U.S. Securities and Exchange Commission

Washington, DC 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED

March 31, 2009

Commission File Number: 1-34131

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 Number)

1603-1604, Tower B Fortune Centre Ao City

Beiyuan Road, Chaoyang District,

Beijing, People’s Republic of China 100107

(Address of principal executive offices)

Issuer’s telephone number, including area code: 86-10-84928149

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

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 the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No 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	o	Accelerated filer	o
Non-accelerated filer (Do not check if smaller reporting company)	o	Smaller reporting company	x

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

As of May 12, 2009, the Registrant had 15,942,336 shares of common stock, par value $0.001 per share, issued and outstanding. 

SINOENERGY CORPORATION AND SUBSIDIARIES

	Page
Part I. Financial Information		1
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and September 30, 2008		1
Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2009 and 2008 (Unaudited)		2
Consolidated Statements of Operations and Comprehensive Income for the Six Months Ended March 31, 2009 and 2008 (Unaudited)		3
Consolidated Statement of Stockholders’ Equity for the Six Months Ended March 31, 2009 (Unaudited)		4
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2009and 2008 (Unaudited)		5
Notes to Consolidated Financial Statements for the Three and Six Months Ended March 31, 2009 and 2008 (Unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 4. Controls and Procedures		33
Part II. Other Information
Item 6. Exhibits		34
Signatures

i

Sinoenergy Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share information)

	March 31, 2009 (unaudited)		September 30, 2008
ASSETS
CURRENT ASSETS
Cash	$	4,884	$	8,871
Restricted cash		878		523
Accounts and notes receivable, net		30,206		22,008
Other receivables, net		9,953		16,983
Deposits and prepayments		9,817		7,918
Inventories		3,800		7,303
Deferred expenses		61		91
TOTAL CURRENT ASSETS		59,599		63,697
Long-term investments		2,995		1,568
Property, plant and equipment, net		39,634		30,298
Intangible assets		29,096		27,591
Due from related party		425		383
Other long term asset		7,320		6,891
Goodwill		1,906		1,906
Deferred tax asset		16		13
TOTAL NON-CURRENT ASSETS		81,392		68,650
TOTAL ASSETS	$	140,991	$	132,347
CURRENT LIABILITIES
Short-term bank loan	$	22,133	$	11,953
Other notes payable		2,926		1,633
Accounts payable		4,499		5,894
Advances from customers		1,940		2,409
Additional interest payable under convertible note indenture		280		420
Income taxes payable		831		633
Other payables		2,302		5,341
Accrued expenses		199		335
Deferred income		64		95
TOTAL CURRENT LIABILITIES		35,174		28,713
3% senior convertible notes		10,128		12,593
12% senior notes		16,669		16,658
Long-term loans		4,389		3,667
Deferred tax liabilities		744		1,095
TOTAL LIABILITIES		67,104		62,726
Minority interests		15,315		14,394
Commitments
SHAREHOLDERS’ EQUITY
Common stock- par value $0.001 per share; Authorized - 50,000,000 shares; Issued and outstanding- 15,942,336 shares at March 31, 2009 and September 30, 2008		16		16
Additional paid-in capital		34,415		30,396
Retained earnings		18,816		19,953
Accumulated other comprehensive income		5,325		4,862
TOTAL SHAREHOLDERS’ EQUITY		58,572		55,227
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	140,991	$	132,347

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

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Sinoenergy Corporation and Subsidiaries

Consolidated Statements of Income and Comprehensive Income (Unaudited)

(In thousands, except per share information)

	Three Months Ended March 31,
	2009			2008
NET SALES	$	6,971		$	7,734
COST OF SALES		(5,495	)		(4,011	)
GROSS PROFIT		1,476			3,723
OPERATING EXPENSES
Selling expenses		74			138
General and administrative expenses		3,382			967
TOTAL OPERATING EXPENSES		3,456			1,105
INCOME (LOSS) FROM OPERATIONS		(1,980	)		2,618
OTHER INCOME (EXPENSES)
Rental income, net of land use right amortization		-			1,185
Loss from unconsolidated entity		(17	)		-
Investment gain		-			123
Interest expense		(1,109	)		(720	)
Additional interest payable under convertible note indenture		(140	)		(140)
Other income, net		28			3
OTHER INCOME (EXPENSES), NET		(1,238	)		451
INCOME (LOSS) BEFORE INCOME TAX AND MINORITY INTEREST		(3,218	)		3,069
Income tax provision		(46	)		(165	)
INCOME BEFORE MINORITY INTEREST		(3,264	)		2,904
Minority interest		429			(61	)
NET INCOME (LOSS)		(2,835	)		2,843
Other comprehensive income:
Foreign currency translation adjustments		624			2,768
COMPREHENSIVE INCOME (LOSS)	$	(2,211	)	$	5,611
Net Income Per Common Share
Basic	$	(0.18	)	$	0.18
Diluted	$	(0.18	)	$	0.15
Weighted Average Common Shares Outstanding
Basic		15,942			15,709
Diluted		15,942			18,826

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

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Sinoenergy Corporation and Subsidiaries

Consolidated Statements of Income and Comprehensive Income (Unaudited)

(In thousands, except per share information)

	Six Months Ended March 31,
	2009			2008
NET SALES	$	22,899		$	16,541
COST OF SALES		(16,621	)		(8,907	)
GROSS PROFIT		6,278			7,634
OPERATING EXPENSES
Selling expenses		588			294
General and administrative expenses		4,739			1,975
TOTAL OPERATING EXPENSES		5,327			2,269
INCOME FROM OPERATIONS		951			5,365
OTHER INCOME (EXPENSES)
Rental income, net of land use right amortization		1,329			1,185
Loss from unconsolidated entity		(33	)		-
Investment gain		-			103
Interest expense		(2,317	)		(1,280	)
Additional interest payable under convertible note indenture		(140	)		(140)
Other income, net		213			147
OTHER INCOME (EXPENSES), NET		(948	)		15
INCOME BEFORE INCOME TAX AND MINORITY INTEREST		3			5,380
Income tax provision		(614	)		(45	)
INCOME BEFORE MINORITY INTEREST		(611	)		5,335
Minority interest		(526	)		(173	)
NET INCOME (LOSS)		(1,137	)		5,162
Other comprehensive income:
Foreign currency translation adjustments		463			3,733
COMPREHENSIVE INCOME (LOSS)	$	(674	)	$	8,895
Net Income Per Common Share
Basic	$	(0.07	)	$	0.33
Diluted	$	(0.07	)	$	0.27
Weighted Average Common Shares Outstanding
Basic		15,942			15,709
Diluted		15,942			18,875

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

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Sinoenergy Corporation and Subsidiaries

Consolidated Statement of Shareholders’ Equity (Unaudited)

(In thousands)

	Number of Common Shares Issued		Par Value Common Stock		Additional Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Income		Total Shareholder’s Equity -
Balance, October 1, 2008		15,942	$	16	$	30,396	$	19,953		$	4,862	$	55,227
Share-based compensation						157							157
Adjustment to record reduction in conversion price of 3% senior convertible notes						3,862							3,862
Net income for the period								(1,137	)				(1,137	)
Currency translation adjustment											463		463
Balance, March 31, 2009		15,942	$	16	$	34,415	$	18,816		$	5,325	$	58,572

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

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Sinoenergy Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In thousands of United States dollars) 

	Six Months Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES:	2009			2008
Net income (loss)	$	(1,137	)	$	5,162
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Share-based compensation		157			237
Amortization of note discount		686			28
Deferred portion of interest expense		722			784
Minority interest		844			173
Depreciation		380			319
Amortization of intangible assets		227			285
Provision for (recovery of) doubtful accounts		13			(108	)
Changes in operating assets and liabilities:
Accounts and notes receivable		(7,520	)		(6,206	)
Other receivables, deposits and prepayments		4,685			7
Inventories		3,212			(1,730	)
Deferred tax asset		(3	)		-
Accounts payable		(94	)		(1,598	)
Accrued expenses		(125	)		(120	)
Advances from customers		(430	)		1,517
Other payables		(3,237	)		2,206
Deferred income		(28	)		-
Income taxes payable		182			50
Net cash provided by (used in) operating activities		(1,466	)		1,006
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(9,307	)		(12,842	)
Purchase of land use right		(1,583	)		(11,655	)
Investment in unconsolidated entities		(1,308	)		(9,387	)
Changes in restricted cash		(325	)		-
Other payment for investment activities		-			(443	)
Net cash used in investing activities		(12,523	)		(34,327	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds received from note subscription receivable		-			29,840
Proceeds from bank loan		9,995			-
Payment of bank borrowings		-			(596	)
Net cash provided by financing activities		9,995			29,244
Effect on cash of changes in exchange rate		7			3,733
Net decrease in cash		(3,987	)		(344	)
Cash at beginning of period		8,871			4,547
Cash at end of period	$	4,884		$	4,203
Supplemental disclosure of cash flow information:
Interest paid	$	532		$	1,248
Income taxes paid	$	338		$	-

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

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Sinoenergy Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2009

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.

(b) Reverse Split of 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 of 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. 

(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.

Company	Ownership %	Business activities
Sinoenergy Holding Limited	100%	Holding company
Qingdao Sinogas 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 kit
Qingdao Sinogas Yuhan Chemical Equipment Company Limited (“Yuhan”)	81%**	Manufacturing of customized pressure containers
Wuhan Sinoenergy Gas Company Limited (“Wuhan Sinoenergy”)	80%*	Construction and operating of CNG stations and the manufacturing and sales of automobile conversion kits
Pingdingshan Sinoenergy Gas Company Limited (“Pingdingshan Sinoenergy”)	90%	Construction and operating of CNG stations and the manufacturing and sales of automobile conversion kits

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Jiaxing Lixun Automotive Electronic Company Limited (“Lixun”)	81%**	Design and manufacturing of electric control devices for alternative fuel
Hubei Gather Energy Company Limited (“Hubei Gather”)	80%	Construction and operating of natural gas processing plants
Xuancheng Sinoenergy Vehicle Gas Company Limited (“Xuancheng Sinoenegy”)	100%	Construction and operating of CNG stations and the manufacturing and sales of automobile conversion kits
Qingdao Jingrun General Machinery Company Limited (“Jingrun”)	100%	Design and manufacturing of petroleum refinery equipment and petroleum machinery
Qingdao Sinoenergy General Machinery Company Limited (“Qingdao Sinoenergy”)	100%	Manufacturing and installation of general machinery equipment

*             This subsidiary is owned 40% by Sinogas and 50% by Sinoenergy.

**           These subsidiaries are owned 75% by Sinogas and 25% by Sinoenergy.

As of May 10, 2009, Hubei Gather, Jingrun, and Qingdao Sinoenergy remain in the start-up stage and have no operations.

2. Summary of Significant Accounting Policies

Management’s Responsibility

Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements, which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company’s Form 10-K annual report for the fiscal year ended September 30, 2008. Results for the six months ended March 31, 2009 are not necessarily indicative of results to be expected for the year.

Basis of Presentation

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

Principles of Consolidation

The accompanying consolidated financial statements include the financial statements of Sinoenergy Corporation and its wholly-owned and majority-owned subsidiaries. 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, 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 consideration, 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.

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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, Xuancheng Sinoenergy and Jingrun, and relates to the pressure container, vehicle conversion kits, and CNG station operation reporting segments. As of March 31, 2009, management determined that there is no indication of impairment.

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 March 31, 2009 and September 30, 2008, 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.

Long-Term Investments

Investments in entities in which the Company owns more than 20% and up to 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.  Under the equity method, an investment is initially recorded at cost. Subsequently, the carrying amount of the investment is increased to reflect the investor's share of income of the investee and is reduced to reflect the investor's share of losses of the investee or dividends received from the investee.

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 years
Machinery and equipment	8 years
Motor vehicles	5 to 10 years
Office 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 rights for the land on which the Sinogas, Jiaxing, Xuancheng, Jingrun, and Qingdao Sinoenergy facilities are located are recorded as intangible assets.

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.

-8-

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 $139,617 and $505,000 of interest during the three months ended March 31, 2009 and 2008, respectively, and $241,990 and $792,000 of interest during the six months ended March 31, 2009 and 2008, respectively.

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.  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 expected to be incurred at contract completion (the customer will provide progress report based on the actual percentage of the work volume.) Revenue is presented net of any sales tax and value added tax.

Rental Income

Rental income is recognized ratably over the term of the lease.

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.

The following tables show a reconciliation of the changes in the Company’s product warranty liability (dollars in thousands).

	Six months ended March 31,
	2009			2008
Product warranty liability, as of September 30	$	167		$	76
Reductions for payments made (in cash or kind) during period		-			-
Changes in liability for warranties issued during the period		33			36
Foreign exchange gain/loss		(1	)		6
Product warranties, as of March 31	$	199		$	118

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, if any, 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.

-9-

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 quarter. 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

The Company adopted  Statement of Financial Accounting Standards (“SFAS”) 157 Fair Value Measurements and SFAS 159 The Fair Value Option for Financial Assets and Financial Liabilities on October 1, 2008.  The Company has not yet adopted the provisions of these statements related to non-financial assets and non-financial liabilities, as permitted.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

 - Level 1 — quoted prices (unadjusted) in active markets for identical asset or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities and exchange-based derivatives.

 - Level 2 — inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.

 - Level 3 — unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.

SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value.

The Company determined that as of March 31, 2009, the Company did not have any significant financial assets or liabilities that require fair value measurement pursuant to SFAS 157, nor did the company choose to report any assets or liabilities at fair value, pursuant to SFAS 159.

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 that the 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 with general industry practice in China.

The Company maintains its cash accounts with major banks in China.  The Chinese banks do not provide deposit insurance.

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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.

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 comprehensive income is foreign currency translation gain $624,000 and $2,768,000 for the three months ended March 31, 2009 and 2008, respectively, and $463,000 and $3,733,000 for the six months ended March 31, 2009 and 2008, respectively.  Cumulative other comprehensive income is recorded as a separate component of shareholders’ equity.

New Accounting Pronouncements

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 Company will be required to adopt SFAS No. 140 on October 1, 2009, which will apply to business combinations completed on or after that date.  Earlier adoption is not permitted.

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. The Company will be required to adopt SFAS No. 160 on October 1, 2009.  Earlier adoption is not permitted. The Company is currently evaluating the impact that SFAS 160 may have on  its consolidated financial position, results of operations, and cash flows upon adoption.

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 was adopted by the Company on January 1, 2009.  The adoption of SFAS No. 161 did not have an impact on the Company’s financial position, results of operations, or cash flows.

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.  The Company will be required to adopt FSP FAS 142-3 on October 1, 2009.  Earlier adoption is not permitted.  The guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date.

At its June 25, 2008 meeting, the Financial Accounting Standards Board ratified the consensus reached by the Emerging Issues Task Force Issue 07-5 Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock  (EITF 07-5).  The adoption of EITF 07-5’s requirements will affect accounting for convertible instruments and warrants with down-round provisions.  Down-round provisions are designed to protect an investor in the event the issuer issues securities at a lower price or with a lower exercise or conversion price.  Convertible instruments and warrants which are derivatives and have such provisions will no longer be recorded in equity.  EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  Earlier application by an entity that has previously adopted an alternative accounting policy is not permitted.  The Company will be required to adopt EITF 07-5 commencing with the quarter ending December 31, 2009, which is the first quarter of the fiscal year ending September 30, 2010.  To the extent that the Company’s convertible notes and certain of its warrants are outstanding on December 31, 2009, the Company will reflect as a derivative liability the fair value of the derivate component of these securities and will reflect a gain or loss for the derivative liability based on the change in value of the derivative liability during each fiscal quarter during which the instruments are outstanding.

In May 2008, the FASB issued Financial Accounting Standards Board Staff Position No. APB 14-1 ("FSP APB 14-1"), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 specifies that issuers of such instruments must account separately for the liability and equity components in a manner that reflects the entity's estimated non-convertible borrowing rate at the date of issuance. FSP APB 14-1 is effective for periods subsequent to December 15, 2008 and must be applied retrospectively.  The adoption of FSP APB 14-1 did not have an impact on the Company’s financial statements.

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3. Restricted Cash

The restricted cash as at March 31, 2009 and September 30, 2008 represent deposits on a bill of exchange issued by the Company for the purchase of materials.

4. Accounts and notes receivable

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

	March 31, 2009			September 30, 2008
Accounts receivable	$	27,336		$	22,100
Notes receivable
-rental receivable		2,633			-
-bank acceptance		447			114
Less: allowance for doubtful receivables		(210	)		(206	)
Balance	$	30,206		$	22,008

During the six months ended March 31, 2009, our accounts receivable increased by $8.2 million, from $22.0 million to $30.2 million.  As a result of competitive market pressures during a period of financial uncertainties, we extended very favorable payment terms for customers of CNG equipment.  At September 30, 2008, our accounts receivable were outstanding for an average of 124 days, and at March 31, 2009, our accounts receivable were outstanding for an average of 208 days.  A significant amount of our receivables that were outstanding at September 30, 2008 remained outstanding on March 31, 2009.

5. Other receivables

Details of other receivable are as follows (dollars in thousands)

	March 31, 2009			September 30, 2008
Unsecured interest free receivables relating to projects	$	8,962		$	10,236
Rental receivable		-			2,933
Miscellaneous receivables		1,012			3,826
Less: allowance for doubtful receivables		(21	)		(12	)
Balance	$	9,953		$	16,983

6. Inventories

Inventories at March 31, 2009 and September 30, 2008 are as follows (dollars in thousands):

	March 31, 2009		September 30, 2008
Raw materials	$	1,706	$	4,145
Work in progress		887		2,428
Finished goods		1,199		721
Low value consumables		8		9
Total	$	3,800	$	7,303

7. Long-term investments

At March 31, 2009 and September 30, 2008, the details of long-term investments are as follows (dollars in thousands):

	March 31, 2009			September 30, 2008
Anhui Gather
Initial Investment	$	1,649		$	1,653
Equity in (loss)		(117	)		(85	)
Sinogas General Luxi Natural Gas Facilities Co., Ltd. (Sinogas Luxi)
Initial Investment		1,463			-
Total	$	2,995		$	1,568

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Anhui Gather 

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 $1,375,000 has been paid as of March 31, 2009.

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, the Company owns an 80% interest in Hubei Gather and a 20% interest in Anhui Gather.  Neither Hubei Gather nor Anhui Gather has commenced business activities.  The results of Hubei Gather’s operations are included in the Company’s consolidated operations, and Hubei Gather is not treated as a long-term investment.

Sinogas General Luxi Natural Gas Facilities Co., Ltd. (Sinogas Luxi)

On October 31, 2008, in order to provide for a supply of steel bottles, a major component in its CNG trailer, 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, with a proposed annual production capacity of 4,000 steel bottles. The total registered capital is RMB 50 million (equivalent to $7.31 million based on the exchange rate on March 31, 2009), of which Sinogas has a 40% interest and will contribute 40% to this enterprise. In December 2008, Sinoags contributed RMB10 million (equivalent to $1.46 million based on the exchange rate on March 31, 2009.) Sinogas Luxi has not commenced business activities. 

8. Property, Plant and Equipment

As of March 31, 2009 and September 30, 2008, property, plant and equipment consist of the following (dollars in thousands):

	March 31, 2009			September 30, 2008
Buildings and facility	$	8,010		$	6,254
Machinery equipment		12,617			7,538
Motor vehicles		825			838
Office equipment and other		318			395
Total		21,770			15,025
Accumulated depreciation		(2,008	)		(1,666	)
		19,762			13,359
Construction in process		19,872			16,939
Net Book Value	$	39,634		$	30,298

9. Intangible Assets

As of March 31, 2009 and September 30, 2008, intangible assets consist of the following (dollars in thousands):

	March 31, 2009			September 30, 2008
Patent and technology know-how, etc	$	462		$	424
Land use rights		29,748			28,054
Total		30,210			28,478
Accumulated amortization		(1,114	)		(887	)
Net Book value	$	29,096		$	27,591

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Patents and technology know-how is being amortized over 10 years through September 2014.

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 (dollars in thousands):

Owner	Cost		Expiration
Sinogas	$	20,718	May 2057
Jingrun		4,396	December 2056
Xuancheng Sinoenergy		1,095	June 2058
Qingdao Sinoenergy		3,171	December 2058
Jiaxing Lixun		368	June 2058
Total	$	29,748

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 RMB142 million, equivalent to US$20.72 million based on the March 31, 2009 exchange rate. The land use right 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”), a non-affiliated third party, for a term of three years beginning in January 2008 and expiring on December 31, 2010, at an annual rental of RMB40 million, equivalent to approximately $5.9 million based on the March 31, 2009 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 March 31, 2009, Sinogas signed a memorandum of understanding with Qingdao Mingcheng pursuant to which the Company reduced the rental receivable by 40%. The reduced rent is payable in quarterly installments over a one-year period commencing June 30, 2009.

On December 15, 2007, the Company purchased from a non-affiliated third party 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 March 31, 2009 exchange rate). The cost of the land use right paid by the Company was approximately $4.1 million based on the March 31, 2009 exchange rate.

The land use right owned by Xuancheng was purchased by the Company from Shanghai CNPC Enterprises Group, a non-affiliated third party, for $872,000 based on the March 31, 2009 exchange rate. The Company has paid the purchase price and obtained the title deed for the land use right.

On January 4, 2008, the Company purchased all of the equity of Qingdao Shan Yang Tai Chemistry Resources Development Co., Ltd. (“QDSY”) from an unrelated third party for approximately RMB43 million.  QDSY’s sole asset is the land use right and construction in progress. The cost of the land use right paid by the Company was approximately $1.9 million based on the March 31, 2009 exchange rate. The Company obtained the title deed for the land use right on December 31, 2008.

In June 2008, Lixun acquired from a non-affiliated third party a land use right for $368,000, which Lixun plans to use for construction of a new plant.

10. Other long-term assets

The amount of other long-term assets in the consolidated financial statements at March 31, 2009 (dollars in thousands) consists primarily of the following:

(1) $1,666 prepayments for CNG station equipment. This equipment will be used to construct CNG filling stations as long-term fixed assets.

(2) $1,018 due from customers related to deferred income.

(3) $3,810 prepayments for the rent for CNG stations.

The other long-term assets in the consolidated financial statements at September 30, 2008(dollars in thousands) consists primarily of the following:

(1) $3,715 prepayments for CNG station equipment. This equipment will be used to construct CNG filling stations as long-term fixed assets

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(2) $1,021 due from the customers related to deferred income.

(3) $1,303 prepayments for the CNG land rental.

11. Short Term Bank Loan

The following table summarizes the contractual short-term borrowings between the banks and the Company as of March 31, 2009 (dollars in thousands):

Bank Name	Purpose	Borrowing Date	Borrowing Term	Annual Interest Rate			Amount
Bank of Communication	Working Capital	July 17, 2008	One year		7.326	%	$	337
Bank of Communication	Working Capital	February 4,2009	Six months		4.86	%		5,851
Bank of Communication **	Working Capital	September 5, 2008	One year		5.58	%		5,851
Industrial Bank Co., Ltd.	Working Capital	November 21, 2008	Six months		7.839	%		146
CITIC Bank	Working Capital	December 22, 2008	Six months		5.544	%		439
CITIC Bank	Working Capital	January 4, 2009	One year		5.841	%		220
China Merchants Bank	Working Capital	January 19, 2009	One year		5.5755	%		1,463
CITIC Bank	Working Capital	February 6, 2009	One year		5.841	%		73
China Merchants Bank	Working Capital	March 5, 2009	One year		5.5755	%		439
China Construction Bank	Working Capital	March 16, 2009	One year		5.5755	%		7,314
Total							$	22,133

The interest rates, which are subject to adjustment by the banks determined by the Chinese government economic development policy, reflect the interest rate in effect on March 31, 2009.

* 6-12 month interest rate

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			Amount
Bank of Communication *	Working Capital	August 5, 2008	Six months		5.04	%	$	5,866
Bank of Communication **	Working Capital	September 5, 2008	One year		5.58	%		5,866
Bank of Communication	Working Capital	July 17, 2008	One year		7.326	%		221
Total							$	11,953

The interest rates, which are subject to adjustment by the banks determined by the Chinese government economic development policy, reflect the interest rate in effect on September 30, 2008.

* 6 month interest rate

** 6-12 month interest rate

12. Advances from Customers

Advances from customers at March 31, 2009 and September 30, 2008 consist of advances received for routine sales orders according to the Company’s sales policy.

13. Income Taxes Payable

The Company pays national and local income tax in China.  Beginning January 1, 2008, the Chinese government has adopted a new statutory tax rate at 25%.

As PRC subsidiaries that qualify as wholly foreign owned manufacturing enterprises, Sinogas, Yuhan and Jiaxing Lixun were granted tax preferences. Sinogas and Yuhan were 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 December 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.

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No provision for taxes outside of the PRC is made as Sinoenergy Holding Limited, an investment holding company, has no taxable income in the British Virgin Islands.  

14.  Long term notes payable

In September 2007, the Company issued 12% senior notes due 2012 in the principal amount of $16,000,000 and 3.0% senior convertible notes due 2012 in the principal amount of $14,000,000.

The convertible notes are due in September 2012 and bear interest at the stated interest rate of 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% per annum, the remaining 10.8% per annum interest rate is accrued and treated as deferred interest payable. 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 the Company does not maintain the listing of its common stock on the Nasdaq Stock Market, if, after obtaining the listing, the common stock is not listed on either a United States national or regional securities exchange or the Nasdaq Stock Market or if trading of the common stock on any exchange or market has been suspended for ten or more days.

The indenture also requires the Company to pay additional interest as follows:

• At the rate of 3.0% per annum if the Company fails to maintain the listing of its common stock on the Nasdaq Global Market or the Nasdaq Capital Market.

• 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 March 31, 2009, the Company had accrued additional interest of $560,000 pursuant to this provision, of which $280,000 was paid in January 2009 and $280,000 remained outstanding. The Company has accounted for the additional interest payable as a result of the failure of the Company to have the shares of common stock issuable upon conversion of the 3% senior notes registered in accordance with FSP EITF 00-19-2, “Accounting for Registration Payment Arrangements”, and SFAS No.5, “Accounting for Contingencies”. Accordingly, the Company has accrued the additional interest payable under registration rights agreements up to March 31, 2009. The Company will review and adjust this accrual at each subsequent period end. If the registration statement is not effective by June 21, 2009, an additional $140,000 payment will become due.

At March 31, 2009, the holders of the Notes have the right to convert their Notes into common stock at a conversion price of $4.20 per share, reflecting a reduction in the conversion price through March 28, 2009. The indenture, as clarified, provides that if the Company sells common stock or issues convertible securities with a conversion or exercise price less than the conversion price, the conversion price is to be reduced to the sales price or the exercise or conversion price, but not less than $0.80 per share. The Company agreed not to sell shares at a price or issue convertible securities with an exercise or conversion price less than $0.80.

In addition, the average price of the common stock is computed in accordance with the indenture on September 28 and March 28 of each year.  If the average price of the common stock is less than the conversion price, the conversion price is reduced to the greater of the average price or $4.20 per share. Since the average price before March 28, 2009 is lower than $4.20, the conversion price as of March 31, 2009 is $4.20.

The indenture provides for an adjustment in the conversion price if the Company fails to have net income, as defined in the indenture, of $14.0 million for the year ended December 31, 2008 and $22.5 million for the year ending December 31, 2009. The indenture also had a required net income target for 2007. 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 an entity owned by the chief executive officer and the chairman of the board agreed to pay the investors a total of $600,000.  The noteholders waived payment of this obligation on February 23, 2009.

The Company changed its fiscal year from the calendar year to the year ended September 30, effective with the year ended September 30, 2007. Since the Company does not have audited financial statements for the year ended December 31, 2008, which covers parts of two fiscal years, as of May 10, 2009, the Company has not computed its net income, as defined in the indenture, for the twelve months ended December 31, 2008. 

If the Company’s 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

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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 following discussion is based on the assumptions that (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. Under the formula, if the 2008 target was not met, the conversion rate would increase o 24,021 shares per $100,000 principal amount of note and the conversion price would be adjusted to $4.162 from the conversion price at March 31, 2009, which is $4.20, which represents a conversion rate of 23,810 shares per $100,000 principal amount of notes. If the target for both 2008 and 2009 are not met, the conversion rate would become 28,665 shares per $100,000 principal amount, and the conversion price would be $3.489.

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 Amount
March 28, 2010	$	2,000,000
September 28, 2010	$	2,000,000
March 28, 2011	$	4,000,000
September 28, 2011	$	4,000,000
March 28, 2012	$	2,000,000

Commencing September 28, 2008, the Company may redeem the senior notes at the declining percentages of the principal amount commencing at 108%.

The indentures for both the convertible notes and the senior notes, as amended through May 19, 2009, have certain covenants, including the following:

• If the Company sells assets and does not reinvest the proceeds in its business in the time frames set forth in the indenture, 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, as defined in the indenture, the Company is required to offer to repurchase the notes at 103% of the principal of the note, plus accrued interest.

• The Company is restricted from incurring additional debt unless, either (i) after giving effect to the borrowing, the Company maintains (i) a fixed charge coverage ratio of at least 2.00 to 1.00 through December 31, 2009 and 3.0 to 1.00 thereafter, and (ii) a leverage ratio of not more than 6.0 to 1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, or (ii) the debt is permitted debt. The noteholders agree that they shall not take any action to cause or declare an Event of Default as long as the Company is in compliance with these amended ratio. 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 ratio of outstanding debt to EBITDA, with the interest component being the consolidated interest expense, as defined. Permitted debt includes indebtedness by Sinogas of not more than $10,000,000 and certain purchase money indebtedness.

• 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 or incurring liens.

• The Company cannot enter into transactions with affiliates unless the transaction is not less favorable to the Company than the Company 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.

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• The indentures pursuant to which the notes were issued, as amended through May 13, 2009, provide that the Company shall maintain, as of the last day of each fiscal quarter, (i) a fixed charge coverage ratio of at least 2.00 to 1.00 through December 31, 2009 and 3.0 to 1.00 thereafter, (ii) a leverage ratio of not more than 6.0 to 1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, and (iii) a consolidated subsidiary debt to consolidated net tangible asset ratio of not more than 0.35 thereafter. The noteholders agreed that they would not take any action to declare an event of default as long as the Company is in compliance with the modified covenants.  At March 31, 2009, the fixed charge ratio was 2.26 to 1, the leverage ratio was 5.77 to 1 and the subsidiary debt ratio was 0.28.

The Company also entered into an investor rights agreement, pursuant to which, as long as an investor holds at least $2,000,000 principal amount of notes or at least 3% of the issued and outstanding stock:

• The investor has the right to approve the Company’s annual budget, and the Company cannot deviate by more than 15% of the amount in the approved budget.

• The Company and its subsidiaries cannot replace or change the substantive responsibilities of the chief executive officer except in the event of his incapacity, resignation or retirement.

• The Company and its subsidiaries cannot take any action that would result in a change of control, as defined in the indentures.

• The Company and its subsidiaries cannot change the number of board members or the composition or structure of the board or board committees or delegate powers to a committee or change the responsibilities and powers of any committee.

• The 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.

 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. However, in the first quarter of the fiscal year ending September 30, 2010, the Company will be required to adopt EITF 07-5, as a result of which the conversion feature of the convertible notes will be treated as a derivative. See Note 2-New Accounting Pronouncements.

As a result of the reduction in the conversion price from $6.34 to $5.125, the Company 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. As a result of the reduction of the conversion price to $4.20 in March 2009, the Company recorded an additional beneficial conversion feature of $3,862,000 as a discount to the notes and additional paid-in capital, which is being amortized over the remaining terms of the notes commencing April 1, 2009.

Mr. Huang and Mr. Deng are also prohibited from transferring any shares, with limited exceptions, until the investors shall have sold, singularly or in the aggregate, more than 5% of the Company’s total outstanding equity on a fully-diluted basis.

From the closing date and as long as long as Abax Nai Xin A Lt. and Abax Jade Ltd. (“Abax”), the note holders, 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.

A reconciliation of the original principal amount of the 12% senior notes to the amounts shown on the balance sheet is as follows (dollars in thousands):

Original amount	$	16,000
Note discount		(378	)
Balance, September 30, 2007		15,622
Accrual of interest		1,930
Amortization of beneficial conversion feature		76
Interest paid		(970	)
Balance, September 30, 2008		16,658
Accrual of interest		960
Amortization of beneficial conversion feature		38
Interest paid		(987	)
Balance, March 31, 2009	$	16,669

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A reconciliation of the original principal amount of the 3% senior convertible notes to the amounts shown on the balance sheet is as follows (amounts in thousands):

Original amount	$	14,000
Beneficial conversion feature		(177	)
Balance, September 30, 2007		13,823
Amortization of beneficial conversion feature		35
Interest paid		(211	)
Interest accrued for guaranteed 13.8% return		1,934
Discount resulting from reset adjustment effective March 28, 2008		(3,361	)
Amortization of discount resulting from reset		373
Balance, September 30, 2008		12,593
Amortization of beneficial conversion feature		18
Interest paid		(217	)
Interest accrued for guaranteed 13.8% return		966
Discount resulting from reset adjustment effective March 28, 2009		(3,862	)
Amortization of discount resulting from reset		630
Balance, March 31, 2009	$	10,128

15. Related Party Relationships and Transactions

The related parties with which the Company had transactions in the three months and six months ended March 31, 2009 and 2008, are as follows:

Name of related party	Relationship
Beijing 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 2005
Mr. Guiqiang Shi	Shareholder of Kangtai
Mr. Tianzhou Deng	Chairman of the Company
China New Energy	The minority shareholder of a subsidiary (Hubei Gather)

Significant transactions between the Company and its related parties during the three months and six months ended March 31, 2009 and 2008 are as follows (dollars in thousands):

(1) Sales and purchase transactions with related parties

Name of the Company	For the six months ended March 31, 2009	For the six months ended March 31, 2008
Beijing Sanhuan	$263 fee for right to use the technology and software in the CNG construction	None

(2) Due from related parties

Name of the Company		March 31, 2009	March 31, 2008
China New Energy	$	381	None
Beijing Sanhuan	$	73	None
Anhui Gather	$	44	None
Kangtai		None	$8 inter-company loan

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(3) Due to related parties

Name of the Company	March 31, 2009	March 31, 2008
Beijing Sanhuan	None	$209 payables to Beijing Sanhuan for balance of the purchase price of land use right
Kangtai	$None	$4 of unsecured loan

16. 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.

The information set forth below represents the segment information for the three months and six months ended March 31, 2009 and 2008.

Three Months Ended March 31, 2009 (dollars in thousands)		Customized pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net sales		$	685		$	1,671		$	4,032		$	583		$	6,971
Cost of sales			552			960			3,640			343			5,495
Gross profit			133			711			392			240			1,476
Gross margin			19	%		43	%		10	%		41	%		21	%
Operating expenses:
Selling expenses			40			10			(52	)		76			74
General and administrative expenses			310			2,421			447			204			3,382
Total operating expense			350			2,431			395			280			3,456
Loss from operations		$	(217	)	$	(1,720	)	$	(3	)	$	(40	)	$	(1,980	)
Total assets		$	31,480		$	65,032		$	36,610		$	7,869		$	140,991

Three Months Ended March 31, 2008 (dollars in thousands)	Customized pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net sales	$	1,822		$	3,751		$	282		$	1,879		$	7,734
Cost of sales		1,053			1,592			179			1,187			4,011
Gross profit		769			2,159			103			692			3,723
Gross margin		42	%		58	%		37	%		37	%		48	%
Operating expenses:
Selling expenses		35			21			30			52			138
General and administrative expenses		50			591			8			318			967
Total operating expense		85			612			38			370			1,105
Income from operations	$	684		$	1,547		$	65		$	322		$	2,618
Total assets	$	30,262		$	36,449		$	23,690		$	10,240		$	100,641

Six Months Ended March 31, 2009 (dollars in thousands)		Customized pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net sales		$	3,821		$	7,450		$	8,783		$	2,845		$	22,899
Cost of sales			2,773			4,466			7,423			1,959			16,621
Gross profit			1,048			2,984			1,360			886			6,278
Gross margin			27	%		40	%		15	%		31	%		27	%
Operating expenses:
Selling expenses			98			32			256			202			588
General and administrative expenses			588			2,878			841			432			4,739
Total operating expense			686			2,910			1,097			634			5,327
Income from operations		$	362		$	74		$	263		$	252		$	951

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Six Months Ended March 31, 2008 (dollars in thousands)	Customized pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net sales	$	3,671		$	8,389		$	350		$	4,131		$	16,541
Cost of sales		2,138			3,905			223			2,641			8,907
Gross profit		1,533			4,484			127			1,490			7,634
Gross margin		42	%		53	%		36	%		36	%		46	%
Operating expenses:
Selling expenses		93			33			37			131			294
General and administrative expenses		258			1,073			102			542			1,975
Total operating expense		351			1,106			139			673			2,269
Income (loss) from operations	$	1,182		$	3,378		$	(12	)	$	817		$	5,365

17. Capital Stock

As of March 31, 2009, 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;

• 3,333,333 shares issuable upon conversion of 3% senior 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			Total
Balance at September 30, 2008			85,715			369,644			75,000			25,000			555,359
Issued during the period			-			-			-			-			-
Exercised during the period			-			-			-			-			-
Balance at March 31, 2009			85,715			369,644			75,000			25,000			555,359

As at March 31, 2009, the weighted 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 other recapitalization, and, in the case of the warrants to purchase 455,359 shares of common stock issued in the June 2006 private placement, sales of common stock at prices below the exercise price. The warrants issued in the June 2006 private placement may be treated as derivatives pursuant to EITF 07-5 commencing with the first quarter of the fiscal year ended September 30, 2010. See Note 2-New Accounting Pronouncements.

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. 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 automatic grant provisions, 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.

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	Shares subject to options			Weighted Average exercise		Remaining  life (years)
Options outstanding at September 30, 2008		845,000		$	4.39		4.26
Options granted during the period		-			-		-
Options cancelled during the period		(75,000	)		5.72		-
Options outstanding at March 31, 2009		770,000		$	4.26		3.31
Options exercisable at March 31, 2009		360,000		$	4.26		3.06

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 On
Grant Date	June 1, 2008			April 1, 2008			March 10, 2008			January 9,  2008			April 9, 2007			April 1, 2007			June 2, 2006
Expected 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			3
Dividend 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 share-based compensation expense during the three months and six months ended March 31, 2009 was $74,000 and $157,000, respectively, which was charged to operations as general and administrative expense.

18.  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 that all dilutive convertible shares, stock options and warrants were converted or exercised. The number of shares included in determining diluted earnings per share is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), with the funds obtained thereby being used to purchase common stock at the average market price during the period.

The details for the fully diluted outstanding shares for the six months ended March 31, 2009 and 2008 is as follows:

	Six months ended March 31, 2009	Six months ended March 31, 2008
Weighted average common stock outstanding during period	15,942,336	15,709,033
Common stock issuable pursuant to warrants	-	614,681
Common stock issuable upon conversion of 3% convertible notes	-	2,208,202
Common stock issuable upon exercise of options outstanding during the period	-	343,305
Total diluted outstanding shares	15,942,336	18,875,221

Convertible notes, warrants and options are anti-dilutive for both the three and six months ended March 31, 2009 and are therefore excluded from the computation of diluted earnings per share for the period.

19. Commitments and Contingencies

The Company and New Energy, formed 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 the Company 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 March 31, 2009, the Company’s commitment for future funding was $2,625,000.

In the normal course of our business the Company issues purchase orders for equipment for its CNG stations and well as for components for its products.  At March 31, 2009, there were no significant outstanding purchase orders.

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20. 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 $102,639 and $50,919 for the three months ended March 31, 2009 and 2008, respectively, and $203,733 and $119,804 for the six months ended March 31, 2009 and 2008, 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 temporary labor shortage. 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. Based on the common practice in the PRC, the Company treats those workers as probationary employees, and does not accrue welfare benefits for them. Although the Company believes that it is treating these employees in accordance with applicable law, it is possible that the government may require the Company to accrue the welfare benefit and may assess a penalty for the under-accrual.

21.  Significant Concentrations

In the CNG station facilities and construction segment, the Company manufactures, sells and installs CNG vehicle and gas station equipment. The Company provides products for third party companies that operate fixed and/or mobile CNG filling stations and it designs the CNG station construction plans, constructs CNG stations, and installs CNG station equipment and related systems.

These products and services are designed to meet the customer specifications.  Sales in this segment are dependent upon the Company 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 the three months ended March 31, 2009, one customer of our station facilities and construction segment accounted for 23.6% of our total sales and at March 31, 2009, approximately 53.4% of our accounts receivable was from this customer.

In the three months ended March 31, 2008, 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 40.5% of total sales.  At March 31, 2008, approximately 28.5% of our accounts receivable were from these customers.  The following table sets forth information as to the sales generated from each of these customers for the three months ended March 31, 2009 and 2008 (dollars in thousands):

Name	Three Months Ended March 31, 2009					Three Months Ended March 31, 2008
	Dollars		Percent			Dollars		Percent
Wuhan Lvneng Gas Transportation Co.,	$	14,601		53.4	%	$	*		*
Xuancheng AnJie Co.,		*		*			1,906		24.6	%
Dafeng XinXing Co.,		*		*		$	1,132		15.9	%

*  Less than 10%

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ITEM 2. 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 quarterly 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.”

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q 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 quarterly report, including the risks described under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended September 30, 2008 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q as well as any other filings we make with the SEC. In addition, such statements could be affected by risks and uncertainties related to the ability to conduct business in the PRC, product demand, including our ability to continue to be in compliance with the financial covenants under the indentures relating to our senior debt, our ability to collect outstanding accounts receivable, 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 quarterly report is filed to conform these statements to actual results, unless required by law.

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. 

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.  For this segment, we raised approximately $30 million from the sale of 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 governments. As a result of these price controls, our gross margin is effectively dependent upon the governments’ pricing policies. The operation of CNG stations is reported as a separate segment.

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During 2007, we entered into two agreements to form joint ventures for the operation of natural gas processing plants. We have a majority interest in one of these two ventures and a minority interest in the other. At March 31, 2009, 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 with an unrelated party 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 during the first half of 2009. These contracts do not have specific delivery quantities or prices, all of which are to be determined later, and the delivery of natural gas through this pipeline is dependent upon the completion of the pipeline.  We cannot assure you that the pipeline will be completed as scheduled or that the operator will be able to deliver natural gas in the quantity contemplated by the agreement.

In early 2007, we established a division to sell and manufacture CNG vehicle conversion kits to OEM’s and aftermarket customers. 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. 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.

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.

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 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 and operating our CNG filling stations or the market for our CNG station construction services and our conversion kits.

During the six months ended March 31, 2009, our accounts receivable increased by $8.2 million, from $22.0 million to $30.2 million.  As a result of competitive market pressures during a period of financial uncertainties, we extended very favorable payment terms for customers of CNG equipment.  At September 30, 2008, our accounts receivable were outstanding for an average of 124 days, and at March 31, 2009, our accounts receivable were outstanding for an average of 208 days.  A significant amount of our receivables that were outstanding at September 30, 2008 remained outstanding on March 31, 2009. Although the government of the PRC has announced a stimulus package which can be used by our customers to enable them to make payments to us, we cannot require our customers to use any of the available programs.   Our ability to develop our business may be impaired in the event that we do not receive payments from our customers in a timely manner.  We cannot assure you that we will be able to collect our accounts receivables in a timely manner, if at all, and the failure to collect the accounts receivables is likely to impair our liquidity and our ability to conduct our business.

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On March 31, 2008, Sinogas entered into an agreement to sublease certain parcels of land to Qingdao Mingcheng Real Estate Co., Ltd. (“Qingdao Mingcheng”), an non-affiliated third party, for a term of three years beginning in January 2008 and expiring on December 31, 2010, at an annual rental of RMB40 million, equivalent to approximately $5.9 million based on the March 31, 2009 exchange rate. As a result of the failure of Qingdao Mingcheng to make the required rental payments, on March 31, 2009, Sinogas signed a memorandum of understanding with Qingdao Mingcheng pursuant to which Sinogas agreed to a termination of the sublease, and reduced the rental receivable by 40%, or $1.8 million, which is reflected in general and administrative expenses in the quarter ended March 31, 2009. The reduced rental is now payable in quarterly installments over a one-year period commencing June 30, 2009. To the extent that the Qingdao Mingcheng is unable to make the reduced payments, we have to take further writeoffs.

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.

(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 May 10, 2009, we were operating nineteen CNG stations, of which fourteen are located in Wuhan, two in Pingdingshan and three in Xuancheng.  

(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

Three Months Ended March 31, 2009 and 2008

The information set forth below represents segment information for the three months ended March 31, 2009 and 2008.

Three Months Ended March 31, 2009 (dollars in thousands)		Customized pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net sales		$	685		$	1,671		$	4,032		$	583		$	6,971
Cost of sales			552			960			3,640			343			5,495
Gross profit			133			711			392			240			1,476
Gross margin			19	%		43	%		10	%		41	%		21	%
Operating expenses:
Selling expenses			40			10			(52	)		76			74
General and administrative expenses			310			2,421			447			204			3,382
Total operating expense			350			2,431			395			280			3,456
Loss from operations		$	(217	)	$	(1,720	)	$	(3	)	$	(40	)	$	(1,980	)

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Three Months Ended March 31, 2008 (dollars in thousands)	Customized pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net sales	$	1,822		$	3,751		$	282		$	1,879		$	7,734
Cost of sales		1,053			1,592			179			1,187			4,011
Gross profit		769			2,159			103			692			3,723
Gross margin		42	%		58	%		37	%		37	%		48	%
Operating expenses:
Selling expenses		35			21			30			52			138
General and administrative expenses		50			591			8			318			967
Total operating expense		85			612			38			370			1,105
Income from operations	$	684		$	1,547		$	65		$	322		$	2,618

Net Sales. Net sales for the three months ended March 31, 2009 (“March 2009 quarter”) were approximately $7.0 million, a decrease of approximately $0.7 million, or 10%, from sales of approximately $7.7 million for the three months ended March 31, 2008 (“March 2008 quarter”).  This decrease resulted from:

• A decrease of approximately $1.1 million, or 62%, in sales from customized pressure containers, reflecting the effects of the financial crisis on the development of manufacturing enterprises. We made no sales on the bio-diesel equipment in the March 2009 quarter, as compared with $0.9 million sales from bio-diesel equipment in March 2008 quarter.

• A decrease of approximately $2.1 million, or 55%, in sales from the CNG stations facilities and construction, reflecting a decrease in demand resulting largely from the economic downturn.

• An increase of approximately $3.8 million due to ramping up of our CNG station operations. In the March 2008, we had only one CNG station in operation, while we had 19 stations in operation during the March 2009 quarter.

• A decrease of approximately $1.3 million, or 69%, in sales from vehicle conversion kits, reflecting the effects of the economic downturn and a reduction in price of oil, which resulted in a reduced demand for vehicle conversion kits.

Cost of Sales; Gross Margin.  Cost of sales for the March 2009 quarter was approximately $5.5 million, an increase of approximately 37% from approximately $4.0 million for the March 2008 quarter.  The CNG station operation segment contributed $3.6 million of the total cost of sales reflecting the increase in the number of stations we operated. Our overall gross margin decreased from 48% to 21% from the March 2008 quarter to the March 2009 quarter for the following reasons:

• Our gross margin for the customized pressure containers deceased from 42% to 19% because of price increases of raw materials.  We were not able to pass on all of these cost increases to our customers. In addition, we had no sales of bio-diesel equipment in March 2009 quarter. These products carry a higher gross margin than our other pressure products.

• Our gross margin for the CNG station facilities and construction decreased from 58% to 43% because of price increases for raw materials which we were not able to pass on to our customers.

• The CNG station operation segment gross margin in the March 2009 quarter is 10%, which lowered the overall gross margin. During the March 2009 quarter, the increase of freight cost, together with price control, lowered our gross margin in this segment.

Selling Expenses.  Selling expenses decreased approximately $64,000, or approximately 46%, from the March 2009 quarter to the March 2008 quarter.  Our selling expenses relating to our CNG operations increased because of the increase in the number of stations in operations. This increase was more than offset by the writeoff of land rental costs incurred in connection with a proposed CNG station for which the expenses had been accrued but which will not be developed.

General and Administrative Expenses.  General and administrative expenses increased approximately $2.4 million.  A significant portion of this increase resulted from a $1.8 million bad debt charge as a result of a writeoff of a rental receivable. The expenses in CNG station operation increased approximately $439,000 from the March 2008 quarter to the March 2009 quarter because of the increase in the number of stations in operation. Our general and administrative expenses include, in addition to the management expenses and 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.  Included in general and administrative expenses is non-cash compensation expense of $74,000 in the March 2009 quarter and $119,206 in the March 2008 quarter, for the value of stock options and warrants issued.  General and administrative expense is allocated among the segments based on the relative time devoted by management to the business of the segments.

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Interest Expense.  Interest expense for the March 2009 quarter was approximately $1.1 million, as compared with $720,000 for the March 2008 quarter. Most of this increase relates to interest on an increased level of bank borrowing. Also, since interest is capitalized during the construction stage, as a result of the decreased level of construction during the March 2009 quarter, substantially all interest incurred was expensed in the March 2009 quarter.

Other Income and Other Expenses. During the March 2008 quarter, we recognized rental income of approximately $1.2 million for the rental of the land use rights for Sinogas’ former manufacturing facility. In March 2009, this lease was terminated and we wrote off approximately $1.8 million of the rental receivable.

Income Taxes.  The income tax provision decreased approximately $119,000, from March 2008 quarter to March 2009 quarter, which reflects the decrease in income before income taxes mainly for Sinogas and Yuheng and an effective tax rate of 12.5%.

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.  It changed from a $61,000 charge in the March 2008 quarter to income of $429,000 in the March 2009 quarter because for the loss incurred by Sinogas, Yuheng and Jiaxing.

Net Income.  As a result of the foregoing, we had a net loss of approximately $2.8 million, or $0.18 per share (basic and diluted), for the March 2009 quarter, as compared with net income of approximately $2.8 million, or $0.18 per share (basic) and $0.15 (diluted), for the March 2008 quarter.

Comprehensive Income.  Comprehensive income was approximately $624,000 for the March 2009 quarter as compared with approximately $2.8 million for the March 2008 quarter.  The comprehensive income in both periods reflects foreign currency translation adjustments resulting from changes in the currency rates between the RMB and the United States dollar.

Six Months Ended March 31, 2009 and 2008

The information set forth below represents segment information for the six months ended March 31, 2009 and 2008.

Six Months Ended March 31, 2009 (dollars in thousands)		Customized pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net sales		$	3,821		$	7,450		$	8,783		$	2,845		$	22,899
Cost of sales			2,773			4,466			7,423			1,959			16,621
Gross profit			1,048			2,984			1,360			886			6,278
Gross margin			27	%		40	%		15	%		31	%		27	%
Operating expenses:
Selling expenses			98			32			256			202			588
General and administrative expenses			588			2,878			841			432			4,739
Total operating expense			686			2,910			1,097			634			5,327
Income from operations		$	362		$	74		$	263		$	252		$	951

Six Months Ended March 31, 2008 (dollars in thousands)	Customized pressure containers			CNG station facilities and construction			CNG station Operation			Vehicle conversion kits			Total
Net sales	$	3,671		$	8,389		$	350		$	4,131		$	16,541
Cost of sales		2,138			3,905			223			2,641			8,907
Gross profit		1,533			4,484			127			1,490			7,634
Gross margin		42	%		53	%		36	%		36	%		46	%
Operating expenses:
Selling expenses		93			33			37			131			294
General and administrative expenses		258			1,073			102			542			1,975
Total operating expense		351			1,106			139			673			2,269
Income (loss) from operations	$	1,182		$	3,378		$	(12	)	$	817		$	5,365

 Net Sales. Net sales for the six months ended March 31, 2009 (“the fist half year of 2009”) were approximately $22.9 million, an increase of approximately $6.4 million, or 38%, from sales of approximately $16.5 million for the six months ended March 31, 2008 (“the first half year of 2008”).  This increase resulted from:

• An increase of approximately $8.4 million was due to the expansion of our CNG station operations. In the first half year of 2008, we had only one CNG station in operation, while in the first half year of 2009, we had 19 stations in operation.

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• A decrease of approximately $1.3 million, or 31%, in sales from vehicle conversion kits, reflecting the effects of the economic downturn and a reduction in price of oil, which resulted in a reduced demand for vehicle conversion kits.

Cost of Sales; Gross Margin. The cost of sales for the first half year of 2009 was approximately $16.6 million, an increase of approximately 87% from approximately $7.7 million for the first half year of 2008.  The CNG station operation segment contributed $7.2 million of the total cost of sales. Our overall gross margin decreased from 46% to 27% from the first half year of 2008 to the first half year of 2009 for the following reasons:

• Our gross margin for the customized pressure containers deceased from 42% to 27% because of price increases of raw materials.  We were not able to pass on all of these cost increase to our customers. In addition, we had no sales of bio-diesel equipment in first half year of 2009. These products carry a higher gross margin than our other pressure products.

• Our gross margin for the CNG station facilities and construction decreased from 53% to 40% because of the price increases for raw materials which we were not able to pass on to our customers.

• The CNG station operation segment gross margin in the first half year of 2009 is 15%, which lowered the overall gross margin.  During the first half year of 2009, the increase of freight costs, together with price control, lowered our gross margin in this segment. Also, during both the first half year of 2009 and the first half year of 2008, we did not operate a mother station.

Selling Expenses.  Selling expenses increased approximately $294,000, or approximately 100%, from the first half year of 2008 to the first half year of 2009.  The increase mainly related to the CNG station operations, because of the increase in the number of stations in operation, as well as the vehicle conversion kits segment.

General and Administrative Expenses.  General and administrative expenses increased approximately $2.8 million.  A significant portion of this increase resulted from a $1.8 million bad debt charge as a result of a writeoff of a rental receivable. The expenses in CNG station operation increased approximately $739,000 because of the increase in the number of stations in operation. Our general and administrative expenses include, in addition to the management expenses and 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.  Included in general and administrative expenses is non-cash compensation expense of $157,000 in the first half year of 2009 and $190,839 in the first half year of 2008, for the value of stock options and warrants issued.  General and administrative expense is allocated among the segments based on the relative time devoted by management to the business of the segments.

Interest Expense.  Interest expense for the first half year of 2009 was approximately $2.3 million, as compared with $1.3 million for the first half year of 2008.  Most of this increase related to interest on bank borrowing. Also, since interest is capitalized during the construction stage, as a result of the decreased level of construction during the first half year of 2009, substantially all interest incurred was expensed in the first half year of 2009.

Other Income and Other Expenses.  During the first half year of 2009, we recognized rental income of approximately $1.2 million for the rental of the land use rights for Sinogas’s former manufacturing facility. In March 2009, this lease was terminated and we wrote off approximately $1.8 million of the rent receivable.

Income Taxes.  The income tax provision was $614,000 in the first half year of 2009, which reflects the increase of income before income taxes mainly for Sinogas and Yuheng and an effective tax rate of 12.5%. During the first half year of 2008, Sinogas and Jiaxing benefited from a 100% tax exemption for the three months ended December 31, 2007.

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.  It increased from $173,000 to $526,000, from the first half year of 2008 to the first half year of 2009.

Net Income.  As a result of the foregoing, we had a net loss of approximately negative $1.1 million, or $0.07 per share (basic and diluted) for the first half year of 2009, as compared with net income of approximately $5.2 million, or $0.33 per share (basic) and $0.27 (diluted) for the first half year of 2008.

Comprehensive Income.  Comprehensive income was approximately $463,000 for the first half year of 2009 as compared with approximately $3.7 million for the first half year of 2008.  The comprehensive income in both periods reflects foreign currency translation adjustments resulting from changes in the currency rates between the RMB and the United States dollar.

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Liquidity and Capital Resources

At March 31, 2009, we had working capital of approximately $24.4 million, as compared with working capital of approximately $35.0 million at September 30, 2008.  The following table sets forth information as to the principal changes in the components of our working capital (dollars in thousands).

Category	March 31,		September 30,		September 30 to March 31, 2009
	2009		2008		Change		Percent Change
Current Assets
Cash	$	4,884	$	8,871		-3,987		-44.9	%
Restricted cash		878		523		355		67.9	%
Accounts and notes receivable, net		30.206		22,008		8,198		37.3	%
Other receivables, net		9,953		16,983		-7,030		-41.4	%
Deposits and prepayments		9,817		7,918		1,899		24.0	%
Inventories		3,800		7.303		-3,503		-48.0	%
Deferred expenses		61		91		-30		-33.0	%
Current Liabilities
Short-term bank loan		22,133		11,953		10,180		85.2	%
Notes payable		2,926		1,633		1,293		79.2	%
Accounts payable		4,499		5,894		-1,395		-23.7	%
Advances from customers		1,940		2,409		-469		-19.5	%
Additional interest on notes		280		420		-140		-33.3	%
Income taxes payable		831		633		198		31.3	%
Other payables		2,302		5,341		-3,039		-56.9	%
Accrued expenses		199		335		-136		-40.6	%
Deferred income		64		95		-31		-32.6	%
Total current assets	$	59,599	$	63,697	$	-4,098		-6.4	%
Less:           total current liabilities		35,174		28,713	$	6,461		22.5	%
Net working capital	$	24,425	$	34,984	$	-10,559	-30:2%

Our largest current assets are our accounts and notes receivable and other receivables.  The accounts receivable at March 31, 2009 were $27.1 million.  These accounts receivables are outstanding for an average of 208 days, as compared with 124 days at September 30, 2008. The increase in accounts receivable reflects the nature of the competition as well as the economy, with customers seeking and receiving a longer period to make payments.   A significant portion of the accounts receivable that were outstanding at September 30, 2008 remained outstanding at March 31, 2009. Also, other receivables at September 30, 2008 included a rent receivable of $2.9 million. In March 2009, we wrote off $1.8 million of the rent receivable and took a note for the balance. We cannot assure you that we will be able to collect these accounts or other receivables in a timely manner, and our inability to collect our receivables could impair our liquidity and our ability to conduct our business.

Other receivables were $10.0 million at March 31, 2009 and $17.0 at September 30, 2008.  Other receivables at March 31, 2009, include (1) $3.7 million as a unsecured interest free receivables relating to payments which we made in connection with a bid we made with a non-affiliated company for a project to provide a bio-diesel fuel manufacturing facility, and (2) $5.3 million for unsecured interest free note receivables which we accepted in respect to accounts receivables. 

For the first half year of 2009, net cash used in operating activities was $2.1 million. The changes in working capital for the first half year of 2009, were primarily related to a $8.2 million increase in accounts receivable which resulted from the increase in our business and longer period during which our accounts receivables (principally those generated by Sinogas) are outstanding, a $5.1 million decrease in other payables, and offset by a $3.3 decrease of deposit and prepayment, and a $3.5 million increase of inventories.

We used approximately $14.0 million in investing activities for the first half year of 2009, primarily due to the expansion of our CNG station operations, principally for purchase of property, plant and equipment of $10.2 million, purchase of land use right of $2.1 million, and $1.4 million to invest in the unconsolidated entities.

Net cash provided by financing activities was $10.9 million for the first half year of 2009, solely related loans from domestic banks in China.

For the first half year of 2008, we generated cash flow of approximately $1.0 million from our operations, and we used approximately $34.3 million for investments, consisting of payments of approximately $24.5 million for the purchase of property, plant and equipment, including the purchase of land use rights, and approximately $9.4 million to purchase a portion of the minority interest in some of our subsidiaries.

We generated approximately $29.8 million cash from issuance of 12% guaranteed senior notes and 3% guaranteed convertible notes, and we repaid approximately $596,000 short term bank loans.

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We believe that, as long as the holders of $16 million principal amount of guaranteed senior notes and $14 million principal amount of guaranteed senior convertible notes do not seek to accelerate payment of the notes, our working capital, together with cash flow expected to be 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.  However, to the extent that we are unable to collect the accounts and notes receivable or other receivables, we may not have the cash to develop our business.  We will continue to incur capital expenditures for the CNG station 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.

The indentures 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, as amended through May 19, 2009, include the following:

• We cannot incur any debt unless, after (i) giving effect to the borrowing, either (a) the fixed charge coverage ratio would be greater than 2.00 to 1.00 through December 31, 2009 and 3.0 to 1.00 thereafter, and (b) the leverage ratio would not exceed 6.0 to 1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, or (ii) the debt is permitted debt. 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.  Permitted debt includes indebtedness of Sinogas of up to $10 million and certain purchase money indebtedness.

• We must maintain, as of the last day of each fiscal quarter, (i) a fixed charge coverage ratio of at least 2.00 to 1.00 through December 31, 2009 and 3.0 to 1.00 thereafter, (ii) a leverage ratio of not more than 6.0 to 1.00 through December 31, 2009 and 4.5 to 1.00 thereafter, and (iii) a consolidated subsidiary debt to consolidated net tangible asset ratio of not more than 0.35.

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

• We are subject to restrictions on incurring liens.

As of March 31, 2009, the fixed charge coverage ratio is 2.26 to 1, the leverage ratio is 5.78 to 1, the consolidated subsidiary debt to consolidated net tangible asset ratio was 0.28, which were met the requirements of the covenants, as amended.

The indenture relating to the 3% senior convertible notes provides for an adjustment in the conversion rate if we do not generate net income for the year ended December 31, 2008 of $14.0 million, based upon our audited financial statements for that year. We changed our fiscal year from the calendar year to the year ended September 30, effective with the year ended September 30, 2007. Since we do not have audited financial statements for the year ended December 31, 2008, which covers parts of two fiscal years, as of the date of this report, we have not determined our net income, as defined in the indenture, for the twelve months ended December 31, 2008.

The registration rights agreement with the holders of the convertible notes required us to have a registration statement covering the shares of common stock issuable upon conversion of the notes effective by March 28, 2008. We failed to meet that date. As a consequence, beginning March 28, 2008, for each 90 day period that we fail to have the registration statement declared effective, we must pay additional interest of $140,000, which is 1% of the principal amount of the notes. Through March 23, 2009, we had accrued additional interest of $560,000, of which $280,000 has been paid and $280,000 remained outstanding. If we fail to have the registration statement declared effective by June 21, 2009, an additional payment of $140,000 will become due.

We believe that we will have the financial ability to make all payments on the convertible notes and the senior notes based on the original terms set forth in the indentures, including payments of principal, interest, and additional interest, and we intend to make those payments. However, although we have working capital of approximately $24.4 million, more than $40 million of our current assets are represented by receivables, many of which have been outstanding for a significant period of time. If we are not able to collect our accounts and notes receivable and other receivables in a timely manner, we may have difficulty in making the required payments as well as funding our operations. If we are unable to make the payments as and when required under the indentures, the noteholders may exercise the remedies available under the indentures, including the right to accelerate payment of the notes in the total principal amount of $30.0 million. If the noteholders accelerate payment, we may be unable to continue in business unless we obtain replacement financing, which may not be available to us.

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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 March 31, 2009, we have invested $1,375,000 and our remaining commitment for future funding is $2,625,000.

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.

Revenue Recognition.  We recognize revenue when the significant risks and rewards of ownership have been transferred to the 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, 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 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. 

NEW ACCOUNTING PRONOUNCEMENTS

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 Company will be required to adopt SFAS No. 140 on October 1, 2009, which will apply to business combinations completed on or after that date.  Earlier adoption is not permitted.

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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. The Company will be required to adopt SFAS No. 160 on October 1, 2009.  Earlier adoption is not permitted. The Company is currently evaluating the impact that SFAS 160 may have on  its consolidated financial position, results of operations, and cash flows upon adoption.

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 was adopted by the Company on January 1, 2009.  The adoption of SFAS No. 161 did not have an impact on the Company’s financial position, results of operations, or cash flows.

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.  The Company will be required to adopt FSP FAS 142-3 on October 1, 2009.  Earlier adoption is not permitted.  The guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date.

At its June 25, 2008 meeting, the Financial Accounting Standards Board ratified the consensus reached by the Emerging Issues Task Force Issue 07-5 Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock  (EITF 07-5).  The adoption of EITF 07-5’s requirements will affect accounting for convertible instruments and warrants with down-round provisions.  Down-round provisions are designed to protect an investor in the event the issuer issues securities at a lower price or with a lower exercise or conversion price.  Convertible instruments and warrants which are derivatives and have such provisions will no longer be recorded in equity.  EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  Earlier application by an entity that has previously adopted an alternative accounting policy is not permitted.  The Company will be required to adopt EITF 07-5 commencing with the quarter ending December 31, 2009, which is the first quarter of the fiscal year ending September 30, 2010.  To the extent that the Company’s convertible notes and certain of its warrants are outstanding on December 31, 2009, the Company will reflect as a derivative liability the fair value of the derivate component of these securities and will reflect a gain or loss for the derivative liability based on the change in value of the derivative liability during each fiscal quarter during which the instruments are outstanding.

Item 4. Controls and Procedures

It is the responsibility of management to establish and maintain adequate internal controls over our financial reporting.  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.

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 as a result of which our disclosure controls and procedures may not be effective.  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 December 31, 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.

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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 and the six months ended March 31, 2009, 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 processes, 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 are 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,

• 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.

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. 

PART II. OTHER INFORMATION

Item 6. Exhibits

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1	Certification of Chief Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

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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: May 20, 2009	s/ Bo Huang
	Bo Huang, Chief Executive Officer
	s/ ShiaoMing Sheng
Dated: May 20, 2009	Chief Financial Officer