
            
            
            -
            
            
            
            -All
      officers and directors as a group (seven individuals beneficially owning
      stock)
            
            
            8,301,486
            
            
            
            46.3
            %Jeff
      Feinberg
              c/o
      JLF Asset Management, LLC
              2775
      Via de la Valle, Suite 204
              Del
      Mar, CA 92014
            
            
            2,715,792
            
            
            
            17.1
            %CCIF
      Petrol Limited
              c/o
      China Renaissance Capital Investment Inc.
              M&C
      Corporate Services Limited
              P.O.
      Box 309GT, Ugland House
              South
      Church Street
              George
      Town, Grand Cayman, Cayman Islands
            
            
            917,073
            
            
            
            5.4
            %





*           Less
than 1%.




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 of warrants
or options or upon conversion of convertible securities if they are exercisable
or convertible within 60 days of November 30, 2008.





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Mr. Deng
and Mr. Huang each owns a 50% interest in Skywide Capital Management Limited
(“Skywide”), which owns 6,277,102 shares of common 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. In addition, Mr. Deng and Mr. Huang each
hold an option to purchase 50,000 shares of common stock.




Mr. Yang
is a director, and he may be deemed a controlling person with respect to Abax
Lotus, Ltd. The shares deemed to be beneficially owned by Mr. Yang represent the
shares of common stock beneficially owned by Abax Lotus, Ltd. Mr. Yang and
Christopher Chung-Yi Hsu have joint voting and dispositive power with respect to
the securities owned by Abax Lotus. The shares beneficially owned by Abax Lotus
consist of 34,750 shares of common stock and 1,814,634 shares issuable upon
conversion of our 3.0% convertible notes in the principal amount of $9,300,000
based on the conversion rate in effect on November 30, 2008.





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.





The
shares beneficially owned by CCIF Petrol Limited represent shares of common
stock issuable upon conversion of our 3.0% convertible notes in the principal
amount of $4,700,000 held by CCIF Petrol Limited, a British Virgin Islands
company. CCIF Petrol Limited is wholly owned by China Century Investment Fund
Limited, a Cayman Islands company, whose sole corporate director is China
Renaissance Capital Investment Inc., a Cayman Islands company. Voting and
investment powers of securities held by CCIF Petrol Limited is exercised by the
board of directors of China Renaissance Capital Investment Inc. which consists
of Mark Qiu, Hung Shih, Li Zhenzhi, Charles Pieper and Nicole
Arnaboldi.





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




From the time of our organization until
Sinoenergy Holding acquired Sinogas in November 2005, the principal shareholder
of Sinogas was Beijing Sanhuan Technology Development Co., Ltd. (“Beijing
Sanhuan”), 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, which has a term of 50
years. As of September 30, 2008, the Company had paid the purchase price to
Beijing Sanhuan in full.





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. The, which becameeffective on January 1, 2006as a ten-yearterm.We also pay Beijing Sanhuan $64 per hour for
engineers provided by Beijing Sanhuan.


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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 pay Beijing Sanhuan a fee of $2,561.





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





Xiang Dong (Donald) Yang, a director, is
president of Abax Global Capital.  Abax Lotus Ltd is an affiliate of
Abax Global Capital, and is the lead investor in our $30,000,000 note financing which closed in September
2007, having purchased $10,700,000 principal amount of our 12% Guaranteed Senior
Notes due 2012 and $9,300,000 principal amount of our 3% Guaranteed Senior
Convertible Note due 2012. Pursuant to an investor rights agreement, Abax has the right to appoint up
to 20% of the members of our board of directors and Mr. Tianzhou Deng, our
chairman of the board of directors, and Mr. Bo Huang, our chief executive
officer, have agreed to vote the shares of common stock beneficially owned by them in favor of the
election of the Abax nominees for director at each annual or special meeting of
shareholders at which an election of directors is held or pursuant to any
written consent of the shareholders.  Mr. Yang is the nominee of
Abax.The rights of the holders of the senior
notes and the convertible notes, including the right to additional interest if
we fail to have the shares issuable upon conversion of the convertible notes
registered with the SEC in a timely manner and the rightto an adjustment in the conversion price
of the convertible note are described in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations–Liquidity and Capital
Resources”and Note 15 of
Notes to Consolidated Financial Statements.  At the time
Abax purchased its senior notes and convertible notes, there was no relationship
between us and either of the investors.
 
 The
indenture relating to the convertible notes provides for an adjustment in the
conversion price of the notes if we fail to meet certain earnings
levels.  Although we did not meet the earnings level for 2007, the
investors waived the right to any adjustment based on 2007 net income, in
consideration for which Skywide agreed to pay the investors $600,000 by December
1, 2008.  As of December 19, 2008, Skywide was in default of this
obligation.


ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES




In March
2008, we engaged Grobstein, Horwath & Company LLP (“Grobstein”) as our
registered independent public accounting firm. Before that, on December 11,
2006, we engaged Schwartz Levitsky Feldman LLP (“Schwartz Levitsky”) as our
registered independent public accounting firm.  We were billed by
Grobstein and Schwartz Levitsky, as follows:




Description of services
            
            Year ended
              September 30, 2008
            
            Nine months ended
              September 30, 2007Audit
      fees-Schwartz
      Levitsky
            
            $
            35,000
            
            
            $
            173,000-Grobstein
            
            
            238,000
            
            
            
            -Audit
      related fees
            
            
            -
            
            
            
            -Tax
      fees
            
            
            -
            
            
            
            -All
      other fees
            
            
            -
            
            
            
            -$
            273,000
            
            
            $
            173,000




Audit
fees.    Audit fees represent fees for professional
services performed by Grobstein and 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.




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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 were none of these fees incurred.




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




All other
fees.     Schwartz Levitsky and Grobstein 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.




The audit committee has determined that
both Schwartz Levitsky and Grobstein are independent registered public
accounting firms.













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PART
IV





ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(1)
            Financial
      Statements





See Index
to Consolidated Financial Statements on Page F-1





(2)
            Financial
      Statement Schedules





All
financial statement schedules are omitted because they are not applicable, not
required under the instructions or all the information required is set forth in
the financial statements or notes thereto.





(3)
            Exhibits





2.1
            
            Exchange
      Agreement dated as of June 2, 2006, among the Registrant and the former
      stockholders of Sinoenergy.13.1
            
            Restated
      articles of incorporation .23.2
            
            By-laws.
      34.1
            
            Form
      of convertible note issued in June 2006 private placement. 14.2
            
            Form
      of “A” warrants issued to investors in June 2006 private placement. 14.3
            
            Form
      of “B” warrants issued to investors in the June 2006 private
      placement.14.4
            
            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 2012.44.5
            
            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 2012.410.1
            
            2006
      Long-term incentive plan .1




10.2
            
            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).610.3
            
            Agreement
      between Qingdao Sinogas General Machinery Co. Ltd. and Beijing Sanhuan
      Technology Development Co. Ltd. (English Translation).610.4
            
            Agreement
      dated July, 2006, among Sinoenergy Holding Limited, Qingdao Kangtai
      Machinery Equipment Manufacture Co. Limited and Guili Shi (English
      translation).6




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10.5
            
            Agreement,
      dated March 16, 2007, by and among Sinoenergy Corporation, the June 2006
      Private Placement Investors and Skywide Capital Management Limited. 710.6
            
            Agreement
      dated March 26, 2007, between Beijing Sinogas Sanhuan Technology
      Development Co., Ltd. and Qingdao Sinogas General Machinery Limited
      Corporation (English translation). 210.7
            
            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) .810.8
            
            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) .810.9
            
            Letter
      of Intent to secure the supply of 200 million cubic meters of natural gas
      per year , dated May 14, 2007, among Hubei Gather Energy Gas Co, its 55%
      equity owned subsidiary,   Sinopec Shanghai Petrochemical Company
      Limited (English translation). 410.10
            
            Agreement
      of Natural Gas Sale and Purchase dated June 7, 2007, among China Petroleum
      and Chemical Corporation Natural Gas Branch and Anhui Gather Energy Gas
      Co., Ltd. (English translation).410.11
            
            Composite
      Note Purchase Agreement, dated September 1, 2007, among Sinoenergy
      Corporation, Abax Lotus Ltd. and CCIF Petrol Limited. 410.12
            
            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).  410.13
            
            Equity
      registration rights agreement dated September 28, 2007, by and among the
      Company, Abax Lotus Ltd. and CCIF Petrol Limited.410.14
            
            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 Limited.410.15
            
            Information
      rights agreement dated September 28, 2007, from the Company to Abax Lotus
      Ltd. and CCIF Petrol Limited.4




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10.16
            
            Charge
      agreement over registered shares in Sinoenergy Holding Limited between the
      Company and DB Trustees (Hong Kong) Limited, as security agent. 410.17
            
            Composite
      non-competition covenant and agreement by Mr. DENG Tianzhou and Mr. HUANG
      Bo for the benefit of Abax Lotus Ltd. and CCIF Petrol Limited. 410.18
            
            English
      translation of Equity Transfer Agreement dated January 11, 2008, between
      Sinoenergy Holding Limited, Zhenghong Wang, Hengfu Guo and Jie Shi. 910.19
            
            English
      translation of Equity Transfer Agreement dated December 17, 2007, between
      Sinoenergy Holding Limited, Qingdao Qingqing Enviromental Industry Co.,
      Ltd., Japan Chubu Daichi Yuso Co., Ltd., Japan Neverlandcopy and Sanix
      Co., Ltd. 1010.20
            
            English
      translation of Supplementary Agreement of Equity Transfer dated December
      24, 2007, between Sinoenergy Holding Limited,  Qingdao Qingqing
      Enviromental Industry Co., Ltd. and Qingdao Jia Run He Trading Co.
      Ltd.1110.21
            
            English
      translation of Land Agreement dated March 1, 2008, between Qingdao Sinogas
      General Machinery Co., Ltd and Qingdao Mingchen Real Estate Co., Ltd.1210.22
            
            Employment
      Agreement dated October 20, 2008, between the Company and Shiao Ming
      Sheng.510.23
            
            Letter
      Agreement dated March 6, 2008, between Abax Lotus Ltd., CCIF Petrol
      Limited, and Skywide Capital Management Limited., and Indenture Waiver
      dated March 6, 2008, by Abax Lotus Ltd. and CCIF Petrol Limited.221.1
            
            List
      of Subsidiaries.2




31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.231.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act.232.1
            Certification
      of Chief Executive and Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act.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.




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5
              Filed as an exhibit to the
      Company’s Form 8-K report which was filed
      with the Commission on October 24, 2008, 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.8
              Filed as an exhibit to the
      Company’s Form 10-K report which was filed
      with the Commission onApril 10, 2007, and incorporated herein by
      reference.9
              Filed as an exhibit to the
      Company’s Form 8-K report which was filed
      with the Commission on January 28, 2008, and incorporated herein by
      reference.10
              Filed as an exhibit to the
      Company’s Form 8-K report which was filed
      with the Commission on February 5, 2008, and incorporated herein by
      reference.11
              Filed as an exhibit to the
      Company’s Form 8-K report which was filed
      with the Commission on April 2, 2008, and incorporated herein by
      reference.12
              Filed as an exhibit to the
      Company’s Form 8-K report which was filed
      with the Commission on April 2, 2008, and incorporated herein by
      reference.




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 24,
      2008
              By:
              /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 Shiao Ming Sheng 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.




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Signature
            
            Title
            
            Date/s/
      Bo Huang
            
            Chief
      Executive Officer
            
            December 24,
      2008Bo
      Huang
            
            and
      Director (Principal Executive Officer)/s/
      Shiao Ming Sheng
            
            Chief
      Financial Officer
            
            December 24,
      2008Shiao
      Ming Sheng
            
            (Principal
      Financial andAccounting
      Officer)/s/
      Tianzhou Deng
            
            Director
            
            December 24,
      2008Tianzhou
      Deng/s/
      Robert I. Adler
            
            Director
            
            December 24,
      2008Robert
      I. Adler/s/
      Renjie Lu
            
            Director
            
            December 24,
      2008Renjie
      Lu/s/
      Greg Marcinkowski
            
            Director
            
            December 24,
      2008Greg
      Marcinkowski/s/
      Baoheng Shi
            
            Director
            
            December 24,
      2008Baoheng
      Shi/s/
      Xiang Dong (Donald) Yang
            
            Director
            
            December 24,
      2008Xiang
      Dong (Donald) Yang




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SINOENERGY
CORPORATION AND SUBSIDIARIES




Index
to Financial Statements













PageReports
      of Independent Registered Public Accounting Firms
            F-2/F-3Consolidated
      Balance Sheet as of September 30, 2008 and 2007
            F-4Consolidated
      Statements of Income and Comprehensive Income
      for the Year Ended September 30, 2008 and the nine month transition period
      ended September 30, 2007
            F-5Consolidated
      Statements of Shareholders’ Equity for the
      Year Ended September 30, 2008 and the nine month transition period ended
      September 30, 2007
            F-6Consolidated
      Statements of Cash Flows for the Year Ended September 30, 2008 and the
      nine month transition period ended September 30, 2007
            F-7Notes
      to the Consolidated Financial Statements
            F-8














F-1
 Table of Contents




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Stockholders


Sinoenergy
Corporation




We have audited the accompanying
consolidated balance sheet of Sinoenergy Corporation and subsidiaries (the
“Company”) as of September 30, 2008, and the related consolidated statements of
income and comprehensive income, shareholders’ equity, and cash flows for the
year then ended.  These financial statements are the responsibility of
the Company’s management.  Our responsibility is to express an opinion
on these financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sinoenergy Corporation and
subsidiaries as of September 30, 2008, and the results of their operations and
cash flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.




/s/
      Grobstein, Horwath & Company LLPSherman
      Oaks, CaliforniaDecember
      23, 2008




F-2
 Table of Contents


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of Sinoenergy Corporation





We have
audited the accompanying consolidated balance sheet of Sinoenergy Corporation as
at September 30, 2007 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
audit.





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








/S/
      SCHWARTZ LEVITSKY FELDMAN LLPToronto,
      Ontario, Canada
            Chartered
      AccountantsDecember
      24, 2007
            Licensed
      Public Accountants




F-3
 Table of Contents




Sinoenergy
Corporation and Subsidiaries


Consolidated
Balance Sheets


(In
thousands of United States dollars)




September30, 2008
              
              
              September30, 2007ASSETSCURRENT
      ASSETSCash
              
              $
              8,871
              
              
              $
              3,322Restricted
      cash
              
              
              523
              
              
              
              1,225Accounts receivable,
      net
              
              
              22,008
              
              
              
              5,996Other receivable,
      net
              
              
              16,983
              
              
              
              4,086Note subscription
      receivable
              
              
              -
              
              
              
              29,840Deposits and
      prepayments
              
              
              7,918
              
              
              
              2,795Inventories
              
              
              7,303
              
              
              
              2,901Deferred
      expenses
              
              
              91
              
              
              
              58TOTAL CURRENT
      ASSETS
              
              
              63,697
              
              
              
              50,223Long-term
      investments
              
              
              1,568
              
              
              
              1,592Property, plant and equipment,
      net
              
              
              30,298
              
              
              
              8,388Intangible
      assets
              
              
              27,591
              
              
              
              18,531Due from related
      party
              
              
              383
              
              
              
              -Other long term
      asset
              
              
              6,891
              
              
              
              9,599Goodwill
              
              
              1,906
              
              
              
              729Deferred tax
      asset
              
              
              13
              
              
              
              4TOTAL NON-CURRENT
      ASSETS
              
              
              68,650
              
              
              
              38,843TOTAL
      ASSETS
              
              $
              132,347
              
              
              $
              89,066CURRENT
      LIABILITIESShort-term bank
      loan
              
              $
              11,953
              
              
              $
              14,843Notes
      payable
              
              
              1,633
              
              
              
              799Accounts
      payable
              
              
              5,894
              
              
              
              3,166Advances from
      customers
              
              
              2,409
              
              
              
              1,035Additional interest payable under
      convertible note indenture
              
              
              420
              
              
              
              -Income taxes
      payable
              
              
              633
              
              
              
              119Other
      payables
              
              
              5,341
              
              
              
              5,181Accrued
      expenses
              
              
              335
              
              
              
              395Deferred
      income
              
              
              95
              
              
              
              -TOTAL CURRENT
      LIABILITIES
              
              
              28,713
              
              
              
              25,538Long-term notes
      payable
              
              
              29,251
              
              
              
              29,445Long-term
      loans
              
              
              3,667
              
              
              
              -Deferred tax
      liabilities
              
              
              1,095
              
              
              
              -TOTAL
      LIABILITIES
              
              
              62,726
              
              
              
              54,983Minority
      interests
              
              
              14,394
              
              
              
              1,363CommitmentsSHAREHOLDERS’EQUITYCommon stock- par value $0.001 per
      share; Authorized - 50,000,000 shares; Issued and outstanding- 15,942,336 shares at September
      30, 2008 and 15,709,033 at September 30, 2007
              
              
              16
              
              
              
              16Additional paid-in
      capital
              
              
              30,396
              
              
              
              23,175Retained
      earnings
              
              
              19,953
              
              
              
              8,217Accumulated other comprehensive
      income
              
              
              4,862
              
              
              
              1,312TOTAL SHAREHOLDERS’EQUITY
              
              
              55,227
              
              
              
              32,720TOTAL LIABILITIES AND
      SHAREHOLDERS’EQUITY
              
              $
              132,347
              
              
              $
              89,066




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


F-4
 Table of Contents




Sinoenergy
Corporation and Subsidiaries


Consolidated
Statements of Income and Comprehensive Income


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




Year Ended
                September 30,
      2008
              
              
              Nine months
      Ended
                September 30, 2007NET
    SALES
              
              $
              40,940
              
              
              $
              15,923COST OF
      SALES
              
              
              (25,589
              )
              
              
              (8,090
              )GROSS
      PROFIT
              
              
              15,351
              
              
              
              7,833OPERATING
      EXPENSESSelling
      expenses
              
              
              881
              
              
              
              234General and administrative
      expenses
              
              
              4,889
              
              
              
              3,329TOTAL OPERATING
      EXPENSES
              
              
              5,770
              
              
              
              3,563INCOME FROM
      OPERATIONS
              
              
              9,581
              
              
              
              4,270OTHER INCOME
      (EXPENSES)Rental income, net of land use
      right amortization of $176
              
              
              3,836
              
              
              
              -Gain on sale of equity of
      subsidiary
              
              
              7,367
              
              
              
              -Interest
      income
              
              
              126
              
              
              
              13Interest
      expense
              
              
              (1,783
              )
              
              
              (308
              )Other expense,
      net
              
              
              (260
              )
              
              
              (4
              )Additional interest
      payable under
      convertible note indenture
              
              
              (420
              )
              
              
              -OTHER INCOME (EXPENSES),
      NET
              
              
              8,866
              
              
              
              (299
              )INCOME BEFORE INCOME TAXES AND
      MINORITY INTEREST
              
              
              17,138
              
              
              
              3,783Income
      taxes
              
              
              (1,309
              )
              
              
              (188
              )Minority
      interest
              
              
              (1,082
              )
              
              
              (142
              )NET
      INCOME
              
              
              16,056
              
              
              
              3,641Other comprehensive
      income:Foreign currency translation
      adjustments
              
              
              3,550
              
              
              
              964COMPREHENSIVE
      INCOME
              
              $
              19,606
              
              
              $
              4,605Net Income Per Common
      ShareBasic
              
              $
              1.02
              
              
              $
              0.28Diluted
              
              $
              0.98
              
              
              $
              0.27Weighted Average Common Shares
      OutstandingBasic
              
              
              15,721
              
              
              
              12,776Diluted
              
              
              19,076
              
              
              
              13,364








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


F-5
 Table of Contents




Sinoenergy
Corporation and Subsidiaries
 Consolidated
Statement of Shareholders’ 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
                
                
                Retained
      Earnings
                
                
                Accumulated Other Comprehensive
      Income
                
                
                Total
                  Shareholder’s Equity -Balance, December 31,
      2006
                
                
                7,318
                
                
                $
                8
                
                
                $
                3
                
                
                $
                11,105
                
                
                $
                4,576
                
                
                $
                348
                
                
                $
                16,040Issuance of common stock on
      conversion of series A preferred stock
                
                
                2,846
                
                
                
                3
                
                
                
                (3
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                —Warrants exercised to common
      stock
                
                
                5,545
                
                
                
                5
                
                
                
                
                
                
                
                11,321
                
                
                
                
                
                
                
                
                
                
                
                11,326Amortizationdiscount of 3% guaranteed senior
      convertible notes
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                176
                
                
                
                
                
                
                
                
                
                
                
                176Issuance of warrants for
      services
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                65
                
                
                
                
                
                
                
                
                
                
                
                65Grant of stock
      options
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                508
                
                
                
                
                
                
                
                
                
                
                
                508Net income for the
      period
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,641
                
                
                
                
                
                
                
                3,641Currency translation
      adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                964
                
                
                
                964Balance, September 30,
      2007
                
                
                15,709
                
                
                
                16
                
                
                
                —
                
                
                
                23,175
                
                
                
                8,217
                
                
                
                1,312
                
                
                
                32,720Warrants exercised to common
      stock
                
                
                233Issuance ofwarrantsfor
      services
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                83
                
                
                
                
                
                
                
                
                
                
                
                83Grant of stock
      options
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                431
                
                
                
                
                
                
                
                
                
                
                
                431Adjustment to record reduction in
      conversion price of 3% senior convertible
    notes
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,266
                
                
                
                
                
                
                
                
                
                
                
                2,266Grant of  stock
      award
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                121
                
                
                
                
                
                
                
                
                
                
                
                121Transfer of
      reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,320
                
                
                
                (4,320
                )
                
                
                
                
                
                
                —Net income for the
      period
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                16,056
                
                
                
                
                
                
                
                16,056Currency translation
      adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,550
                
                
                
                3,550Balance, September 30,
      2008
                
                
                15,942
                
                
                $
                16
                
                
                $
                —
                
                
                $
                30,396
                
                
                $
                19,953
                
                
                $
                4,862
                
                
                $
                55,227
  The
accompanying notes are an integral part of these financial
statements.
 
 F-6
 Table of Contents
 Sinoenergy
Corporation and Subsidiaries


Consolidated
Statements of Cash Flows


(In
thousands of United States dollars)




Year Ended
                September 30,
      2008
              
              
              Nine Months
      Ended
                September 30,
      2007CASH FLOWS FROM OPERATING
      ACTIVITIES:Net
      income
              
              $
              16,056
              
              
              $
              3,641Adjustments to reconcile net
      income to net cash provided by (used in) operating
      activities:Equitysale of
      subsidiary
              
              
              (7,367
              )
              
              
              -Warrantsand stock awardsissued for
      services
              
              
              83
              
              
              
              65Grant of stock
      options
              
              
              552
              
              
              
              508Amortization of note
      discount
              
              
              111
              
              
              
              176Estimated additional
      interest
              
              
              420
              
              
              
              -Non-cash portion of interest
      expense
              
              
              1,264
              
              
              
              -Minority
      interest
              
              
              1,269
              
              
              
              142Depreciation
              
              
              551
              
              
              
              417Amortization of intangible
      assets
              
              
              134
              
              
              
              367Provision for (recovery of) doubtful
      accounts
              
              
              (133
              )
              
              
              220Changes in operating assets and
      liabilities:Accounts
      receivable
              
              
              (15,940
              )
              
              
              (1,805
              )Other receivables, deposits and
      prepayments
              
              
              (18,402)
              
              
              
              164Inventories
              
              
              (4,402
              )
              
              
              (1,964
              )Deferred tax
      asset
              
              
              (9
              )
              
              
              -Accounts
      payable
              
              
              3,562
              
              
              
              3,302Accrued
      expenses
              
              
              (60
              )
              
              
              179Advances from
      customers
              
              
              1,374
              
              
              
              334Other
      payables
              
              
              160
              
              
              
              (1,251
              )Deferred
      income
              
              
              95
              
              
              
              -Income taxes
      payable
              
              
              514
              
              
              
              112Net cash provided by (used
      in) operating activities
              
              
              (20,168)
              
              
              
              4,607CASH FLOWS FROM INVESTING
      ACTIVITIESPurchase of property, plant and
      equipment
              
              
              (16,546
              )
              
              
              (5,249
              )Prepayment for long-term
      assets
              
              
              (2,111
              )
              
              
              (4,780
              )Purchase of land use
      right
              
              
              (2,127
              )
              
              
              (6,784
              )Purchase of minority interest in
      subsidiaries
              
              
              (7,958
              )
              
              
              (8,414
              )Net proceeds related to sale of
      investment
              
              
              1,738
              
              
              
              -Net cash used in investing
      activities
              
              
              (27,004
              )
              
              
              (25,227
              )CASH FLOWS FROM FINANCING
      ACTIVITIESNet proceeds received from note
      subscription receivable
              
              
              29,840
              
              
              
              -Cash received from capital
      contribution in subsidiary
              
              
              18,181
              
              
              
              11,933Proceeds from bank
      loan
              
              
              15,620
              
              
              
              11,682Payment of bank
      borrowings
              
              
              (14,843
              )
              
              
              -Net cash provided by financing
      activities
              
              
              48,798
              
              
              
              23,615Effect on cash of changes in
      exchange rate
              
              
              3,221
              
              
              
              964Net increase in
      cash
              
              
              4,847
              
              
              
              3,959Cash at beginning of
      period
              
              
              4,547
              
              
              
              588Cash at end of
      period
              
              $
              9,394
              
              
              $
              4,547Supplemental disclosure of cash
      flow information:Interest
      paid
              
              $
              2,304
              
              
              $
              295Income
      taxes paid
              
              $
              834
              
              
              $
              -






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




F-7
 Table of Contents


Sinoenergy
Corporation and Subsidiaries
 Notes to the
consolidated financial statements






1.
            The
      Company




(a)
Organization





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




On June
2, 2006, the Company acquired Sinoenergy Holding Limited (“Sinoenergy Holding”),
a British Virgin Islands corporation.  Sinoenergy Holding was the sole
stockholder of Qingdao Sinogas General Machinery Limited Corporation
(“Sinogas”), a wholly foreign-owned enterprise (“WFOE”) registered under laws of
the People’s Republic of China (the “PRC”). Sinoenergy Holding had no business
other than its ownership of Sinogas. As a result of this transaction, Sinoenergy
Holding and its subsidiary, Sinogas, became subsidiaries of the Company and the
business of Sinogas became the business of the Company.





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





(b)
Reverse Splitof Common
Stock





The
Company amended its articles of incorporation on June 17, 2008 by a certificate
of change. The certificate of change effected a one-for-two reverse split on the
common stock and reduced the Company’s authorized shares from 100,000,000 shares
of common stock to 50,000,000 shares without changing the par value. This
reverse stock split became effective on July 9, 2008. All share and per share
information in these financial statements retroactively reflects the reverse
split for all periods presented.





(c)
Change of Fiscal Year





The
Company changed its fiscal year from the calendar year to September 30,
effective September 30, 2007.  These financial statements include the
results of operations, cash flows and shareholders’ equity for the year ended
September 30, 2008 and the nine month transitional period ended September 30,
2007.





(d)
Subsidiaries of the Company





Set forth
below is a list of the Sinoenergy’s wholly-owned and majority-owned
subsidiaries, all of whose financial statements are consolidated with
Sinoenergy.  References to the Company include the Company and its
consolidated subsidiaries unless the context indicates otherwise. The percentage ownership
reflects the percentage ownership by Sinoenergy.





F-8
 Table of Contents






Company
              
              Ownership %
              
              Business
      activitiesSinoenergy HoldingLimited
              
              100%
              
              Holding
      companyQingdaoSinogas
      General
                Machinery Limited Corporation
      (“Sinogas”)
              
              75.05%
              
              Production of compressed natural
      gas (CNG) facilities,
      technical consulting in CNG filling station construction, manufacturing of
      CNG vehicle conversion kitQingdaoSinogas
      Yuhan
                Chemical Equipment Company Limited
      (“Yuhan”)
              
              81%**
              
              Manufacturing of customized
      pressure containersWuhan Sinoenergy Gas Company Limited
      (“WuhanSinoenergy”)
              
              80%*
              
              Construction and operating of CNG
      stations and the manufacturing and sales of automobile conversion
      kitsPingdingshan Sinoenergy
      Gas
                Company Limited (“Pingdingshan
      Sinoenergy”)
              
              90%
              
              Construction andoperating of CNG stations and the
      manufacturing and sales of automobile conversion
      kitsJiaxing Lixun
      Automotive
                Electronic Company
      Limited(“Lixun”)
              
              81%**
              
              Design and manufacturing of
      electric control devices for alternative
  fuelHubeiGather Energy
                Company Limited (“HubeiGather”)
              
              80%
              
              Construction and operating of
      natural gas processing plantsXuancheng
      Sinoenergy
                Vehicle Gas Company
      Limited
                (“Xuancheng Sinoenegy”)
              
              100%
              
              Construction and operating of CNG
      stations and the manufacturing and sales of automobile conversion
      kitsQingdaoJingrun
      General
                Machinery Company Limited
      (“Jingrun”)
              
              100%
              
              Design and manufacturing of
      petroleum refinery equipment and petroleum
      machineryQingdaoSinoenergy
      General
                Machinery Company
      Limited
                (“QingdaoSinoenergy”)
              
              100%
              
              Manufacturing and installation of
      general machinery
equipment




*            
This subsidiary is owned40% by Sinogas and 50% by
Sinoenergy.


**           This
subsidiary is owned 75% by Sinogas and 25% by Sinoenergy.





2.
Summary of Significant Accounting Policies





Basis of
Presentation





The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.





F-9
 Table of Contents




Principles of
Consolidation




The
accompanying consolidated financial statements include the financial statements
of Sinoenergy Corporation and its wholly-owned subsidiaries and majority-owned
subsidiaries as to which it exercises control. Intercompany 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, the Company makes estimates,
judgments 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 sales and expenses during the reported periods.
Significant estimates include depreciation and the allowance for doubtful
accounts and other receivables, asset impairment, valuation of warrants and
options and inventory valuation, and the determination of revenue and
costs.  We base our estimates on historical experience and on various
other assumptions that we believe are reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results could differ from those estimates.





Goodwill





Goodwill represents the excess of the
purchase price of business combinations over the fair value of the net assets
acquired and is tested for impairment at least annually. 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
goodwill is written down to the implied fair value of goodwill through a charge
to operations. 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. The goodwill on the Company’s financial statements
was a result of the transactions pursuant to which the Company acquired Yuhan,
Jiaxing Lixun and Xuancheng Sinoenergy, and relates to the pressure container,
vehicle conversion kits, and CNG station operation reporting
segments.





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, 2008 and September 30, 2007, the Company did not have any cash
equivalents.





Allowance for Doubtful
Accounts





An allowance for doubtful accounts is
maintained for customers (other than related parties) 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. When
circumstances related to customers change, estimates of the recoverability of
receivables are further adjusted.





Inventories





Inventories
are comprised of raw materials, work in process, finished goods and low value
consumable articles. Amounts are stated at the lower of cost or market value.
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.





F-10
 Table of Contents




Long-Term
Investments





Investments in entities in which the
Company owns more than20%
but less than 50% of the equity and does not have the ability to control, but
has the ability to exert significant influence, are accounted for using the
equity method, which includes recognition of a percentage share of income or
loss, dividends, andany changes in the investment percentage
in an investee by an investor.


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 and improvements are
capitalized.





The
estimated useful lives are as follows:





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





Intangible
Assets





Intangible
assets, representing patents, technical know-how, and acquired land use rights,
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 which range from 10 to 50 years.





There is
no private ownership of land in the PRC. All land is owned by the government and
the government grants what is known as a land use right, which is a transferable
right to use the land. The land use right for the land on which the Sinogas,
Xuancheng, Jingrun, and Qingdao Sinoenergy facilities are located is recorded as
an intangible asset.





Impairment of
Assets





In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or
Disposal of Long-Lived Assets” (“SFAS No. 144”), impairment of assets is
monitored on a periodic basis, and is assessed based on the undiscounted cash
flows expected to be generated by the underlying assets. In the event that the
carrying amount of assets exceeds the undiscounted future cash flows (fair
value), then the carrying amount of such assets is adjusted to their fair
value.





Capitalization of
Interest





The Company capitalizes interest
incurred in connection with the construction of assets, principally its CNG
stations, during the construction period.  Capitalized interest is
recorded as an increase to construction in progress and, upon completion of the
construction, to property and equipment.  The Company capitalized
$1,791,795 of interest during the year ended September 30, 2008.  The
Company did not capitalize any interest during the nine months ended September
30, 2007.





F-11
 Table of Contents




Revenue
Recognition





The Company recognizes revenue when the
significant risks and rewards of ownership have been transferred to the
customer, including factors such as when persuasive evidence that an arrangement exists, delivery
has occurred, the sales price is fixed or determinable and collectability is
reasonably assured.  The Company recognizes product sales generally at
the time the product is shipped.CNG station construction and
building technical
consulting service revenue related is recognized on the percentage of completion
basis.Under the
percentage-of-completion method, revenue is recognized based upon contract costs
incurred to date as a percentage of total contract costs expectedto be incurred at contract
completion.Revenue is presented net of any sales
tax and value added tax.


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 and industry practice.  Based on experience and industry
practice, the Company has established a warranty reserve rate of 0.2% of gross
sales for customized pressure containers and CNG station facilities and
construction segments. The Company periodically reviews this rate and revises it
as necessary.





Income
Taxes





The
Company accounts for income taxes under Statement of Financial Accounting
Standard (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
applicable 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 adopted FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of
FASB Statement No. 109,” on October 1, 2007. The Company recognizes a tax
benefit associated with an uncertain tax position when, in management’s
judgment, it is more likely than not that the position will be sustained upon
examination by a taxing authority. For a tax position that meets the
more-likely-than-not recognition threshold, the Company initially and
subsequently measures the tax benefit as the largest amount that it judges to
have a greater than 50% likelihood of being realized upon ultimate settlement
with a taxing authority. The liability associated with unrecognized tax benefits
is adjusted periodically due to changing circumstances, such as the progress of
tax audits, case law developments and new or emerging legislation. Such
adjustments are recognized entirely in the period in which they are identified.
The effective tax rate includes the net impact of changes in the liability for
unrecognized tax benefits and subsequent adjustments as considered appropriate
by management.





Foreign Currency
Translations





The
Company’s functional currency is Renminbi (“RMB”) and its reporting currency is
U.S. dollars. The Company’s balance sheet accounts are translated using the
closing exchange rate in effect at the balance sheet date and operating accounts
are translated using the average exchange rate prevailing during the year.
Equity accounts are translated using the historical rate as incurred.
Translation gains and losses are deferred and accumulated as a component of
accumulated other comprehensive income in shareholders’ 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-12
 Table of Contents




For
certain financial instruments, including cash, accounts receivable, related
party and other receivables, accounts payable, other payables and accrued
expenses, the Company estimates that the carrying amounts approximate fair value
because of the nature of the assets and short- term maturities of the
obligations.





Minority
Interest





Minority
interest refers to the portion of a consolidated subsidiary which is not
wholly-owned by the Company. The Company records the minority interest portion
of any related profits and losses in consolidation.





Stock-Based
Compensation





The Company grants stock options to
employees and stock options and warrants to non-employees in non-capital raising
transactions for services and for financing costs. The Company has adopted SFAS
No. 123R, “Share-Based Payment,” which establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services. In accordance with SFAS No. 123R, the fair value of stock options
and warrants issued to employees and non-employees is measured at the grant
date. The Company utilizes the Black-Scholes option pricing model to determine
fair value. 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. In some cases, our principal stockholder, which is
owned by our chief executive officer and our chairman, both of whom are
directors, provided or agreed to provide stock to executive officers in
connection with their employment.  These shares are treated as if the
shares were contributed to and issued by the Company.  The value of
the shares is determined in accordance with SFAS No.
123R.





Concentration of Credit
Risk





Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
primarily of trade accounts receivable. While there are risks associated
with any concentration of customers management believes thatthe active monitoring system in place to
monitor the creditworthiness of customers will minimize such
risks.
 
 The Company performs ongoing credit
evaluations of its debtors, but does not require collateral, in accordance withindustry practice in
China.
 
 The Company maintains its cash accounts
with major banks inChina.  While the Chinese banks do not
provide deposit insurance.




Earnings per
Share





The
Company computes earnings per share (“EPS’) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  SFAS
No. 128 requires companies with complex capital structures to present basic
and diluted EPS.  Basic EPS is measured as net income divided by the
weighted average common shares outstanding for the period.  Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options and warrants) as
if they had been converted at the beginning of the periods presented, or
issuance date, if later.  Potential common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.





The
calculation of diluted weighted average common shares outstanding is based on
the average of the closing price of the Company’s common stock during the
reporting periods, and is applied to options and warrants using the treasury
stock method to determine if they are dilutive. The common stock issuable upon
conversion of the convertible preferred stock and convertible notes payable is
included on an “as if converted” basis when the preferred stock and convertible
notes are dilutive.





F-13
 Table of Contents




Comprehensive
Income





The
Company has adopted the provisions of SFAS 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 or loss to include all changes in equity except those
resulting from investments by owners and distributions to owners, including
adjustments to minimum pension liabilities, accumulated foreign currency
translation, and unrealized gains or losses on marketable
securities.





The Company’s only component of other comprehensiveincome is foreign currency
translation gain of $4,862,000 for the year ended September 30,
2008, and $1,312,000 for the nine months ended September 30,
2007.  Cumulative other comprehensive income is recorded as a separate
component of shareholders’equity.




New Accounting
Pronouncements





In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, “Defining Fair Value
Measurement” (“SFAS 157”), which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. As such,
the Company is required to adopt these provisions at the beginning of the fiscal
year beginning October 1, 2008. The Company is currently evaluating the impact
of SFAS 157 on its consolidated financial statements.
  In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”), which permits companies to choose to measure many financial
instruments and certain other items at fair value. SFAS 159 is effective for
financial statements issued for fiscal years beginning after November 15,
2007. As such, the Company is required to adopt these provisions at the
beginning of the fiscal year beginning October 1, 2008. The Company is currently
evaluating the impact of SFAS 159 on its consolidated financial
statements.


In
December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations” (“SFAS No. 141(R)”).
SFAS No. 141(R) requires an entity to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date.  Subsequent
changes to the estimated fair value of contingent consideration will be
reflected in earnings until the contingency is settled. 
SFAS No. 141(R) also requires acquisition-related costs and
restructuring costs to be expensed as incurred rather than treated as part of
the purchase price. The adoption of SFAS No. 141(R) will change
the Company’s accounting treatment for business combinations on a prospective
basis beginning October 1, 2009.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” to improve the relevance, comparability, and
transparency of financial information provided to investors by requiring all
entities to report noncontrolling (minority) interests in subsidiaries in the
same way as required in the consolidated financial statements. Moreover, SFAS
No. 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. SFAS No. 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The Company is currently
evaluating whether the adoption of SFAS No. 160 will have a significant
effect on its consolidated financial position, results of operations or cash
flows.





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - an Amendment of FASB Statement
133.” SFAS No. 161 provides new disclosure requirements for an entity’s
derivative and hedging activities. SFAS No. 161 is effective for periods
beginning after November 15, 2008. The Company has not yet determined the
impact on its consolidated financial statements of adopting
SFAS No. 161.










F-14
 Table of Contents




In
April 2008, the FASB issued Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets” (FSP FAS 142-3). This
position amends the factors an entity should consider when developing renewal or
extension assumptions used in determining the useful life over which to amortize
the cost of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.” FSP FAS 142-3 requires an entity to consider its own
historical experience in renewing or extending similar arrangements in
determining the amortizable useful life. Additionally, this position requires
expanded disclosure regarding renewable intangible assets. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008. The guidance
for determining the useful life of a recognized intangible asset must be applied
prospectively to intangible assets acquired after the effective date. Early
adoption is prohibited. The Company expects to adopt FSP FAS 142-3 as of
October 1, 2009.




3.
Restricted Cash





The balances of restricted cash as at
September 30, 2008 and 2007 represent a deposit on a bill of exchange issued by
the Company for the purchase of materials.




4. Accounts
receivable
 
 Details of allowance for doubtful
receivables deducted from accounts receivable are as follows (dollars in
thousands):
 
 September
      30, 2008
              
              
              September
      30, 2007Accounts
      receivable
              
              $
              22,100
              
              
              $
              6,274Notes
      receivable-bank acceptance
              
              
              114Less:
      allowance for doubtful receivables
              
              
              (206
              )
              
              
              (278
              )Balance
              
              $
              22,008
              
              
              $
              5,996
 
 5.Note Subscription
Receivable
  Note subscription
receivable relates to a long-term note described in Note 15.  The
subscription was collected in October 2007.


6.
Inventories




Inventories
at September 30, 2008 and September 30, 2007 are as follows (dollars in
thousands):




September
      30, 2008
            
            
            September 30, 2007Raw
      materials
            
            $
            4,145
            
            
            $
            1,936Work
      in progress
            
            
            2,428
            
            
            
            538Finished
      goods
            
            
            721
            
            
            
            426Low
      value consumables
            
            
            9
            
            
            
            1Total
            
            $
            7,303
            
            
            $
            2,901




7.
Long-term investments





AnhuiGatherandHubeiGather
 
 On March
23, 2007, the Company and Hong Kong China New Energy Development Investment Co.,
Ltd. (“China New Energy”) organized two companies to construct and operate
natural gas processing plants – Anhui Gather Energy Company (“Anhui Gather”),
which is based in Wuhu City, and Hubei Gather Energy Gas Co., Ltd. (“Hubei
Gather”), which is located in Wuhan.
  Anhui Gather was initially owned 55% by China New Energy and 45%
by Tianjin Green Fuel.  On July 4, 2007, the Company purchased the 45%
interest from Tianjin Green Fuel for $2,750,000.Hubei Gather was initially owned 55% by the Company and 45% by
China New Energy.   The Company’s capital obligation to Hubei Gather was
$4,000,000, of which$1,375,000was paid as of September 30,
2008.
  F-15
 Table of Contents
   In July2008, the Company entered into an
agreement with China New Energy pursuant to which it exchanged a 25%
interest in Anhui Gather for a 25% interest in Hubei Gather.  As a
result of the exchange, we own an 80% interest in Hubei Gather and a 20%
interest in Anhui Gather.  Neither Hubei Gather nor Anhui Gather has
commenced business
activities.
 Hong Kong Giant Power International
Investment Ltd.
 Hong Kong Giant Power International
Investment Ltd is a holding company that, through its four subsidiaries,
specializes in investing in CNG inChina. On January 24, 2008, the Company
acquired all of the equity of Hong Kong Giant Power International
Investment Ltd.
(“HK Power”) from its shareholders, who were
unrelated to the Company. The acquisition cost was RMB64 million (equivalent to
$8,865,713 at the date of acquisition) in cash. In June 2008, the Company signed
an equity transfer agreement with anunrelated party("Greka")to sell its 100% equity interest in HK
Power for $10.68 million. As of September 30, 2008,Grekapaid all the payments. The Company
recorded a gain of $1,737,955 on the sale of its interest, which is reflected as
other income in thestatement of
operations.


8.
Property, Plant and Equipment




As of
September 30, 2008 and 2007, property, plant and equipment consist of the
following (dollars in thousands):




September 30,
      2008
              
              
              September 30,
      2007Buildings and
      facility
              
              $
              6,254
              
              
              $
              3,173Machinery
      equipment
              
              
              7,538
              
              
              
              1,501Motor
      vehicles
              
              
              838
              
              
              
              621Office equipment and
      other
              
              
              395
              
              
              
              180Total
              
              
              15,025
              
              
              
              5,475Accumulated
      depreciation
              
              
              (1,666
              )
              
              
              (966
              )13,359
              
              
              
              4,509Construction in
      process
              
              
              16,939
              
              
              
              3,879Net Book
      Value
              
              $
              30,298
              
              
              $
              8,388




9.
Intangible Assets





As of
September 30, 2008 and 2007, intangible assets consist of the following (dollars
in thousands):





September
      30, 2008
            
            
            September 30, 2007Patent
      and technology know-how
            
            $
            424
            
            
            $
            350Land
      use rights
            
            
            28,054
            
            
            
            18,856Total
            
            
            28,478
            
            
            
            19,206Accumulated
      amortization
            
            
            (887
            )
            
            
            (675
            )Net
      Book value
            
            $
            27,591
            
            
            $
            18,531




Patents
and technology know-how is being amortized over 10 years through September 2014.
Included in the cost of patent and technology know-how is $91,000, which
represents the technical know-how purchased, while $226,000 represents the
technical know-how contributed from Kangtai (minority shareholder) when Yuhan
was incorporated. An additional $42,000 represents the patent and know-how of
Jiaxing Lixun.





The land
use rights include four parcels of land purchased by the Company, which are held
by Sinogas, Jingrun, Xuancheng, Qingdao Sinoenergy and Jiaxing Lixun. The land
use rights are being amortized over the following periods for which they are
transferable and renewable:




Owner
            
            Cost
            
            ExpirationSinogas
            
            $
            20,772
            
            May
      2057Jingrun
            
            
            4,126
            
            December
      2056Xuancheng
      Sinoenergy
            
            
            874
            
            June
      2058Qingdao
      Sinoenergy
            
            
            1,914
            
            (1)Jiaxing
      Lixun
            
            
            368
            
            June
      2058Total
            
            $
            28,054







F-16
 Table of Contents




(1) The purchase price for these land use
rights has been paid in full, but the land use rights have not yet been
transferred to the Company. The Company has applied to the applicable government
agency and is awaiting government approval. The transfer will be made upon
receipt of government approval.The Company believes that the approvals
will be obtainedin fiscal
2009.




The land
use right owned by Sinogas represents two parcels of land located in the central
portion of Qingdao City, on which Sinogas and Yuhan’s offices and
manufacturing facilities are located. The land use right was purchased by the
Company from Beijing Sanhuan, a former shareholder of Sinogas, for a price of
RMB160 million, equivalent to US$23.47 million based on the current exchange
rate. The land is being amortized from May 2007 over a 50-year term. On
March 1, 2008, Sinogas entered into an agreement to sublease certain parcels of
land to Qingdao Mingcheng Real Estate Co., Ltd. (“Qingdao Mingcheng”), an
unrelated party, for a term of three years beginning in January 2008 and
expiring on December 31, 2010, for a price of RMB40 million per year, equivalent
to approximately $5.6 million per year based on the current exchange rate. The
lease also gives Qingdao Mingcheng a right of first refusal to purchase the
property at a value to be negotiated if Sinogas proposes to sell the property
during the term of the lease.





On
December 15, 2007, the Company purchased all of the equity of Jingrun, whose
sole asset is the land use right and construction in progress, for approximately
RMB60 million ($8.8 million based on the September 30, 2008 exchange rate).
The cost of the land use right paid by the Company was approximately $4.1
million based on the September 30, 2008 exchange rate.





The land
use right owned by Xuancheng was purchased by the Company from Shanghai CNPC
Enterprises Group for $874,000 based on the September 30, 2008 exchange rate.
The Company has paid the purchase price, and obtained the title deed for the
land.





On
January 4, 2008, the Company purchased all of the equity of Qingdao Shan Yang
Tai Chemistry Resources Development Co., Ltd. (“QDSY”), whose sole asset is the
land use right and construction in progress, for approximately RMB43
million. The cost of the land use right paid by the Company was approximately
$1.9 million based on the September 30, 2008 exchange rate.





In June
2008, Jiaxing Lixun acquired a land use right for $368,000, which will be used
for construction of a new plant.





10.
Goodwill





The
amount of goodwill in the consolidated financial statements at September 30,
2008 and 2007 is as follows (dollars in thousands):





Transactions
            
            September
      30, 2008
            
            
            September 30, 2007Purchase
      of an additional 45% (2007:35%)interest in Yuhan
            
            $
            995
            
            
            $
            676Purchase
      of 90% (2007:60%)equity in Jiaxing Lixun
            
            
            619
            
            
            
            53Purchase
      of a 70% equity in Xuancheng Sinoenergy
            
            
            258
            
            
            
            —Purchase
      of Jingrun
            
            
            34Total
            
            $
            1,906
            
            
            $
            729





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.
The consolidated balance sheet reflects goodwill of $995,000, which represents the excess of the
purchase price for45% of Yuhan’s equityover45% of Yuhan’s tangible assets at date of
acquisition. In January 2008, the Company paid the remainder of the purchase
price. As of September 30,
2008, the Company’s financial statements reflect a75% ownership of Yuhan bySinogasanda 25% ownership by
Sinoenergy.





F-17
 Table of Contents




In March 2007, the Company purchased a
60% interest in Jiaxing
Lixun Automotive from its shareholders, for a total cash payment of
$310,310. The consolidated balance sheet at September 30, 2007 reflects goodwill
of $52,385, which represents the excess of the purchase price over the
tangible assets of Lixun at the date of acquisition. In July
2007, the shareholders provided a further contribution to capital of $700,000
which increased the Company’s interest to 70%. In May 2008, the
Company purchased the remaining 30% interest with a total cash payment of$1,152,000, including goodwill of $566,000. As of September 30, 2008, the
Company’s financial statements reflect a 75%
ownership of Lixun by Sinogas and a 25% ownership by
Sinoenergy.
 
 Xuancheng Sinoenergy was established on
March 26, 2007. Upon incorporation, Shanghai CNPC owned a 70%
interest and Sinogas owned a 30% interest. On November 6, 2007, the Company
purchased the 70% equity interest owned by Shanghai CNPC for $1,807,000. The consolidated balance sheet as
of September 30, 2008 reflectsgoodwill of $258,000, which represents
the excess of the purchase price over the tangible assets of Xuancheng
at the date of acquisition.


The
Company monitors the impairment of goodwill at least annually. As of September
30, 2008, there were no indications that the carrying amount of the goodwill was
impaired.




11.Other long-term
assets
 
 The amount of other long-term assets in
the consolidated financial statements at September 30, 2008(dollars in
thousands)consists primarily of the
following:
 (1) $3,715,159prepayments for CNG station
equipment from overseas.
This equipment will be used to construct CNG filling stations as long-term fixed
assets
 
 (2)$1,021,046due from the customersrelatedto thedeferred income.
 
 (3) $1,302,509prepayments for the CNG land
rental.
 
 The amount of other long-term
assets in the consolidated
financial statements at September 30, 2007(dollars in thousands)consists primarily of the
following:
 (1) $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
 
 (2)$4,087,175 prepayment for acquisition of
100% of the equity of Jingrun;
 
 (3)$732,278 prepayment to Shanghai CNPC
Enterprises for 70% equity purchase of Xuancheng Sinoenergy Vehicle Gas
Company;




12.
Short Term Bank Loan





The
following table summarizes the contractual short-term borrowings between the
banks and the Company as of September 30, 2008 (dollars in
thousands):





Bank
      Name
            Purpose
            Borrowing
      Date
            Borrowing
      Term
            
            Annual
      Interest Rate
            
            
            AmountBank
      of Communication *
            Working
      Capital
            August
      5, 2008
            Six
      months
            
            
            5.04
            %
            
            $
            5,866Bank
      of Communication **
            Working
      Capital
            September
      5, 2008
            One
      year
            
            
            5.58
            %
            
            
            5,866Bank
      of Communication
            Working
      Capital
            July
      17, 2008
            One
      year
            
            
            7.326
            %
            
            
            221Total
            
            
            
            
            
            
            
            
            $
            11,953





The interest rates, which are subject to
adjustment by the banksdetermined by the Chinesegovernmenteconomicdevelopmentpolicy, reflect the interest rate in effect on
September 30, 2008.


* 6 month
interest rate


** 6-12
month interest rate




F-18
 Table of Contents




The
following table summarizes the contractual short-term borrowings between the
banks and the Company as of September 30, 2007 (dollars in
thousands):
  Bank Name
              Purpose
              Borrowing Date
              Maturity date
              
              Annual
                Interest
                Rate
              
              
              AmountShenzhen
      Development Bank
              Working
      Capital
              November
      27,2006
              November
      27, 2007
              
              
              5.58
              %
              
              $
              863CITIC
      Bank
              Working
      Capital
              March
      29, 2007
              March
      29, 2008
              
              
              7.02
              %
              
              
              666Bank
      of Communication
              Working
      Capital
              April
      30-2007
              April
      30, 2008
              
              
              6.39
              %
              
              
              2,662Bank
      of Communication
              
              August
      14, 2007
              August
      14, 2008
              
              
              7.29
              %
              
              
              5,326Bank
      of Communication
              Working
      Capital
              September
      9, 2007
              September
      9,2008
              
              
              7.29
              %
              
              
              5,326Total
              
              
              
              
              
              
              
              
              $
              14,843


13.
Advances from Customers





Advances
from customers at September 30, 2008 and 2007 consist of advances received for
routine sales orders according to the Company’s sales policy.





14.
Income Taxes Payable





The
Company pays income taxes in a number of jurisdictions.  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. Beginning January 1, 2008, the Company’s PRC
subsidiaries are generally subject to enterprise income tax at a statutory rate
of 25%.





As PRC
subsidiaries that qualify as wholly foreign owned manufacturing enterprises,
Sinogas, Yuhan and Jiaxing Lixun were granted tax preferences. Sinogas and Yuhan
was granted a 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 was granted a 100% tax
exemption from August 2007 through 2008 and a 50% enterprise
income tax exemption for the following three calendar years (2009 through
2011).




Under the
current tax laws of the PRC, the Company’s other PRC subsidiaries, Wuhan
Sinoenergy and, Pingdingshan Sinoenergy will each be entitled to a two-year 100%
tax exemption followed by three years of a 50% tax exemption
once they become profitable.





No provision for other overseas tax is
made as Sinoenergy Holding Limited, which is an investment holding company, and
has no taxable income in
the British Virgin Islands.





The
reconciliation between the income tax computed at the United States statutory
tax rate and the Company’s provision for income tax is as follows:




Year
      Ended
              September
      30, 2008
            
            Nine Months
      Ended
              September 30, 2007U.S.
      statutory rate
            
            
            34
            %
            34
            %Foreign
      income not recognized in the U.S.
            
            
            (34
            )%
            (34
            )%PRC
      Enterprise Income Tax
            
            
            25
            %
            33
            %Tax
      holiday granted to the subsidiaries in PRC
            
            
            (20
            )%
            (28
            )%Effective
      tax rate
            
            
            5
            %
            5
            %




F-19
 Table of Contents






At
September 30, 2008 and 2007, our deferred tax assets and liabilities are
comprised of the following items:




2008
              
              
              2007Deferred tax assets,
      currentAccrued expenses and accounts
      receivable
              
              $
              -
              
              
              $
              -Net operating loss carryforwards
      and otherTotal deferred tax assets,
      current
              
              
              -
              
              
              
              -Deferred tax assets,
      non-current
              
              
              
              
              
              
              -Accrued expenses and accounts
      receivable
              
              
              529
              
              
              
              4Net operating loss carryforwards
      and other
              
              
              609
              
              
              
              -Valuation
      allowance
              
              
              (1,125
              )
              
              
              -Total deferred tax assets,
      non-current
              
              $
              13
              
              
              $
              4Deferred tax liabilities,
      non-current
              
              
              
              
              
              
              -Convertible
      debt
              
              $
              1,095
              
              
              $
              -




AtSeptember 30, 2008, we had Federal net operating loss
(NOL) carryforwards of approximately $1.4 million availableto offset future regular and alternative
minimum taxable income. The Federal NOL carryforwards will begin to expire in
2027.The
Company has fully reserved the deferred tax asset related to the NOL benefit due
to the uncertainty that it will be realized.


The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109” (“FIN 48”), on October 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB Statement 109,
“Accounting for Income Taxes”, and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.





Based on our evaluation, we have
concluded that there are no significant uncertain tax positions requiring
recognition in our financial statements. Our evaluation was performed for the
tax years ended December
31, 2007 and 2006, the tax years, which remain subject to examination by the tax
authorities in the PRC as ofDecember 31, 2008.


F-20
 Table of Contents




15.  Long
term notes payable





On
September 1, 2007, the Company entered into a note purchase agreement (the “Note
Purchase Agreement”) pursuant to which two investors agreed to purchase 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. The convertible notes were initially
convertible into common stock at an initial conversion price of $6.34 per share,
which represented a 25% premium of the 30 trading days volume weighted average
price ending August 31, 2007. The conversion price has been reduced to $5.125 as
described below.





The
closing pursuant to the Note Purchase Agreement occurred on September 28, 2007,
and the Company received the net proceeds from the financing on October 8, 2007.
In addition, the Company’s chief executive officer and its chairman, both of
whom are directors, executed non-competition agreements with the
Company.




The
Company paid the investors an arrangement fee of $160,000, which was deducted
from the proceeds payable to the Company.




The
convertible notes were issued pursuant to an indenture between the Company and
DB Trustees (Hong Kong) Limited, as trustee. The convertible notes are due in
September 2012 and bear interest at the stated interest rate of 3% per annum.
Although the stated interest rate is 3% per annum, if the convertible notes are
not redeemed or converted or purchased and cancelled by the maturity date, the
Company is required to redeem the convertible notes at the 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. As a result, the Company is accruing
interest at the rate of 13.8% per annum. Since the Company is only required to
pay interest currently at the interest rate of 3%, the remaining 10.8% interest
rate is accrued and treated as deferred interest payable (cumulative balance of
$420,000 as of September 30, 2008). If the convertible notes are converted, the
deferred interest payable will be credited to additional paid in
capital.





The
convertible note indenture requires the Company to offer to purchase the Notes
at a price which would generate a 13.8% yield if either of the following events
shall occur:




•
              The
      occurrence at any time after the Company’s common stock is listed on the
      Nasdaq Stock Market of any event in connection with which all or
      substantially all of the Company’s common stock is exchanged for,
      converted into, acquired for or constitutes solely the right to receive,
      consideration which is not all or substantially all common stock or other
      equity securities listed on the Nasdaq Stock Market or any similar United
      States system of automated dissemination of quotations of securities
      prices.•
              At
      any time after the Company’s common stock is listed on the Nasdaq Stock
      Exchange, the common stock is neither listed for trading on a United
      States national or regional securities exchange or the Nasdaq Stock
      Market.•
              Trading
      in the Company’s common stock on any exchange or market has been suspended
      for ten or more consecutive trading
days.
  F-21
 Table of Contents
  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 September 30, 2008, the Company
      had obtained the required listing.•
              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. As of September 30, 2008, the Company had accrued additional
      interest of $420,000 pursuant to this
  provision.
  At
September 30, 2008, the holders of the Notes have the right to convert their
Notes into common stock at a conversion price of $5.125 per share, reflecting a
reduction in the conversion price pursuant to a supplemental indenture dated as
of June 23, 2008. 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 to our
      stockholders;•
              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, subject to limitations
      provided in the investor rights agreement; 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 $4.20 per share; and•
              An adjustment based on the
      Company’s failure to have consolidated net
      income, as defined in
      the indenture, of $7.5 million for 2007, $14.0 million for 2008 and $22.5
      million for 2009, or the equivalent in RMB. The investors have waived the
      right to any adjustment based on 2007 net income, in consideration for which the
      Company’s principal stockholder, which is owned
      by the chief executive officer and the chairmanof the board by December 1,
      2008.  As of December 19, 2008, the principal stockholder was in
      default of this obligation.




If the
Company’s consolidated net income does not reach the stated level for 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,
shall be 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
conversion rate was 15,773 shares of common stock for each $100,000 principal
amount of convertible notes.  At September 30, 2008, the conversion
rate was 19,512 shares 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
(iv) 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 issued and
outstanding common stock immediately prior to such issuance or
grants.




F-22
 Table of Contents




The
investors have waived the right to an adjustment in the conversion rate for
2007. The following table sets forth a computation of the resulting conversion
price if (a) the target levels are not met for both 2008 and 2009, (b) the
number of fully diluted shares of common stock (other than shares issuable upon
conversion of the convertible notes) through the end of 2009, 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.




Year
            Conversion Rate
              Beginning of
              Year*
            
            Conversion Price
              Beginning of
              Year
            
            Conversion Rate
              As Adjusted
            
            Conversion Price
              As Adjusted2008
            19,512
            
            $
            5.125
            
            24,021
            
            $
            4.1632009
            24,021
            
            $
            4.163
            
            28,665
            
            $
            3.489





* The
conversion rate at the beginning of the year has been adjusted to reflect the
adjustment made pursuant to the indenture as supplemented by a supplemental
indenture dated as of June 23, 2008.





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 Company has complied with this
requirement.





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




Commencing
September 28, 2008, the Company may redeem the senior notes at 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
            %




F-23
 Table of Contents




The
indentures for both the convertible notes and the senior notes have certain
covenants, including the following:




•
              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
      at the principal amount plus accrued interest..•
              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.•
              The
      Company is restricted from incurring additional 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 Need to define this.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 is subject to restriction in paying dividends, purchasing its own
      securities or those of its subsidiaries, prepaying subordinated debt, and
      making any investment other than any investments in itself and its
      subsidiaries engaged in the Company’s business and certain other permitted
      investments.•
              The
      Company is subject to restrictions on incurring liens.•
              The
      Company cannot enter into, or permit its subsidiaries to enter into,
      transactions with affiliates unless it is in writing, in the Company’s
      best interest and not less favorable to the Company than it could obtain
      from a non-affiliate in an arms’ length transaction, with any transaction
      involving more than $1,000,000 requiring audit committee approval and any
      transaction involving more than $5,000,000 requiring a written opinion
      from an independent financial advisor.•
              The
      Company shall 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. The
      Company was in compliance with such debt covenants at September 30,
      2008.•
              The
      Company shall make all payments of principal, interest and premium, if
      any, without withholding or deduction for taxes, and must offer to
      repurchase the notes if they are adversely affected by changes in tax laws
      that affect the payments to the
holders.
  The
indentures provide for an event of default in the event that the Company fails
to comply with its obligations under the indentures and certain events of
bankruptcy or similar relief.
  The
Company’s obligations are guaranteed by its subsidiaries and are secured by a
charge on the stock of Sinoenergy Holding.
  F-24
 Table of Contents
  The
Company also entered into an investor rights agreement, as clarified, 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 Company has complied with this condition.•
              The
      investors have a right of first refusal on future financings by us 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.




The
investor rights agreement, as clarified, also provides that (i) the Company will
not sell shares of its common stock or grant options or warrants or issue
convertible securities with an exercise or conversion price that is less than
$0.80 per share, (ii) the minimum conversion price for the convertible debenture
would be $0.80 per share, (iii) the holders of the convertible notes may call an
event of default if the Company breaches its covenant not to issue shares at a
price which is less than $0.40 per share. If the Company increases its
authorized common stock, the conversion price would decrease to an amount not
less than $0.05 per share. The Company and the investors agreed to use their
commercially reasonable efforts to modify the indenture for the convertible
notes to reflect these provisions of the investor rights agreement.





Management
reviewed the accounting for these transactions and concluded that the conversion
option did not constitute an embedded derivative under SFAS No. 133, as the
Company has sufficient authorized but unissued shares to meet its maximum share
obligations upon conversion, including any reductions in the conversion price.
However, the transaction includes a beneficial conversion feature pursuant to
EITF 98-5 and 00-27, and the total beneficial conversion feature of $176,656 was
charged to additional paid in capital and is being amortized over the life of
the notes commencing October 1, 2007.





As a
result of the reduction in the conversion price from $6.34 to $5.125, which
caused the Company to recorded an additional beneficial conversion feature of
$3,360,905 as a discount to the notes and additional paid in capital, which is
being amortized as interest expense over the remaining term of the notes
commencing April 1, 2008.





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 Company’s total outstanding equity on a fully-diluted
basis.




F-25
 Table of Contents




From the
closing date and as long as long as Abax continues to hold more than 5% of the
outstanding shares of common 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 the 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 he or she 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.




The
Company is required to prepare and file a registration statement covering the
sales of all of the shares of common stock issuable upon conversion of the
convertible notes, subject to any limitation required by applicable? of Rule 415
of the SEC pursuant to the Securities Act of 1933 and to have the registration
statement declared effective by March 28, 2008. In the event that the
registration statement has not been declared effective by the SEC on or before
March 28, 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, the Company is required
to pay additional interest at the rate of one percent 1% of the convertible
notes, as described above. As of September 30, 2008, the common stock issuable
upon conversion of the notes had not been registered under the Securities
Act of 1933, as amended.





The
Company has accounted for registration rights liquidated damages in accordance
with EITF 00-19-2, “Accounting for Registration Payment Arrangements”, and SFAS
No. 5, “Accounting for Contingencies”.  Accordingly, the Company recorded
$420,000 as an estimate of liquidated damages payable under registration rights
agreements for the year ended September 30, 2008. The Company will review and
adjust this accrual at each subsequent period end.





A
reconciliation of the original principal amount of the 12% senior notes to the
amounts shown on the balance sheet at September 30, 2008 and September 30, 2007
is as follows (amounts in thousands):





Original
      amount
            
            $
            16,000Note
      discount
            
            
            (378
            )Balance,
      September 30, 2007
            
            
            15,622Accrual
      of interest
            
            
            1,930Amortization
      of beneficial conversion feature
            
            
            76Interest
      paid
            
            
            (970
            )Balance,
      September 30, 2008
            
            $
            16,658





A
reconciliation of the original principal amount of the 3% senior convertible
notes to the amounts shown on the balance sheet at September 30, 2008 and 2007
is as follows (amounts in thousands):





Original
      amount
            
            $
            14,000Beneficial
      conversion feature
            
            
            (177
            )Balance,
      September 30, 2007
            
            
            13,823Amortization
      of beneficial conversion feature
            
            
            35Interest
      paid
            
            
            (211
            )Interest
      accrued for guaranteed 13.8% return
            
            
            1,934Discount
      resulting from reset adjustment effective March 28, 2008
            
            
            (3,361
            )Amortization
      of discount resulting from reset
            
            
            373Balance,
      September 30, 2008
            
            $
            12,593






F-26
 Table of Contents









16.
            Related
      Party Relationships and
Transactions




The
related parties with which the Company had transactions in the year ended
September 30, 2008 and nine months ended September 30, 2007, 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
      Beijing Sanhuan is the Company’s CEO before July 2007.Qingdao
      Kangtai Machinery Equipment Manufacture Co. Limited
    (Kangtai)
            
            Minority
      shareholder of a subsidiary (Yuhan) from May 2005Xuancheng
      Sinoenegy Vehicle Gas Company
            
            30%
      equity owner as at September 30, 2007Mr.
      Guiqiang Shi
            
            Shareholder
      of KangtaiMr.
      Tianzhou Deng
            
            Chairman
      of the CompanyChina
      New Energy
            
            The
      minority shareholder of a subsidiary (Hubei
  Gather)




Significant
transactions between the Company and its related parties during the year ended
September 30, 2008 and nine months ended September 30, 2007 are as
follows:





(1) Sales
and purchase transactions with related parties





Name
      of the Company
            
            Year
      ended
              September
      30, 2008
            
            For
      the nine months ended
              September
      30, 2007Beijing
      Sanhuan
            
            -None
            
            -
      providing CNG station technology know-how license
  $170,000




(2) Related
party receivables





Name
      of the Company
            
            September
      30, 2008
            
            September
      30, 2007Kangtai
            
            -None
            
            -$186,431
      inter-company loan
              -$169,030
      sales receivable on behalf of the Company
              -$145,595
      rental fee receivablesChina
      New Energy
            
            $
            500,000
            
            Current
      account





(3) Related
party payables





Name
      of the Company
            
            September
      30, 2008
            
            September
      30, 2007Beijing
      Sanhuan
            
            -None
            
            -$3,235,671
      payables to Beijing Sanhuan for balance of the purchase price of the land
      use right
              -$67,000
      for use of know-how for CNG station system integrationKangtai
            
            -None
            
            -$310,664
      unpaid balance for 35% equity purchase of YuhanXuancheng
      Sinoenergy
            
            -None
            
            -$44,895
      current accountMr.Tianzhou
      Deng
            
            -None
            
            -$19,128
      current accountMr.
      Guiqiang Shi
            
            -None
            
            -$1,331
      current account





F-27
 Table of Contents








17.
Segment Information





Operating
segments are defined by SFAS No.131, “Disclosure about Segments of an Enterprise
and Related Information,” as components of an enterprise about which separate
financial information is available that is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance.




As all
businesses of the Company are carried out in the PRC, the Company is deemed to
operate in one geographical area.




In
September 30, 2007, we changed our fiscal year from a calendar year to a year
ending on September 30, commencing with the year ending September 30,
2008.  As a result, we are comparing the results of operations for the
year ended September 30, 2008 with the nine-month transitional period ending
September 30, 2007.  As a result, in each category of the statements
of operations, we will be comparing a twelve-month period with a nine-month
period.




The
information set forth below has been derived from our audited financial
statements for the year ended September 30, 2008, and nine-month transitional
period ended September 30, 2007.




Year
      Ended September 30, 2008
            
            Customized
              pressure
              containers
            
            CNG
      station
              facilities
      and construction
            
            CNG
      station
              Operation
            
            Vehicle
              conversion
              kits
            
            TotalNet
      revenue
            
            $
            9,692
            
            $
            16,237
            
            
            3,246
            
            $
            11,765
            
            $
            40,940Cost
      of revenues
            
            
            5,375
            
            
            9,470
            
            
            2,551
            
            
            8,194
            
            
            25,589Gross
      profit
            
            
            4,318
            
            
            6,77
            
            
            695
            
            
            3,571
            
            
            15,351Gross
      margin
            
            
            45%
            
            
            42%
            
            
            21%
            
            
            30%
            
            
            37%Operating
      expenses:Selling
      expenses
            
            $
            275
            
            $
            53
            
            $
            150
            
            $
            404
            
            $
            881General
      and administrative expenses
            
            
            942
            
            
            1,591
            
            
            1,533
            
            
            822
            
            
            4,889Total
      operating expense
            
            
            1,217
            
            
            1,644
            
            
            1,683
            
            
            1,226
            
            
            5,770Income
      (loss) from operations
            
            $
            3,100
            
            $
            5,124
            
            
            (988)
            
            $
            2,345
            
            $
            9,581Total
      assets
            
            $
            41,075
            
            $
            45,441
            
            $
            28,654
            
            $
            17,177
            
            $
            132,347





F-28
 Table of Contents





Nine months ended September 30,
      2007
            
            Customized
              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
            
            $
            4,270Total
      assets
            
            $
            21,792
            
            $
            33,827
            
            $
            10,979
            
            $
            22,468
            
            $
            89,066





18.
Capital Stock





As of
September 30, 2008, the Company had the following shares of common stock
reserved for issuance:




•
            555,359
      shares issuable upon exercise of the warrants issued in the June 2006
      private placement and issued for services of investment relations
      company;•
            2,731,707
      shares issuable upon conversion of 3% senior guaranteed convertible
      notes;•
            1,000,000
      shares issuable upon exercise of stock options or other equity-based
      incentives pursuant to the Company’s 2006 long-term incentive
      plan.





Number
      of shares issuable on exercise of warrants$1.70
      Warrants
            
            $2.40
      Warrants
            
            $4.20
      Warrants
            
            $8.00
      Warrants
            
            TotalBalance
      at December 31, 2006
            
            
            3,171,429
            
            
            3,171,429
            
            
            -
            
            
            -
            
            
            6,342,858Issued
      during the period
            
            
            -
            
            
            -
            
            
            75,000
            
            
            -
            
            
            75,000Exercised
      in the nine months
            
            
            (2,828,572
            )
            
            (2,716,071
            )
            
            -
            
            
            -
            
            
            (5,544,643
            )Balance
      at September 30, 2007
            
            
            342,857
            
            
            455,358
            
            
            75,000
            
            
            -
            
            
            873,215Issued
      during the period
            
            
            -
            
            
            -
            
            
            -
            
            
            25,000
            
            
            25,000Exercised
      during the period
            
            
            (257,142
            )
            
            (85,714
            )
            
            -
            
            
            -
            
            
            (342,856
            )Balance
      at September 30, 2008
            
            
            85,715
            
            
            369,644
            
            
            75,000
            
            
            25,000
            
            
            555,359





F-29
 Table of Contents




As at September 30, 2008, the average exercise price for the
above mentioned warrants is $2.79. None of the outstanding warrants are subject
to reset provisions other than as a result of a stock distribution, split or
dividend, a reverse split or combination of shares or otherrecapitalization, and, in the case of the warrants topurchase455,360 shares of common stock issued in
the June 2006 private placement,sales of common stock at prices below
the exercise price.


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
15,000 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 2,500 shares of common stock on the 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 60,000 shares of common stock at $1.30 per share,
being the fair market value on the date of grant. The options become exercisable
cumulatively as to fifty percent (50%) of the shares subject thereto six months
from the date of grant and as to the remaining fifty percent (50%), eighteen
months from the date of grant, and expire on the earlier of (i) five years from
the date of grant, or (ii) seven (7) months from the date such independent
director ceases to be a director if such independent director ceases to be a
director other than as a result of his death or disability.





Pursuant
to the 2006 long-term incentive plan, each independent director is to be
granted an option to purchase 2,500 shares of common stock on
the first trading day in April of each calendar year at market price. On
April 1, 2007, the four independent directors were granted stock options to
purchase a total of 10,000 shares of common stock at an exercise price of $4.06
per share, being the fair market value on the date of grant.  On April
1, 2008, the four independent directors were granted stock options to purchase a
total of 10,000 shares of common stock at an exercise price of $5.80 per share,
being the fair market value on the date of grant. The options become exercisable
cumulatively as to fifty percent (50%) of the shares subject thereto six months
from the date of grant and as to the remaining fifty percent (50%), eighteen
months from the date of grant, and expire on the earlier of (i) five years from
the date of grant, or (ii) seven (7) months from the date such independent
director ceases to be a director if such independent director ceases to be a
director other than as a result of his death or disability.





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 590,000 shares of common stock at $4.00 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.





On
January 9, 2008, 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 60,000 shares of common stock at $8.20
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 January 9, 2009 and as to
the remaining 50% on January 9, 2010.





On March
10, 2008, 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 40,000 shares of common stock at $6.20 per share,
being the fair market value on the date of grant. The options vest as to 42% of
the underlying shares of common stock on December 31, 2008, 50% on December 31,
2009 and as to the remaining 8% on March 9, 2010.





F-30
 Table of Contents




On June
1, 2008, pursuant to 2006 long-term incentive plan, the stock option committee
of the board of directors granted five year options to the former CFO to acquire
75,000 shares of common stock at $5.72 per share, being the fair market value on
the date of grant. On October 18, 2008, the CFO resigned from the Company and
the option was cancelled.




Shares subject
                to options
              
              
              Weighted
                Averageexercise price
      scope
              
              
              Remaining Contractual
                life(years)Options outstanding at December
      31, 2006
              
              
              60,000
              
              
              $
              1.30
              
              
              
              3.75Options granted during the
      period
              
              
              600,000
              
              
              $
              4.00-4.06
              
              
              
              4.5Options outstanding at September
      30, 2007
              
              
              660,000
              
              
              $
              3.76
              
              
              
              4.43Options granted during the
      period
              
              
              185,000
              
              
              $
              4.39-8.20
              
              
              
              2.67-4.50Options outstanding at September
      30, 2008
              
              
              845,000
              
              
              $
              4.39
              
              
              
              4.26Options exercisable atSeptember 30,
      2008
              
              
              360,000
              
              
              $
              3.55
              
              
              
              4.26




The fair
value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the assumptions shown in the
following table:




Stock
      Options Granted OnGrant
      Date
              
              June
      1, 2008
              
              April
      1, 2008
              
              March
      10, 2008
              
              January
      9,  2008
              
              April
      9, 2007
              
              April
      1, 2007
              
              June
      2, 2006Expected
      volatility
              
              
              46.1
              %
              
              46.1
              %
              
              68.32
              %
              
              80.06
              %
              
              26.39
              %
              
              35.16
              %
              
              50
              %Risk-free
      rate
              
              
              2.93
              %
              
              2.93
              %
              
              4.64
              %
              
              4.64
              %
              
              4.64
              %
              
              4.64
              %
              
              4.64
              %Expected
      term (years)
              
              
              3
              
              
              5
              
              
              5
              
              
              5
              
              
              5
              
              
              5
              
              
              3Dividend
      yield
              
              
              0
              %
              
              0
              %
              
              0
              %
              
              0
              %
              
              0
              %
              
              0
              %
              
              0
              %Fair
      value per share
              
              $
              1.94
              
              $
              2.54
              
              $
              3.56
              
              $
              5.16
              
              $
              1.24
              
              $
              1.2
              
              $
              0.5




The fair
value of stock options during the year ended September 30, 2008 and nine months
ended September 30, 2007 was $435,907 and $328,134, respectively, which was
charged to operations as general and administrative expense.




19.  Basic
and Diluted Earnings Per Share
 
 Earnings per share is calculated in
accordance with the Statement of Financial Accounting Standards No. 128
(“SFAS No. 128”), “Earnings per share.”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 thatall dilutive convertible
shares,stock optionsand warrantswere 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-31
 Table of Contents







The
details for the fully diluted outstanding shares for the year ended September
30, 2008 and nine months ended September 30, 2007 is as follows:




Year ended
                September 30,
      2008
              
              Nine months
                ended September 30,
  2007Weighted average common stock
      outstanding during period*
              
              15,720,681
              
              12,775,783Common stock issuable upon
      conversion of series A preferred stock
              
              -
              
              7,307Common stock issuable pursuant to
      warrants
              
              328,949
              
              456,835Common stock issuable upon transfer of
      convertible notes
              
              2,731,707
              
              16,177Common stock issuable upon
      exercise of options outstanding during the
    period
              
              295,589
              
              107,812Total diluted outstanding
      shares
              
              19,076,926
              
              13,363,914




*The common stock as of September 30, 2008 is
15,942,336 and the weighted
average common stock outstanding during the year ended September 30,
2008is 15,720,681,the difference represented
that two warrants holders exercised their warrants in September 9 and
September 17,
2008.
 
 For the purpose of computing
EPSfor the year ended
September 30,
2008, earnings are as
follows:
 
 Year ended
                September 30,
      2008Net income
              
              $
              16,056Add back interest on convertible
      notes
              
              
              2,555Net incomeattributabletocommon
      shareholders
              
              $
              18,611


20.
Commitments and Contingencies




The
Company has the following material contractual obligations and capital
expenditure commitments:




The
Company and Hong Kong China New Energy Development Investment Co. Ltd (“New
Energy”) formed Hubei Gather Energy Gas Co., Ltd (“Hubei Gather”) to construct
and operate natural gas processing plants with expected annual processing
capacity of 100-300 million cubic meters in Hubei Province. The registered
capital is $5 million of which the Company will contribute $4 million as 80%
equity owner and New Energy will contribute $1 million for a 20% interest. The
term of the business of Hubei Gather is from March 23, 2007 to March 22, 2027.
As of September 30, 2008, our commitment for future funding was
$2,625,000.




Wuhan
Sinoenergy and Pingdingshan Sinoengery, the subsidiary of the Company, has
leased 12parcels of land in Wuhan City and Pingdingshan City for its CNG
stations under operating lease agreements. The lease terms are from 8 year to 30
years with annual rental fees of approximately $462,608.





F-32
 Table of Contents




For theconstructionof new factory in Jingrun, the Company
has signed contracts to pay the contractor $878,078.FortheCNG construction,the Company has signed contracts to pay
the contractor $546,735 for theconstructionprojects and $3,106,079 for theequipmentused intheCNG station.


21.
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 $346,774 and $79,979 for the year ended September
30, 2008 and the nine months ended September 30, 2007, 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 then accrue welfare benefits. So based
on the common practicein
the PRC, the Company treats
those workers as probationers, and doesnot accrue welfare benefits for them.
Although the Company believes the common treatment is acceptable under these
circumstances, thereexistsa possibility that the government may
require the Company to accrue the welfare benefit and may assess a
penalty for the under
accrual.





22.
 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.





In the year ended September 30, 2008 and
the nine months ended September 30, 2007, two customers accounted for more than
10% of consolidated
sales.  These customers accounted for approximately 10.4% and 21.6% of
consolidated sales, respectively, for the year ended September 30, 2008 and
24.3% and 13.1% of consolidated sales for the nine months ended September 30,
2007. As at September 30, 2008 and September 30, 2007,
approximately19.4% and43.6% respectively of accounts receivable
were from these customers.


23.
Subsequent Events





(1) On October 31, 2008, in
order to provide for a
supply of raw materials, Sinogas signed a joint venture agreement with LuXi
Chemical Group, a Chinese chemical company, to set up a company located in
Liaocheng City, Shandong province, to set up a company with proposed annual
productioncapacity of 4,000 steel bottles used in
CNG trailermanufacturing. The total
registered capital is RMB 50 million (equivalent to $7.33 million based on the
exchange rate on October 31, 2008) of which Sinogas has a 40% interest and will
contribute 40% tothis
enterprise. As of December 10, 2008, this enterprise has almost finished its
plant, and will put it into operation in the middle of the year ending September
30, 2009.





(2) On March 6, 2008,Skywide,owned by Mr Tianzhou Deng, the chairman
of the BOD and Mr Bo Huang, the CEO of the company, entered into agreement,
where ABAX and CCIF agreed to execute a waiver to forbear from adjusting the
Conversion Rate (as set forth in the Indenture) uponthe occurrence of a Financial and
Operation Trigger resulting from the Company’s annual audit for the twelve-month
period ending December 27, 2007 (the “Waiver”). In exchange for executing the waiver,
Skywide agreement to pay ABAX and CCIF the sum of $400,000 and $200,000 respectively. And ABAX
and CCIF executed the Waiver on March 6, 2008 and expected to receive payments
no later than December 1, 2008. Up to December 19, 2008, Skywide is negotiating
with ABAX and CCIF on the detailed payment issue.




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 Table of Contents