- Amended Quarterly Report (10-Q/A)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q/A

(Mark One)

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

For the quarterly period ended: March 31, 2009

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

For the transition period from ____________ to _____________

Commission File Number: 333-83375

CHINA NEW ENERGY GROUP COMPANY

(Exact Name of Registrant as Specified in Its Charter)

Delaware		65-0972647
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

20/F, Center Plaza, No.188 Jie Fang Road

He Ping District, Tianjin, China 300042

(Address of principal executive offices, Zip Code)

(86 22) 5829 9778

(Registrant’s telephone number, including area code)

No. 1703 and 1704, A Building, No. 1, Hongji Apartment, Jin Wei Road

He Bei District, Tianjin, China

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ¨

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 ¨ No ¨

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

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

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

The number of shares outstanding of each of the issuer’s classes of common equity, as of May 10, 2010 is as follows:

Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		101,788,199

Quarterly Report on FORM 10-Q/A

Three Months Ended March 31, 2009

Table of Contents

PART I
FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS.	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	39
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	47
ITEM 4.	CONTROLS AND PROCEDURES.	47

PART II
OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS.	48
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	48
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	48
ITEM 5.	OTHER INFORMATION.	48
ITEM 6.	EXHIBITS.	48

EXPLANATORY NOTE REGARDING RESTATEMENT

This Amendment No. 1 ("Form 10-Q/A") to our Quarterly Report on Form 10-Q for the three month period ended March 31, 2009 ("Form 10-Q"), which was filed with the SEC on May 15, 2009, amends the Form 10-Q to reflect restated amounts and revised disclosures of the Company's consolidated financial statements for the three month period ended March 31 2009 and for the year ended December 31, 2008.

The company has restated its property, plant and equipment, intangible assets, registration rights penalties payable and certain expenses for the three months ended March 31, 2009 and expanded the related footnote disclosures. These adjustments resulted in an increase in the Group’s net loss for the three months ended March 31, 2009 by $12,152,643, from the net loss of $338,900 to the net loss of $12,491,543, with a corresponding increase in accumulated deficit and equity at March 31, 2009. A detailed discussion of the restatement of the consolidated financial statements for the three months ended March 31, 2009 originally filed May 20, 2009 is included in note 18

PART I

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

CHINA NEW ENERGY GROUP COMPANY

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

Index to condensed consolidated financial statements – unaudited

	Page
Condensed Consolidated Balance Sheets (Restated)	2
Condensed Consolidated Statements of Operations and Comprehensive Loss (Restated)	4
Condensed Consolidated Statements of Cash Flows (Restated)	5
Notes to Condensed Consolidated Financial Statements	6

CHINA NEW ENERGY GROUP COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31		December 31
	2009		2008
	Restated
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	3,634,032	$	5,612,356
Restricted cash		220,737		221,152
Accounts receivable, net of allowance for doubtful accounts of $- and $-		1,685,239		2,183,087
Inventories, net		287,450		257,597
Prepaid expenses		376,738		133,614
Other current assets		2,338		3,340
TOTAL CURRENT ASSETS		6,206,534		8,411,146

Property, plant and equipment, net		13,495,652		13,470,468
Intangible assets, net		1,301,326		1,308,375
Other receivables		2,286,943		2,254,997
Deposits paid for acquisition of long term assets		1,497,837		1,424,747
Goodwill		63,017		63,014
TOTAL ASSETS	$	24,851,309	$	26,932,747

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

CHINA NEW ENERGY GROUP COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31			December 31
	2009			2008
	Restated
LIABILITIES AND EQUITY

CURRENT LIABILITIES
Accounts payable	$	997,417		$	874,542
Accruals and other payables		244,600			242,309
Acquisition consideration payable		-			1,838,946
Registration rights penalties payable		1,350,000			900,000
Tax payable		221,209			693,116
Related party payables		498,638			498,703
Dividends payable on preferred stock		329,000			194,000
Derivative financial instruments – warrants		17,218,657			5,506,143

TOTAL CURRENT LIABILITIES		20,859,521			10,747,759

Commitment and contingencies (Note 16)

Preferred Stock : 10,000,000 shares authorized, $0.001 par value Series A Convertible Preferred Stock: 1,857,373 shares issued and outstanding, liquidation preference of $8,971,112 as of March 31, 2009 and December 31, 2008		7,031,818			7,031,818

CHINA NEW ENERGY'S STOCKHOLDERS' DEFICIENCY

Common stock: 500,000,000 shares authorized, $0.001 par value, 100,000,041 shares issued and outstanding as of March 31, 2009 and December 31, 2008, respectively		100,000			100,000
Additional paid in capital		9,396,046			9,396,046
Accumulated deficit		(16,414,737	)		(3,809,149	)
Statutory surplus reserve fund		1,746,890			1,746,890
Accumulated other comprehensive income		1,606,297			1,616,977
TOTAL CHINA NEW ENERGY'S STOCKHOLDERS’ (DEFICIT) EQUITY		(3,565,504	)		9,050,764

Non-controlling interest		525,474			102,406
TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY		(3,040,030	)		9,153,170

TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY	$	24,851,309		$	26,932,747

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

CHINA NEW ENERGY GROUP COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	(Unaudited)
	For the three months ended
	March 31,
	2009			2008
	Restated
Revenue:
Connection services	$	146,752		$	-
Natural gas		178,265			101,755
		325,017			101,755
Cost of Sales:
Connection services		93,955			-
Natural gas		181,735			75,937
		275,690			75,937
Gross Profit		49,327			25,818
Operating Expenses:
General and administrative expenses		334,638			202,975
Selling expenses		50,500			43,444
Registration rights penalties		450,000			-
Total operating expenses		835,138			246,419
Operating Loss		(785,811	)		(220,601	)
Other Income (Expenses):
Change in fair value of derivative financial instruments – warrants		(11,712,514	)		-
Interest income		8,357			-
Interest expense		(671	)		(124	)
Other Income		93			-
Total other expenses		(11,704,735	)		(124	)
Loss From Continuing Operations, Before Income Tax		(12,490,546	)		(220,725	)
Income Tax		(997	)		-
Loss From Continuing Operations, net of Income Tax		(12,491,543	)		(220,725	)
Loss From Discontinued Operations, net of Income Tax		-			(17,838	)
Net Loss		(12,491,543	)		(238,563	)
Add: Net loss Attributable to Non-controlling Interest		20, 955			1,166
Net Loss Attributable to China New Energy Group		(12,470,588	)		(237,397	)
Dividends and Deemed Dividend on Preferred Stock		(135,000	)		-

Net Loss Attributable to Common Stockholders		(12,605,588	)		(237,397	)

Other Comprehensive Loss
Net Loss		(12,491,543	)		(238,563	)
Foreign currency translation		(10,679	)		127,843
Comprehensive Loss Attributable to Non-controlling Interest		5,026			1,291
Comprehensive Loss	$	(12,497,196	)	$	(109,429	)

(Loss) per share – Basic
(Loss) from continuing operations		(0.13	)		(0.00	)
(Loss) from discontinued operations		0.00			(0.00	)
Total (loss) per share	$	(0.13	)	$	(0.00	)

(Loss) per share – Diluted
(Loss) from continuing operations		(0.13	)		(0.00	)
(Loss) from discontinued operations		0.00			(0.00	)
Total (loss) per share	$	(0.13	)	$	(0.00	)

Weighted average common shares outstanding
Basic		100,000,041			95,134,934
Diluted		176,709,543			95,134,934

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

CHINA NEW ENERGY GROUP COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For The Three Months Ended
	March 31,
	2009			2008
	Restated
Cash flows from operating activities
Net loss	$	(12,491,543	)	$	(220,725	)
Net loss from discontinued operations		-			(17,838	)
Net loss from continuing operations		(12,491,543	)		(238,563	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		110,863			41,897
Change in fair value of derivative financial instruments – warrants		11,712,514			-
Registration rights penalties		450,000			-

Changes in operating assets and liabilities:
Accounts receivable		497,969			312,302
Other receivables		(18,465	)		-
Inventories		(29,838	)		179,024
Prepaid expenses		(243,112	)		12,201
Other current assets		1,002			-
Accounts payable		114,362			(181,084	)
Accrued expense		-			(332,724	)
Other payables		(4,541	)		(4,252	)
Tax payable		(471,940	)		1,620
Cash provided by operating activities-continuing operations		(372,729	)		(209,579	)
Cash provided by operating activities-discontinued operations		-			239

Net cash used in operating activities		(372,729	)		(209,340	)

Cash flows from investing activities
Deposits paid and acquisition of property, plant and equipment		(201,139	)		(184,660	)
Payment made to acquire subsidiary – Chensheng		(1,838,946	)		-
Cash used in investing activities-continuing operations		(2,040,085	)		(184,660	)
Cash used in investing activities-discontinued operations		-			(44,039	)

Net cash used in investing activities		(2,040,085	)		(228,699	)

Cash flows from financing activities
Fund deposit as restricted cash		415			-
Contribution from Non-controlling interest		438,852			59,656
Cash provided by financing activities-continuing operations		439,267			59,656
Cash provided by financing activities-discontinued operations		-			-

Net cash flows provided by financing activities:		439,267			59,656

Effect of exchange rate changes in cash and cash equivalents		(4,777	)		60,043

Net decrease in cash and cash equivalents		(1,978,324	)		(318,340	)

Cash and cash equivalents - beginning of period		5,612,356			2,311,028

Cash and cash equivalents - end of period	$	3,634,032		$	1,992,688

Supplemental disclosure of non cash investing and financing activities:

Interest paid in cash	$	-		$	-
Income taxed paid in cash	$	371,384		$	-

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

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

Restatement of previously issued March 31, 2009 Consolidated Financial Statements

The Group has restated its property, plant and equipment, intangible assets, registration rights penalties payable and certain expenses for the three months ended March 31, 2009 and expanded the related footnote disclosures. These adjustments resulted in an increase in the Group’s net loss for the three months ended March 31, 2009 by $12,152,643, from the net loss of $338,900 to the net loss of $12,491,543, with a corresponding increase in accumulated deficit and equity at March 31, 2009. A detailed discussion of the restatement of the consolidated financial statements for the three months ended March 31, 2009 originally filed May 20, 2009 is included in note 18.

1.	Basis of Presentation

The financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of our subsidiaries in China, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

The interim condensed consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Group, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Group believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the financial statements of the Group for the year ended December 31, 2008 and notes thereto included in the Form 10KA of China New Energy Group Company filed on April 15, 2010. The Group follows the same accounting policies in the preparation of interim reports.

Results of operations for the interim periods are not indicative of annual results.

2.	Organization and Nature of Business

China New Energy Group Company (“CNER” and the “Group”) was incorporated on March 28, 2008 in the state of Delaware USA, under the name of Travel Hunt Holdings, Inc.. On May 27, 2008, Travel Hunt changed its name to China New Energy Group Company in connection with a share exchange transaction as described below.

Reverse Acquisition

On March 28, 2008, the Company executed a share exchange agreement with Willsky Development Ltd. (“Willsky”) whereby the Company issued to the stockholders of Willsky 94,908,650 shares of the Company’s Common Stock in exchange for all of the issued and outstanding capital stock of Willsky (the “Share Exchange”). Prior to the Share Exchange, 7,091,391 shares of Common Stock were issued and outstanding. Willsky thereby became our wholly-owned subsidiary and the former shareholders of Willsky became our controlling stockholders.

Concurrently with the Share Exchange, the two existing shareholders of Travel Hunt surrendered to the Company a total of 2,000,000 shares of the Common Stock of the Company for cancellation in exchange for $660,000 payable through the delivery of a six month Convertible Promissory Note. After surrender, the existing shareholders retained 5,091,391 shares of our Common Stock.

Simultaneous with the consummation of the Share Exchange, the shareholder of Willsky, Eternal International Holding Group Ltd, a Hong Kong corporation, distributed 85,417,785 shares of the Company’s Common Stock to its shareholders as a dividend. Accordingly, following this distribution and the surrender of 2,000,000 shares held by the existing shareholders, Eternal International beneficially owned approximately 9.49% of the Company’s outstanding capital stock of 100,000,041 common shares.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

2.	Organization and Nature of Business - continued

This transaction has been accounted for as a reverse acquisition and recapitalization of the Company whereby Willsky is deemed to be the accounting acquirer (legal acquiree) and the Company the accounting acquiree (legal acquirer). The historical financial statements for periods prior to March 28, 2008, are those of Willsky except that the equity section and earnings per share have been retroactively restated to reflect the reverse acquisition.

Principal activity

The principal activity of the Group is the operation of natural gas distribution network through its Chinese subsidiary companies. The Group’s operating subsidiaries and branches (which together with the Company are collectively referred to as the “Group”) and their principal activities as of March 31, 2009 are as follows:

Willsky Development Ltd. (“Willsky”)

Willsky Development Ltd. (“Willsky”) was incorporated on May 31, 2005 under the laws of the British Virgin Islands.

Tianjin Sing Ocean Public Utility Development Co., Ltd. (“Singocean”)

In 2005, Willsky acquired a 99% shareholding in Singocean, which was formed in the PRC as an equity joint venture to be operated for a period of 50 years until January 18, 2054, with registered capital of $4,500,000 (RMB31,897,000). Singocean set up a branch division in Acheng, Tianjin, called Tianjin Sing Ocean Public Utility Development Co., Ltd. – Acheng Division (“Singocean – Acheng Division”) which is to be operated for a period of five years until December 28, 2010.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

2. Organization and Nature of Business-continued

Qinhuangdao Chensheng Gas Company Limited (“Chensheng”)

On September 16, 2008, our Singocean subsidiary entered into an Equity Swap Agreement with Mr. Xiu Hai Tian, whereby we acquired from Mr. Xiu a 49% ownership interest in Chensheng, in exchange for our 99% ownership in Hunchun Sing Ocean. The parties to the Equity Swap Agreement determined that the value of the 49% interest in Chensheng and the 99% interest in Hunchun Sing Ocean were approximately equal and therefore there was no cash or other consideration exchanged.

On December 10, 2008, we entered into an Agreement for Equity Transfer with the holders of the remaining 51% ownership interest in Chensheng. The Agreement was consummated on December 30, 2008 and the Company purchased the remaining 51% of Chensheng from 17 individuals, for an aggregate purchase price of approximately $1,840,000 (RMB 12,560,000). As a result, the Company owns 51% of Chensheng and our 99%-owned subsidiary Singocean owns 49% of Chensheng and thus the Group ultimately owns 99.5% of Chensheng.

China New Energy (Tianjin) Investment & Consulting Co., Ltd. (“Tianjin Investment”)

On January 12, 2009, Tianjin Investment was established in the PRC and is engaged in the business of investment holding.

Yingkou Zhongneng Gas Development Co., Ltd. (“Yingkou Zhongneng”)

On January 23, 2009, Yingkou Zhongneng was established in the PRC and operates a natural gas distribution network in the city of Dashiqiao.

Operational Rights and Right to Supply and Operate Gas Pipeline

The Group, through Singocean, has signed an “Investment Agreement of Piped Gas Project Construction in Dashiqiao City” which states that the Group is in charge of operations and management of the piped gas project in Dashiqiao. On June 16, 2005, the Dashiqiao City Construction Bureau gave the Group a certificate which confirmed that the Group has exclusive operational rights for thirty years in Dashiqiao City. The Group receives a connection fee of $380 (RMB2,600) per user.

On June 10, 2005, the Group, through Singocean, signed an “Investment Agreement of Piped Gas Project Construction in Acheng City” which states that the Group has the exclusive right to invest in and operate the gas pipeline system in Acheng City for thirty years. The Group receives a connection fee of $293 (RMB2,000) per user.

On October 8, 2005, the Group, through Chensheng, signed an “Investment Agreement of Piped Gas Project Construction in Qinhuangdao” which states that the Group has the exclusive right to invest in and operate the gas pipeline system in Qinhuangdao for twenty-five years. The Group receives a connection fee of $351 (RMB2,400) per user.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

3. Summary of Significant Accounting Policies

(a) Basis of Presentation

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of our subsidiaries in China, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

(b) Use of Estimates

In preparing consolidated financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Actual results could differ from those estimates.

Significant Estimates

These consolidated financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to revenue recognition of gas connection contracts, depreciation of property, plant and equipment, the valuation allowance for deferred taxes, impairment testing of intangible assets, the fair value of derivative instrument liabilities and various contingent liabilities. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.

The consolidated financial statements include the accounts of the Group and all of its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.

(d) Cash and Cash Equivalents

The Group 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 December 31, 2008, the Group did not have any cash equivalents.

Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. Management believes the probability of a bank failure, causing loss to the Group, is remote.

(e) Property, Plant and Equipment

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

Computer equipment		3 years
Furniture & fixtures		5 years
Office equipment		5 years
Motor vehicles		5 years
Gas transportation vehicles		5 -20 years
Gas station		20-25 years
Underground gas pipelines		20-30 years

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

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

3. Summary of Significant Accounting Policies-continued

(f) Intangible Assets

Intangible assets are generally amortized on a straight line basis over their respective estimated useful lives. The Group has no intangible assets with indefinite useful lives. Intangible assets represent land use rights in the PRC. According to Chinese regulations, land belongs to the nation. Land use rights refer to the purchase of the legal right to use land from the government. The term of the land use rights is 50 years. The land use rights are amortized using the straight-line method over their estimated useful life of 50 years.

(g) Inventories

Inventories, including construction materials, integrated circuit cards, gas meters, polyethylene valves and natural gas are stated at the lower of cost and net realizable value. Cost is calculated using the weighted average method. Net realizable value is based on estimated selling prices in the ordinary course of business less estimated costs to completion and the estimated costs necessary to make the sale.

(h) Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination, In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill” and Other Intangible Assets”, goodwill is no longer subject to amortization. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. Fair value is generally determined using a discounted cash flow analysis.

(i) Impairment of Assets

In accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", the Group evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment. If indicators of impairment exist and if the value of the assets is impaired, an impairment loss would be recognized. As of March 31, 2009 and December 31, 2008, no impairment loss has been recognized.

(j) Income Taxes

The Group accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Also, the Group did not have any liabilities for unrecognized income tax benefits according to the provisions of FIN 48.

(k) Revenue Recognition

Among the accounting policies adopted by the Group, the most critical one is the policy regarding revenue recognition of the Group’s major sources of income, namely, gas connection services and sales of gases. In accordance with the SEC's Staff Accounting Bulletin ("SAB") No. 104, under this policy, all of the following criteria must be met in order for us to recognize revenue:

Persuasive evidence of an arrangement exists;

Delivery has occurred or services have been rendered;

The seller's price to the buyer is fixed or determinable; and

Collectibility is reasonably assured.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

3. Summary of Significant Accounting Policies-continued

Gas connection revenue

Gas connection revenue is recognized when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably.

Revenue from gas connection contracts is recognized on the percentage of completion method, measured by reference to the value of work carried out during the year. When the outcome of a gas connection contract cannot be estimated reliably, revenue is recognized only to the extent of contract costs incurred that it is probable will be recoverable.

When the outcome of a gas connection contract can be estimated reliably and the stage of contract completion at the balance sheet date can be measured reliably, contract costs are charged to the income statement by reference to the stage of completion of the contract activity at the balance sheet date on the same basis as revenue from the gas connection contract is recognized.

When the outcome of a gas connection contract cannot be estimated reliably, contract costs are recognized as expenses in the period in which they are incurred. When it is probable that total contract costs will exceed contract revenue, the expected loss is recognized as an expense immediately.

Where contract costs incurred to date plus recognized profits less recognized losses exceed progress billings, the surplus is shown as an amount due from customers for contract work. For contracts where progress billings exceed contract costs incurred to date plus recognized profits less recognized losses, the surplus is shown as an amount due to customers for contract work. Amounts received before the related work is performed are included in the consolidated balance sheet, as a liability, as advances received. Amounts billed for work performed but not yet paid by the customer are included in the consolidated balance sheet under trade and other receivables.

During the three months ended March 31, 2009 and 2008, all the contracts for connection services were started and completed in the same period.

Revenue from sale of gas

Sales revenue from sale of gas represents the invoiced value of goods sold, net of value-added tax (“VAT”). Revenue from sale of gas is recognized when the goods are delivered and title has passed.

All of the Group’s products that are sold in the PRC are subject to Chinese value-added tax of 3% of the gross sales price. This VAT may be offset by VAT paid by the Group on raw materials and other materials included in the cost of producing their finished product. The Group recorded VAT payable and VAT receivable net of payments in the financial statements.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

3 . Summary of Significant Accounting Policies-continued

(l) Foreign Currency Translation and Transactions

The Group’s functional currency is the Renminbi (“RMB”) and its reporting currency is U.S. dollars. The Group’s consolidated balance sheet accounts are translated into U.S. dollars at the year-end exchange rates and all revenue and expenses are translated into U.S. dollars at the average exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred. The translation and transaction gains and losses were immaterial for the periods ended March 31, 2009 and 2008.

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

(m) Fair Value of Financial Instruments

The Group records and discloses certain financial and non-financial assets and liabilities at their fair value. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Ÿ	Level 1, defined as observable inputs such as quoted prices in active markets;

Ÿ	Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

Ÿ	Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring the Group to develop our own assumptions.

Our derivative instrument liabilities are recorded at fair value. Our financial instruments that are recorded at cost include cash and cash equivalents, restricted cash, accounts receivable, receivables related to subsidiaries sold, deposits for acquisitions, accounts payable, accrued expenses, dividends payable, other current liabilities, and our convertible preferred stock. We believe the carrying values of these financial instruments approximate their fair values due to their short-term nature.

(n) Derivative Financial Instruments

We do not use derivative financial instruments to hedge exposures to cash-flow, exchange-rate or market-risks that may affect the fair values of our financial instruments. However, certain financial instruments, such as warrants, which are indexed to our Common Stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or physical or net-share settlement is not within our control or (b) the instrument is not solely indexed to our Common Stock. Derivative financial instruments are initially recorded, and continuously carried, at fair value.

Determining the fair value of these complex derivative financial instruments involves judgment and the use of certain relevant assumptions including, but not limited to, interest rates and stock price volatility. The use of different assumptions could have a material effect on the estimated fair value amounts.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

3. Summary of Significant Accounting Policies-continued

(o) Basic and Diluted Earnings Per Share

The Group reports basic earnings per share in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Group represents the common stock outstanding during the reporting periods.

Diluted earnings per share is based on the assumption that all dilutive options were converted or exercised as of the beginning of the period or when issued, if later. Dilution is computed by applying the treasury stock method. Under this method, options are assumed to be exercised at the beginning of the period or the time of issuance, if later, and as if the funds obtained thereby were used to re-purchase common stock at the average market price during the period.

(p) Accumulated Other Comprehensive Income

Accumulated other comprehensive income represents the change in equity of the Group during the periods presented from foreign currency translation adjustments.

(q) Profit Appropriation

In accordance with PRC regulations, the Group is required to make appropriations to the statutory surplus reserve, based on after-tax net income determined in accordance with PRC GAAP. Appropriation to the statutory surplus reserve should be at 10% of the after-tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entity’s registered capital. Statutory surplus reserve is non-distributable other than in liquidation.

(r) Accounts Receivable

Gas connection fees are recognized on the percentage of completion method, measured by reference to the value of work carried out during the year. The portion that is not received in cash is recorded as accounts receivable.

Trade accounts receivable are stated at the amount management expects to collect from balances outstanding at the period end. Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Over the last two years, we have not experienced any bad debts from customers and, accordingly, did not have a provision for uncollectible accounts at March 31, 2009 and December 31, 2008.

Allowances for doubtful accounts receivable balances are recorded when circumstances indicate that collection is doubtful for particular accounts receivable or as a general reserve for all accounts receivable. Management estimates such allowances based on historical evidence such as amounts that are subject to risk. Accounts receivable are written off if reasonable collection efforts are not successful.

Based on management’s evaluation of historical experience, the following policy for allowance of doubtful accounts is established:

Trade and other receivables due:	% of Balance

Between 91 and 180 days:		5	%
Between 181 and 360 days:		20	%
Between 361 and 720 days:		50	%
Over 721 days:		100	%

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

3. Summary of Significant Accounting Policies-continued

(s) Non-controlling interests

As of March 31, 2009 , Tianjin Huan Long Trading directly held a 1% non-controlling interest in Tianjin Singocean and held a 0.5% non-controlling interest interest in Qinhuangdao Chengsheng Gas Co., Ltd.

(t) Discontinued Operations

Effective September 26, 2008, the Group entered into an asset swap in which it disposed of our former subsidiary Hunchun.

In accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets”, Hunchun operation is being accounted for as discontinued operations and, accordingly, its operating results are segregated and reported as discontinued operations in the accompanying consolidated statement of operations for the three months ended March 31, 2008.

(u) Advertising and Promotion Costs

Costs incurred in direct-response advertising are capitalized and amortized on a straight-line basis over the duration of the advertising campaign. As of March 31, 2009 and 2008, there was no capitalized direct-response advertising. All other advertising costs are expensed as incurred. Advertising and promotion costs were nil for the three months ended March 31, 2009 and 2008.

(v) Post-Retirement and Post-Employment Benefits

The Group’s subsidiaries contribute to a state pension plan in respect of its PRC employees. Other than the above, neither the Group nor its subsidiary provides any other post-retirement or post-employment benefits.

(w) Shipping and Handling Costs

Shipping and handling costs related to delivery of finished goods are included in other selling, general and administrative expenses. During the three months ended March 31, 2009 and 2008, shipping and handling costs were nil.

(x) Seasonality

Our pipeline distribution networks are primarily located in northeastern China, which is extremely cold during the winter months. During such time, we are unable to construct new primary gas pipelines. However, if a primary pipeline is already in place, we are able to connect new customers to our distribution network during the winter months. Additionally, gas consumption by residential customers is higher in the winter months for heating purposes, and we see a corresponding increase in usage during that time.

(y) New Accounting Pronouncements

Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

3. Summary of Significant Accounting Policies-continued

In December 2007, the FASB amended its guidance on accounting for business combinations. The new accounting guidance resulted in a change in our accounting policy effective January 1, 2009, and is being applied prospectively to all business combinations subsequent to the effective date. Among other things, the new guidance amends the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. It also establishes new disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. The adoption of this new accounting policy affects our acquisitions made during 2009.

In December 2007, the FASB issued new accounting and disclosure guidance related to non-controlling interests in subsidiaries (previously referred to as minority interests), which resulted in a change in our accounting policy effective January 1, 2009. Among other things, the new guidance requires that a non-controlling interest in a subsidiary be accounted for as a component of equity separate from the parent's equity, rather than as a liability. The new guidance is being applied prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively. The adoption of this new accounting policy affects the presentation and disclosure of non-controlling interests on our consolidated financial statements.

In August 2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring liabilities at fair value. This ASU provides additional guidance clarifying the measurement of liabilities at fair value in circumstances in which a quoted price in an active market for the identical liability is not available; under those circumstances, a reporting entity is required to measure fair value using one or more of the valuation techniques, as defined. This ASU is effective for the first reporting period, including interim periods, beginning after the issuance of this ASU. The adoption of this ASU did not have a material impact on the Group’s consolidated financial statements.

In January 2010, the FASB issued an accounting standard update to address the accounting for distributions to shareholders with components of stock and cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260 for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Group does not expect the provisions of this ASU to have a material effect on the financial position, results of operations, or cash flows of the Group.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

4. Restricted Cash

At March 31, 2009 and December 31, 2008, restricted cash of $220,737 and $221,152 represented the cash held by an escrow agent for expenses relating to investor and public relations.

5. Other Receivables

Other receivables consist of the following:

	March 31 2009		December 31 2008
	Unaudited

Due from Tianjin East Ocean Gas Company Limited	$	1,416,790	$	1,416,707
Other receivables		870,153		838,290

Total	$	2,286,943	$	2,254,997

The balance due from Tianjin East Ocean Gas Company Limited (“East Ocean”) represents the amount due from Hunchun to the Group which was assigned to East Ocean when East Ocean obtained 99% ownership of Hunchun by the exchange of a 49% ownership interest in Chensheng during September 2008.

Other receivables are mainly comprised of an amount due from the Dashiqiao City Construction Bureau relating to various construction projects. These deposits will be refunded to us once certain construction milestones are completed.

6. Inventories

Inventories at March 31, 2009 and December 31, 2008 of $287,450 and $257,597, respectively, consist of raw materials and do not include any work in progress or finished goods.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

7. Property, Plant and Equipment, net

Property, plant and equipment consist of the following:

	March 31 2009			December 31 2008
	Unaudited
	(Restated)
At Cost
Office Equipment	$	77,772		$	33,660
Motor Vehicles		171,184			171,175
Gas Transportation Vehicles		652,948			652,910
Gas Station		891,343			891,291
Machinery		141,733			141,725
Underground Gas Pipelines		6,631,285			6,630,897
		8,566,265			8,521,658
Less: Accumulated depreciation		(744,517	)		(640,741	)
	$	7,821,748		$	7,880,917
Construction-in-progress		5,673,904			5,589,551
		13,495,652			13,470,468

The gas pipelines, gas station, and other constructed assets belong to the Group, not to the municipalities or other units that contract with the Group to provide the hookups and the gas distribution to the households. Depreciation is provided for these assets as they are used in operations.

During the three months ended March 31, 2009, depreciation expenses amounted to $103,738, of which $94,471 and $9,267 were recorded as cost of sales and general and administrative expenses, respectively.

During the three months ended March 31, 2008, depreciation expenses amounted to $39,853, of which $37,602 and $2,251 were recorded as cost of sales and general and administrative expenses, respectively.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

8. Intangible Assets, net

Intangible asset consist of the following:

	March 31 2009			December 31 2008
	Unaudited
	(Restated)
Land use rights	$	1,348,995		$	1,348,915
Less: accumulated amortization		(47,669	)		(40,540	)

	$	1,301,326		$	1,308,375

Amortization expense for the three months ended March 31, 2009 and 2008 was $7,125 and $2,044, respectively.

Estimated amortization for the next five years and thereafter is as follows:

Remainder of 2009	$	21,375
2010		28,500
2011		28,500
2012		28,500
2013		28,500
Thereafter		1,165,951

Total	$	1,301,326

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

9. Acquisition Consideration Payable

	March 31 2009		December 31 2008
	Restated

Acquisition consideration payable relating to the purchase of Chensheng		-		1,838,946
Total	$	-	$	1,838,946

The acquisition consideration payable as of December 31, 2008 represents the amount due for acquiring the remaining 51% interest in Chensheng in December, 2008 (see Note 2). This amount was paid on January 20, 2009.

10. Related Party Payable

As of March 31, 2009 and December 31, 2008, the Group has the following balances payable to related parties:

	March 31 2009		December 31 2008
	Restated
Eternal International Holding Group Ltd, shareholder of the Company		400,726		400,797

Tianjin Huanlong Commercial and Trading Company, non-controlling shareholder of the a subsidiary	$	97,912	$	97,906
	$	498,638	$	498,703

The balances have no stated terms for repayment and are not interest bearing.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

11. Capital Stock Transactions

August 20, 2008 Private Placement - Series A Redeemable Convertible Preferred Stock

In connection with the August 20, 2008 private placement, the Company filed a Certificate of Designations of Preferences, Rights and Limitations of Series A Convertible Preferred Stock with the Secretary of State of the State of Delaware (the "Certificate"). The Company’s Certificate of Incorporation authorizes it to issue 10,000,000 shares of Preferred Stock and by the filing, 5,500,000 shares were designated as Series A Convertible Preferred Stock ("Series A Preferred Stock"). On August 20, 2008, the Company issued 1,857,373 shares of Series A Preferred Stock to China Hand Fund I, LLC (“China Hand”).

At March 31, 2009 and December 31, 2008, 1,857,373 shares of Series A Preferred Stock were issued and outstanding.

Dividends

The holders of the Series A Preferred Stock are entitled to cumulative dividends at a rate of 6% per annum of the stated price paid per share of $4.83, compounded daily and payable semi-annually on June 1 and December 1. Dividends are payable in shares of Common Stock or, at the option of the Company, in cash. If paid in shares of Common Stock, the number of shares to be issued is determined by dividing the dividend payable by 90% of the volume-weighted average price for the 20 days preceding the dividend payment date of June 1 or December 1. As long as any shares of Series A Preferred Stock are outstanding, the Company may not declare or pay dividends with respect to the Common Stock.

Voting Rights

In addition to the right to vote as a separate class of securities, the holders of the Preferred Stock are entitled to vote together with the holders of the Company’s Common Stock, with each such holder of Series A Preferred Stock entitled to the number of votes equal to the number of shares of the Company’s Common Stock in to which such Series A Preferred Stock would be converted if converted on the record date for the taking of a vote. However, for so long as the number of outstanding shares of Series B Preferred Stock is at least 30% of the total number of shares of Series B Preferred Stock originally issued, the holders of Series B Preferred Stock vote together as a single class with the holders of the Company’s Common Stock and the holders of any other class or series of shares entitled to vote with the Common Stock, including the Series A Preferred Stock, with the holders of Series B Preferred Stock being entitled to 70% of the total votes on all such matters regardless of the actual number of shares of Series B Preferred Stock then outstanding, and the holders of Series A Preferred Stock and Common Stock being entitled to their proportional share of the remaining 30% of the total votes based on their respective voting power.

Liquidation

Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (each, a “Liquidation Event”), the holders of the Series A Preferred Stock are entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series A Preferred Stock an amount equal to $4.83, plus any accumulated but unpaid dividends thereon (the “Liquidation Value”), before any distribution or payment is made to the holders of any securities which are junior to the Series A Preferred Stock upon the occurrence of a Liquidation Event and after any distributions or payments made to holders of any class or series of securities which are senior to the Series A Preferred Stock upon the occurrence of a Liquidation Event. If the assets of the Company are insufficient to pay in full such amounts, then the entire assets to be distributed to the Series A Holders will be distributed among the Series A Holders ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. In the event the assets of the Company available for distribution to the holders of shares of Series A Preferred Stock upon the occurrence of a Liquidation Event are insufficient to pay in full all amounts to which such holders are entitled, no such distribution shall be made on account of any shares of any other class or series of capital stock of the Company ranking on a parity with the shares of Series A Preferred Stock upon the occurrence of such Liquidation Event unless proportionate distributive amounts are paid on account of the shares of Series A Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon the occurrence of such Liquidation Event.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

11. Capital Stock Transactions -continued

August 20, 2008 Private Placement - Series A Redeemable Convertible Preferred Stock

Conversion

Each share of Series A Preferred Stock is initially convertible, at any time at the option of the holder, into 35 shares of the Company’s Common Stock, subject to future adjustments as provided for in the Certificate. The Series A Preferred Stock will automatically convert into shares of the Company’s Common Stock immediately prior to any transaction resulting in a Change in Control of the Company. Further, provided there is an effective registration statement covering the shares to be received on conversion, the Company may require conversion of the Series A Preferred Stock if the volume-weighted average price for at least 20 trading days in any consecutive 30 day period equals or exceeds twice the conversion price and the trading volume on each day in the 30 day period has equaled or exceeded 100,000 shares.

The conversion price of the Series A Preferred Stock will be adjusted for standard anti-dilution events, including stock dividends or stock splits or reclassification of shares of the Common Stock. For as long as any shares of Series A Preferred Stock remain outstanding, the Company may not enter into any Variable Rate Transactions or Most Favored Nation transactions. If the Company does enter into a Variable Rate Transaction, in which it issues debt or equity securities that are convertible into shares of Common Stock at a conversion or exercise price that is based upon or varies with the trading price for shares of the Common Stock or enters into a Most Favored Nation transaction in which the Company issues any securities in a capital raising transaction or series of transactions on terms more favorable than those granted to the holders of the Series A Preferred Stock, the holders of the Series A Preferred Stock are entitled to adjustment of the conversion price and to receive additional shares or other rights. Furthermore, if the Company issues (except in an underwritten public offering approved by holders of the Series A Preferred Stock in which the gross proceeds to the Company are not less than $20 million) any shares of Common Stock or securities convertible into shares of Common Stock at a price which is less than the conversion price then in effect, the conversion price will be reduced to that lower price.

As long as 20% of the shares of Series A Preferred Stock remain outstanding,, the Company may not issue any other preferred stock (except for the issuance of Series A Preferred Stock and Series B Preferred Stock issued pursuant to the agreements under which those Series were originally issued) or any convertible debt convertible into Common Stock, without the consent of the holders of outstanding shares of Series A Preferred Stock.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

11. Capital Stock Transactions -continued

August 20, 2008 Private Placement - Series A Redeemable Convertible Preferred Stock

Warrants

On August 20, 2008, the Company consummated a private placement transaction in which it issued and sold to China Hand, 1,857,373 shares of the Company's Series A Preferred Stock and warrants to purchase 13,001,608 shares of the Company's common stock at an initial exercise price of $0.187 per share (subject to adjustments) for a period of 5 years following the date of issuance, for a purchase price of $9 million in gross proceeds. The proceeds left the Company with $7,076,302 in net proceeds after the deduction of offering expenses in the amount of $1,923,698 and which includes a cash fee equal to $900,000, representing 10% of the gross proceeds received from the Private Placement to Kuhns Brothers and other offering costs of $1,023,698. Currently, none of the warrants have been exercised.

Kuhns Brothers Securities Corporation ( “ Kuhns Brothers ” ) acted as placement agent in connection with the Private Placement. As compensation for its services, Kuhns Brothers received a cash fee equal to $900,000, representing 10% of the gross proceeds received from the Private Placement, as well as warrants to purchase 6,500,804 shares of the Company’s common stock (the “Agent Warrants”), representing 10% of the aggregate number of shares of common stock issuable to China Hand upon conversion of the Preferred Stock sold in the Private Placement.

The fair value of the 13,001,608 warrants issued with the Series A Redeemable Convertible Preferred Stock was $1,968,182 to investors and the fair value of the 6,500,804 warrants issued to the placement agent was $984,091 at the issuance date and the total amount was $2,952,273. The fair value was computed using the Cox-Ross-Rubinstein (“CRR”) Binomial Model under the following assumptions: (1) expected life of 5 years, (2) volatility of 66%, (3) risk free interest rate of 3% and dividend rate of 0%.

As at March 31, 2009 and December 31, 2008, the fair value of the warrants was $17,218,657 and $5,506,143, respectively. Therefore, the Company recognized a loss of $11,712,514 and $2,553,870 loss from the change in fair value for the quarter ended March 31, 2009 and for the year ended December 31, 2008.

As at March 31, 2009 and December 31, 2008, the fair value of the warrants was $17,218,657 and $5,506,143, respectively, based on the following assumptions:

	March 31, 2009			December 31, 2008

Warrants outstanding		19,502,412			19,502,412
Exercise price	$	0.187		$	0.187
Annual dividend yield		0	%		0	%
Expected life (years)		4.42			4.64
Risk-free interest rate		1.51	%		1.45	%
Expected volatility		90	%		66	%

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

11. Capital Stock Transactions -continued

August 20, 2008 Private Placement - Series A Redeemable Convertible Preferred Stock

Make Good Provision

The Company agreed to make good provisions that will require the Company to issue to China Hand up to an aggregate of 1,114,442 (557,221 shares for each of 2008 and 2009) additional shares of its Preferred Stock if it does not achieve the targeted after-tax net income and earnings per share targets for 2008 and 2009. The 2008 after tax net income target is $4,300,000, and the 2008 earnings per share target is $0.0261 on a fully-diluted basis. The 2009 after tax net income target is $6,000,000 and the 2009 earnings per share target is $0.0294 on a fully diluted basis; provided that if the Subsequent Closing does not occur within 30 days of the filing of the Company’s 2008 annual report on Form 10-K. As of December 31, 2008, the Company has not met the 2008 Income Target of $4,300,000.

The Company agreed to issue to China Hand 241,545 shares of Series A Preferred Stock because the Company did not meet the 2008 earnings target.

Management Incentive

China Hand agreed to place in escrow 46,434 shares of Series A Preferred Stock, to be issued to certain members of the Company’s management as a performance incentive if the 2008 and 2009 earnings targets were met. The 2008 earnings target was not met and the shares were returned to China Hand. In connection with the May 1, 2009 private placement with China Hand, the number of shares to be provided as an incentive for 2009 was revised to 22,328 shares of Series B Preferred Stock.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

11. Capital Stock Transactions -continued

August 20, 2008 Private Placement - Series A Redeemable Convertible Preferred Stock

Registration Right Liabilities

In connection with the private placement, the Group and China Hand entered into a Registration Rights Agreement dated August 20, 2008, in which the Group agreed to register all of the shares of Common Stock underlying the securities issued to China Hand. The Agreement requires the Group to file the required Registration Statement within 45 days of August 20, 2008 and achieve effectiveness within 150 days, i.e., file by October 4, 2008 and achieve effectiveness by January 17, 2009.

The Group is subject to registration delay payments if it is unable to file the Registration Statement, cause it to become effective or maintain its effectiveness as required by the Registration Rights Agreement. Registration delay payments accrue at a rate of 1% per month of the aggregate investment amount paid by the holder or $90,000 per month, provided that the maximum aggregate amount of the registration delay payments will be $1,350,000, or 15% of the gross proceeds of the private placement.

As of December 31, 2008, the Group has not filed the required Registration Statement. Management currently expects to file the required Registration Statement and use it best efforts to have it effective by December, 2009. In accordance with the guidance in EITF 00-19-2, the Group has accrued the $90,000 per month registration delay payments for the 15 month period from October, 2008 to December, 2009 and as of March 31, 2009 and December 31, 2008, has accrued an amount of $1,350,000 and $900,000 for these registration delay payments respectively.

August 20, 2008 Private Placement - Series A Redeemable Convertible Preferred Stock

Accounting

In accordance with the guidance in FAS 133 Derivatives and Hedging – Recognition , the Series A Preferred Stock is considered to be an equity instrument and, accordingly, the embedded conversion option has not been separated and accounted for as a derivative financial instrument. After allocating $1,968,182 to the initial fair value of the warrants issued to China Hand, the remaining proceeds received from China Hand of $7,031,818 were allocated to the carrying value of the Series A Preferred Stock. As required by EITF 00-27 Beneficial Conversion Features , the Company recognized a beneficial conversion feature as of the date of issuance of the Series A Preferred Stock. The amount of the beneficial conversion feature exceeded the proceeds allocated to the carrying value of the Series A Preferred Stock and, accordingly, the beneficial conversion feature recorded was limited to the allocated proceeds. Because the holders of the Series A Preferred Stock may convert their shares at any time, the beneficial conversion feature recorded of $7,031,818 was immediately recognized as a deemed dividend to those holders.

As discussed above, the Company was obligated to issue additional shares of Series A Preferred Stock to China Hand if the Company did not meet prescribed earnings targets for 2008 and 2009. This obligation represents a contingent beneficial conversion feature, which would be accounted for at the date the contingency is resolved. Because all of the proceeds allocated to the Series A Preferred Stock were recognized at inception as a beneficial conversion feature, no further recognition of any beneficial conversion feature is permitted and the 241,545 additional shares issued to China Hand because the 2008 earnings target was not met have been recorded at their par value.

Because the Series A Preferred Stock has conditions for its redemption that may be outside our control, including the right of the holders to request redemption at the liquidation value in the event of a Fundamental Transaction or a Change in Control, in accordance with EITF D-098 Distinguishing Liabilities from Equity , the Series A Preferred Stock has been classified outside of Stockholders’ Equity in our consolidated balance sheet. Because the Company believes that it is not probable that the Series A Preferred Stock will become redeemable, the carrying value of the Series A Preferred Stock is not being adjusted to its redemption value.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

12. Income Taxes

USA

The Group and its subsidiary and branch divisions are subject to income taxes on an entity basis on income arising in, or derived, from the tax jurisdiction in which they operate. As the Group had no income generated in the United States, there was no tax expense or tax liability due to the Internal Revenue Service of the United States as of March 31, 2009.

BVI

Willsky incorporated under the international Business Companies Act of the British Virgin Islands and, accordingly is exempted from payment of British Virgin Islands income taxes.

PRC

Pursuant to the PRC Income Tax Laws, the prevailing statutory rate of enterprise income tax is 25% for Singocean, Acheng, and Daishiquiao, whereas Chensheng is being taxed on 0.8% of its annual sales.

The Group had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of FIN 48. The income tax expense was $997 and $0 for the three months ended March 31, 2009 and 2008, respectively. The Group has recorded no deferred tax assets or liabilities as of March 31, 2009 and 2008, since nearly all differences in tax basis and financial statement carrying values are permanent differences.

Our policy for recording interest and penalties associated with audits is to record such items as a component of income tax expenses. There were no interest and penalties recorded for the three months ended March 31, 2009.

	For The Three Months Ended
	March 31,
	2009			2008
	Unaudited			Unaudited
	(Restated)
Income Tax Expense
Current tax	$	997		$	-
Change in deferred tax assets – NOL		3,124,970			35,240
Change in valuation allowance		(3,124,970	)		(35,240	)
Total	$	997		$	-

All of the Group’s income (loss) before income taxes is from PRC sources. Actual income tax expenses reported in the consolidated statements of income and comprehensive income differ from the amounts computed by applying the PRC statutory income tax rate of 25% for the fiscal year of 2009 and 2008 respectively to income (loss) before income taxes for the three months ended March 31, 2009 and 2008 for the following reasons:

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

12. Income Taxes-continued

	For The Three Months Ended
	March 31,
	2009			2008
	Unaudited			Unaudited
	(Restated)

Loss from continuing operations before income taxes	$	(12,490,546	)	$	(220,725	)

Computed “expected” income tax expense at 25% in 2009 and 2008, except on the net income of Chensheng of $2,931 in 2009 and $- in 2008	$	(3,125,567	)		(55,181	)
Income tax expense of “Chensheng” - charged at 0.8% of gross sales of $ 199,250 and $- in 2008		1,594			-
Tax effect of net taxable permanent differences		-			19,941
Effect of cumulative tax losses		3,124,970			35,240
	$	997		$	-

Our policy for recording interest and penalties associated with audits is to record such items as a component of income tax expense. There were no interest and penalties recorded for the years ended December 31, 2009 and 2008.

13. Earnings Per Share

Basic earnings per share (EPS) is computed by dividing the earnings for the periods by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including stock options and warrants, in the weighted average number of common shares outstanding for a period, if dilutive. The numerators and denominators used in the computations of basic and dilutive EPS are presented in the following table:

	Three months ended March 31,
	2009			2008
	unaudited			unaudited
	(restated)
Numerator for basic earnings (loss) per share from continuing operations
Net (loss) income from continuing operations	$	(12,470,588	)	$	(237,397	)
Dividend on preferred stocks		(135,000	)		-

Income (loss) from continuing operations used in computing basic earnings per share	$	(12,605,588	)	$	(237,397	)

Basic earnings (loss) per share from continuing operations	$	(0.13	)	$	(0.00	)

Numerator for basic earnings (loss) per share from discontinued operations
Net income (loss) from discontinued operations	$	-		$	(17,838	)
Dividend on preferred stocks		-			-

Income (loss) from discontinued operations used in computing basic earnings per share	$	-		$	(17,838	)

Basic earnings (loss) per share from discontinued operations	$	-		$	0.00

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

13. Earnings Per Share - continued

Numerator for diluted earnings per share from continuing operations
Net income (loss) from continuing operations	$	(12,605,588	)	$	(237,397	)
Dividend on preferred stocks		135,000			-

Income (Loss) from continuing operations used in computing diluted earnings per share	$	(12,470,588	)	$	(237,397	)

Diluted earnings (loss) per share from continuing operations	$	(0.13	)	$	0.00

Numerator for diluted earnings per share from discontinued operations
Net income (loss) from discontinued operations	$	-		$	(17,838	)
Dividend on preferred stocks		-			-

Income (loss) from discontinued operations used in computing diluted earnings per share	$	-		$	(17,838	)

Diluted earnings (loss) per share from discontinued operations	$	-		$	0.00

Denominator for basic and diluted earnings per share
Weighted average shares of common stock outstanding		100,000,041			95,134,934
Weighted average shares of common stock issuable on assumed conversion of preferred stock outstanding		65,008,055			-
Dilutive effect of options, warrants, and contingently issuable shares		11,701,447			-
Shares used in computing diluted net income (loss) per share		176,709,543			95,134,934

Total earnings (loss) per share:
Basic	$	(0.13	)	$	0.00
Diluted	$	(0.13	)	$	0.00

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

14. Business and geographical segments

The Group’s operations are classified into two principal reportable segments which are provision of gas pipe connection services and provision of natural gas. Separate management of each segment is required because each business unit is subject to different production and technology strategies.

Reportable Segments

	Provision of gas pipe connection services			Provision of natural gas			Corporate			Provision of connection services		Provision of natural gas			Corporate		Total
	For the three months ended March 31, 2009									For the three months ended March 31, 2008							For the three months ended March 31
																	2009			2008

External revenue	$	146,752		$	178,265		$	-		$	-	$	101,755		$	-	$	325,017		$	101,755
Interest income		8,357			-			-			-		-			-		8,357			-
Interest expense		(211	)		-			(460	)		-		(124	)		-		(671	)		(124	)
Depreciation and amortization		53,566			40,905			16,392			26,172		11,430			4,295		110,863			41,897
Income Tax		997			-			-			-		-			-		997			-

Net income (loss) after income tax		60,484			(3,470	)		(12,548,557	)		-		(238,563	)				(12,491,543	)		(238,563	)

Expenditures for long-lived assets		137,166			19,865			44,108			-		184,373			-		201,139			184,373

		As at March 31, 2009												At December 31, 2008												As at March 31, 2009				At December 31, 2008
Assets			15,336,666				8,277,575				1,237,068				16,542,520				2,520,108				7,870,119				24,851,309				26,932,747

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

15. Concentrations and Credit Risk

Cash - Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the PRC. The Group considers all highly liquid instruments purchased with original maturities of three months or less, and money market accounts, to be cash equivalents. Total cash in these banks at March 31, 2009 and 2008 amounted to $3,634,032 and $5,612,356, respectively, of which no deposits were covered by insurance. Also, as of March 31, 2009 and 2008, the Group held $220,737 and $221,152 in restricted cash in a corporate legal counsel’s trust account respectively, in accordance with an agreement with investors for the restricted use of preferred stock dividend and investor relation related expenses. Nonperformance by these institutions could expose the Group to losses not covered by insurance. Management reviews the financial condition of these institutions on a periodic basis. The Group has not incurred any losses on these accounts from nonperformance by the aforementioned institutions.

Major customers –For the three months ended March 31, 2009, one customer accounted for approximately 45% of the Company’s sales and four customers accounted for approximately 58% of the Company’s accounts receivable as of March 31, 2009. For the three months ended March 31, 2008, no customers accounted for more than 10% of the Company’s sales and two customers accounted for approximately 90% of the Company’s account receivable as of March 31, 2008.

Major suppliers –For the three months ended March 31, 2009, one supplier accounted for approximately 13% of the Company’s purchases and three suppliers accounted for approximately 67% of the Company’s accounts payable as of March 31, 2009. For the three months ended March 31, 2008, no suppliers accounted for more than 10% of the Company’s purchases and three suppliers accounted for approximately 79% of the Company’s accounts payable as of March 31, 2008.

Political and economic risks - The Group's operations are carried out in the PRC. Accordingly, the Group's business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, and by the general state of the PRC's economy. The Group's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic, and legal environments, and foreign currency exchange. The Group's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among others.

The Group does not require collateral to support financial instruments that are subject to credit risk.

Environmental Matters - The Group does not anticipate any material future cash requirements related to environmental issues. If circumstances change, the Group will record the estimated charges necessary to return sites to their original condition.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

16. Commitments and Contingencies

Operating Leases - In the normal course of business, the Group leases the land for hen house under operating lease agreements. The Group rents land, primarily for the office rental. The operating lease agreements generally contain renewal options that may be exercised at the Group’s discretion after the completion of the base rental terms. The Group was obligated under operating leases requiring minimum rentals as follows:

As of December 31,

Remainder of 2009	$	100,219
2010		114,743
2011		-
2012		-
2013		-
Thereafter		-

Total minimum lease payments	$	214,962

During the three months ended March 31, 2009 and 2008, rental expenses included in general and administrative expenses were $35,479 and $0, respectively.

As of March 31, 2009, and December 31, 2008, the Group did not have any contingent liabilities.

The Group is obligated to provide uninterrupted piped gas to connected users and to ensure safety in the process of piped gas operations. The volume of gas to be supplied by the Group will grow with the increase of gas users. The Group has selected three qualified gas resource suppliers to ensure stable operations in meeting its obligations.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

17. Subsequent Events

Issuance of Series B Convertible Preferred Stock Securities Purchase Agreement

On April 30, 2009, China New Energy Group Company (the “Group”) entered into a Series B Convertible Preferred Stock Securities Purchase Agreement (the “SPA”) with China Hand Fund I L.P. (“China Hand”).

Pursuant to the SPA, on May 1, 2009, the Group issued and sold to China Hand, and China Hand purchased from the Group, 1,116,388 shares of the Group’s Series B Convertible Preferred Stock (“Series B Preferred Stock”) and warrants (the “Warrants”) to purchase 7,814,719 shares of its Common Stock at an initial exercise price of $0.187 per share (subject to adjustments) for a period of five (5) years following the date of issuance for an aggregate purchase price of $5,400,000 (the “Private Placement”).

Kuhns Brothers Securities Corporation (“Kuhns Brothers”) acted as placement agent in connection with the Private Placement. As compensation for its services, Kuhns Brothers received a cash fee equal to $540,000, representing 10% of the gross proceeds received from the Private Placement, as well as warrants to purchase 3,907,358 shares of the Group’s Common Stock (the “Agent Warrants”), representing 10% the aggregate number of shares of common stock issuable to China Hand in the Private Placement upon conversion of the Preferred Stock.

In connection with the signing of the SPA, on April 30, 2009, the Group also entered into a Closing Escrow Agreement by and among the Group, China Hand and Escrow LLC (the “Escrow Agent”), pursuant to which China Hand agreed to deposit all funds due to the Group under the SPA in escrow until such time as all closing conditions of the SPA have been satisfied and the Escrow Agent shall have received notice, executed by both the Group and China Hand, instructing the Escrow Agent to release such funds to the Group. The Closing Escrow Agreement terminates upon the release of all funds from escrow as described above, or upon the 90 th day following the date of the Closing Escrow Agreement if no such instructions to disburse funds is received by the Escrow Agent, on which date all such funds will be returned to China Hand.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

17. Subsequent Events - continued

Make Good Provision

Additionally, the Group agreed to make good provisions that will require the Group to issue to China Hand up to 334,916 additional shares (the “Make Good Shares”) of its Series B Preferred Stock if it does not achieve an audited after-tax net income of $5.0 million for the year ending December 31, 2009 (the “2009 Income Target”); if the Group is successful in achieving the 2009 Income Target, China Hand will transfer 22,327 shares of its Series B Preferred Stock to certain members of the Group’s management, which shares have been deposited into an escrow account. The Group also agreed to issue to China Hand 27,910 shares of Series B Preferred Stock if the Group’s Common Stock is not listed for trading on a national securities exchange on or before January 31, 2010 (the “Listing Shares”).

Amendment and Restatement of Certain Registration Rights

In connection with the closing of the Private Placement, the Group and China Hand amended and restated that certain registration rights agreement between the Group and China Hand dated August 20, 2008. Pursuant to the Amended and Restated Registration Rights Agreement (the “Amended and Restated Registration Rights Agreement”), among other things, the Group agreed to register all of the shares of common stock underlying the securities issued to China Hand in the Private Placement, as well as the private placement that was consummated on August 20, 2008 (collectively, the “Shares”) within a pre-defined period. Under the terms of the Amended and Restated Registration Rights Agreement, the Group is obligated to file a registration statement (the “Registration Statement”) under the Securities Act of 1933 covering the resale of the Shares by May 30, 2009. The Group is subject to registration delay payments in amounts prescribed by the Amended and Restated Registration Rights Agreement if it is unable to file the Registration Statement, cause it to become effective or maintain its effectiveness as required by the Amended and Restated Registration Rights Agreement. Registration delay payments will accrue at a rate of $54,000 per month or one percent (1%) of the gross proceeds of the Private Placement; provided that the maximum aggregate amount of the registration delay payments pursuant to the Amended and Restated Registration Rights Agreement is $810,000, or fifteen percent (15%) of the gross proceeds of the Private Placement.

Waiver of Certain Post-Closing Obligations in the August Securities Purchase Agreement

As partial consideration for the Group’s issuance of the Series B Preferred Stock, and in connection with the closing of the Private Placement, the Group and China Hand executed a Waiver (the “Waiver”) of certain post-closing obligations relating to the private placement consummated between the parties on August 20, 2008. Specifically, China Hand waived its rights (i) to 557,212 shares of the Group’s Series A Preferred Stock held in escrow and due to China Hand as of the date of the closing pursuant to a Securities Purchase Agreement dated August 8, 2008 (the “August SPA”); provided that the Group agreed to deliver to China Hand 241,545 shares of Series A Preferred Stock and to place an additional 241,545 shares of Series A Preferred Stock into escrow, to be delivered to China Hand if the Group’s after-tax net income for the year ending December 31, 2009 is not at or above $5,000,000 (the “Amended Series A Make Good”); (ii) under Section 6.18 of the August SPA in favor of the Amended Series A Make Good; (iii) to liquidated damages under Section 6.31 of the August SPA arising from the Group’ s failure to effect a reverse split of its Common Stock prior to March 31, 2009; and (iv) its rights to liquidated damages under a Registration Rights Agreement dated August 20, 2008, provided that the parties enter into the Amended and Restated Registration Rights Agreement.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

17. Subsequent Events - continued

Board of Directors Nomination

In connection with the Private Placement, China Hand, together with the holders of the Group’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”), will have the right to nominate an aggregate of four (4) members to the Group’s Board of Directors following the closing of the Private Placement. In connection with the closing of the private placement consummated between the parties on August 20, 2008 as noted above, China Hand nominated John D. Kuhns and James Tie Li to the Group’s Board of Directors, and accordingly, may nominate up to two additional members to the Board of Directors. John D. Kuhns is the president, chief executive officer, director and principle shareholder of Kuhns Brothers, and is a principal of China Hand. James Tie Li is a consultant for Kuhns Brothers.

Material Modification to the Rights of Security Holders

In connection with the Private Placement, the Group filed a Certificate of Designations of Preferences, Rights and Limitations of Series B Convertible Preferred Stock with the Secretary of State of the State of Delaware (the “Certificate”). Pursuant to the Certificate, there are 2,000,000 shares of Series B Preferred Stock authorized. The holders of the Series B Preferred Stock will be entitled to cumulative dividends at a rate of 6% of the price paid per share, as may be adjusted in accordance with the Certificate, per annum compounded daily and payable semi-annually.

Additionally, in addition to the right to vote as a separate class of securities, the holders of the Preferred Stock are entitled to vote together with the holders of the Group’s common stock, with each such holder of Preferred Stock entitled to the number of votes equal to the number of shares of the Group’s common stock in to which such Preferred Stock would be converted if converted on the record date for the taking of a vote. For so long as the number of outstanding shares of Series B Preferred Stock is at least thirty percent (30%) of the total number of shares of Series B Preferred Stock issued under the SPA, the holders of Series B Preferred Stock shall vote together as a single class with the holders of the Group’s Common Stock, and the holders of any other class or series of shares entitled to vote with the Common Stock, with the holders of Series B Preferred Stock issued under the SPA being entitled to seventy percent (70%) of the total votes on all such matters regardless of the actual number of shares of Series B Preferred Stock then outstanding, and the holders of Series A Preferred Stock and Common Stock being entitled to their proportional share of

the remaining 30% of the total votes based on their respective voting power as calculated under the Certificate of Designations of Preferences, Rights and Limitations of Series A Convertible Preferred Stock and the Group’s Certificate of Incorporation.

Each share of Series B Preferred Stock is initially convertible, at any time at the sole option of the holder of such Preferred Stock, into 35 shares of the Group’s Common Stock, subject to future adjustments as provided for in the Certificate. The Series B Preferred Stock shall automatically convert into shares of the Group’s common stock immediately prior to any transaction resulting in a change in control of the Group.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

18. Restatement and reclassification of financial statements

The Restatement results from our management’s determination subsequent to the issuance of our financial statements for the three months ended March 31, 2009 that originally filed on May 20, 2009. The Group has also reflected the corrections of the following errors and reclassifications in its consolidated financial statements as of and for the three months ended March 31, 2009. For Note 1 to Note 3, the errors are reflected in the restated financial statements for the year ended December 31, 2008 which brings the same effects to the financial statements for the period ended March 31, 2009.

No. 1 to No. 3 are the same restatements adjustments included in the Form 10KA of China New Energy Group Company filed on April 15, 2010, which brought forward to these financial statements for the three months ended March 31, 2009.

There were errors in the recording of the fair value of the assets acquired during the acquisition of Chensheng. Therefore, the Group has recorded the increase to the fair value from the book value of several assets, including $1,036,655 of Property, plant and equipment, $757,550 of Intangible assets (ie Land use right) and $3,012 of Inventories, and the decrease in $1,200,477 of Goodwill. Consequently, we recalculated the $96,489 of the depreciation for such increment of those assets and minority interest in Chensheng, which caused a decrease to the minority interest by $77,647 in the consolidated balance sheet and a decrease to the minority interest’s share of net income by $414,763 in the consolidated statement of operations and comprehensive income.

There was an error in the elimination of its intercompany accounts. Therefore, the Group has recorded a decrease in the Related party receivable balances by $84,120 and an increase in the General and administrative expenses by $54,196 and the comprehensive income of $29,924.

The Group reassessed the nature of the Preferred stock together with warrants and the Group reclassified $1,857 and $7,029,961 (total amounting to $7,031,818) from Preferred stock and Additional paid in capital of Stockholders’ Equity to the mezzanine section as of December 31, 2008. Also, the Group reclassified warrant liabilities of $2,952,273 from additional paid in capital and recognized a $2,553,870 loss from the change in fair value of the warrant liabilities in the income statement and the total amount of the warrant liabilities was $5,506,143 as of December 31, 2008. Besides, the Group has accrued $900,000 registration right liabilities as of December 31, 2008.

The adjustments further made for this quarter owing to the effect on the above 3 brought forward restatement adjustments from 2008K/A are:

The Group further provided the depreciation and amortization of $16,835 in the income statement and brought a decrease of $110 exchange effects to accumulated other comprehensive income for the increment of the fair value of the assets which decreased $12,841 and $3,884 of the property, plant and equipment and intangible assets respectively. The Group increased the goodwill of $26,011 by the exchange rate effects.

The Group corrected the Related party receivable by $84,120 and decreased the General and administrative expenses by $26,706 and the comprehensive income of $57,414.

The Group has further accrued $450,000 registration right liabilities for the three months ended March 31, 2009 that resulted in a balance of $1,350,000 as of March 31, 2009.

The Group has recorded an increase in the derivative financial instruments – warrants and the expense for change in fair value of warrant liabilities by $11,712,514 for the three months ended March 31, 2009.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

18. Restatement and reclassification of financial statements- continued

The Group has reflected the following reclassifications.

The Group reclassified $220,737 from cash and cash equivalents to restricted cash for cash placed in escrow.

The Group reclassified $2,286,943 of other receivable from current assets to long term assets.

The Group reclassified $1,497,837 from prepayment to deposits paid for acquisition of long term assets.

The Group reclassified accrued expenses and accruals and other payable-Third Party amounting to $253,084 and $1,003,250, respectively, to accounts payable of $771,386, other receivables of $84,222 and related party payable of $400,726.

The Group reclassified $347,202 from additional paid-in capital and $156,144 from statutory surplus reserve fund to accumulated other comprehensive income of $503,346.

The Group reclassified $25,870 from non-controlling interest to accumulated other comprehensive income.

The Group reclassified $178,265 from connection services revenue to natural gas revenues for the three months ended March 31, 2009 and also the Group reclassified ($50,500), $168,545 and $63,690 from selling expenses, cost of sales from connection services and general and administrative expenses to cost of sales of natural gas.

The Group has the above reclassifications which brought the same reclassification effect into the cashflow statements for the period ended March 31, 2009.

The net effect of the correction of errors was to:

Increase the Group’s reported total assets as of March 31, 2009 by $469,782 from $24,381,527 to $24,851,309.

Decrease the Group’s reported minority interest as of March 31, 2009 by $103,517 from $628,991 to $525,474.

Decrease the Group’s reported accumulated deficit as of March 31, 2009 by $15,342,435 from $1,072,302 to $16,414,737.

Increase the Group’s reported accumulated other comprehensive income as of March 31, 2009 by $886,918 from $719,379 to $1,606,297.

Decrease the Group’s reported net loss by $12,152,643 for the three months ended March 31, 2009 from $338,900 to $12,491,543.

Increase the Group’s reported net loss attributable to China New Energy Group by $12,152,643 for the three months ended March 31, 2009 from $317,945 to $12,470,588.

Decrease the Group’s reported comprehensive loss attributable to China New Energy Group by $12,152,533 for the three months ended March 31, 2009, from $344,663 to $12,497,196.

Decrease the basic net loss per share from continuing operations by $0.13 from $0.00 to $0.13.

Decrease the dilutive net loss per share from continuing operations by $0.13 from $0.00 to $0.13.

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

18. Restatement and reclassification of financial statements (Continued)

	March 31																		March 31
	2009																		2009
	(Reported)			Note 1			Note 2			Note 3			Note 4			Note 5			(Restated)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	3,854,769															(220,737	)	$	3,634,032
Restricted cash		-															220,737			220,737
Accounts receivable		1,685,239																		1,685,239
																	(2,286,943	)
Other receivables		2,371,165															(84,222	)		-
Related party receivable		-						(84,120	)					84,120						-
Inventories, net		284,438			3,012															287,450
Prepaid expenses		1,874,575															(1,497,837	)		376,738
Other current assets		2,338																		2,338
TOTAL CURRENT ASSETS		10,072,524			3,012			(84,120	)		-			84,120			(3,869,002	)		6,206,534


Property, plant and equipment, net		12,471,838			1,036,655									(12,841	)					13,495,652
Intangible assets, net		547,660			757,550									(3,884	)					1,301,326
Other receivables																	2,286,943			2,286,943
Deposits paid for acquisition of long term assets		-												-			1,497,837			1,497,837
Goodwill		1,289,505			(1,200,477	)								(26,011	)					63,017

TOTAL ASSETS	$	24,381,527			596,740			( 84,120	)		-			41,384			( 84,222	)	$	24,851,3 09

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable	$	226,031															771,386		$	997,417
Accrued expenses		253,084															(253,084	)		-
Other payables		1,247,850															(1,003,250	)		244,600
Registration right payable											900,000			450,000						1,350,000
Tax payable		221,209																		221,209
Related party payable		97,912															400,726			498,638
Dividend payable		329,000																		329,000
Warrant liabilities		-									5,506,143			11,712,514						17,218,657

TOTAL CURRENT LIABILITIES		2,375,086			-			-			6,406,143			12,162,514			(84,222	)		20,859,521

Commitment and contingencies (Note 16)

Preferred Stock : 10,000,000 shares authorized, $0.001 par value Series A Convertible Preferred Stock: 1,857,373 shares issued and outstanding, liquidation preference of $8,971,112 as of March 31, 2009		-									7,031,818									7,031,818

CHINA NEW ENERGY’S STOCKHOLDERS’ EQUITY																	-			-

Common stock: (500,000,000 shares authorized, $0.001 par value, 100,000,041 shares issued and outstanding) as of March 31, 2009		100,000																		100,000
Preferred shares: (10,000,000 shares authorized, 1,857,373 shares issued and outstanding)		1,857									(1,857	)								-

											(7,029,961	)
Additional paid in capital		19,725,482									(2,952,273	)					(347,202	)		9,396,046

														(11,712,514	)
														(450,000	)
					414,763						(900,000	)		(16,835	)
Accumulated deficit		(1,072,302	)		(96,489	)		(54,196	)		(2,553,870	)		26,706						(16,414,737	)
Statutory surplus reserve fund		1,903,034															(156,144	)		1,746,890

														110
														(26,011	)		25,870
Accumulated other comprehensive income		719,379			356,113			( 29 , 924	)					57,414			503,346			1,6 06,297
TOTAL CHINA NEW ENERGY’S STOCKHOLDERS EQUITY (DEFICIT)		21,377,450			674,387			(84,120	)		(13,437,961	)		(12,121,130	)		25,870			(3,565,504	)

Non-controlling interest		628,991			( 77,647	)										(25,870)				52 5,474
TOTAL EQUITY (DEFICIT)		22,006,441			596,740			(84,120	)		(13,437,961	)		(12,121,130	)		-			(3,040,030	)

TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	24,381,527			596,740			(84,120	)		-			41,384			(84,222	)	$	24,851,309

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

18. Restatement and reclassification of financial statements (Continued)

	2009															2009
	As reported			Note 1		Note 2		Note 3		Note 4			Note 5			(Restated)
Revenue:
Connection services	$	325,017												(178,265	)	$	146,752
Natural gas		-												178,265			178,265
		325,017			-		-		-		-			-			325,017
Cost of Sales:
Connection services		262,500												(168,545	)		93,955
Natural gas		-												181,735			181,735
		262,500			-		-		-		-			13,190			275,690

Gross Profit		62,517			-		-		-		-			(13,190	)		49,327

Operating Expenses:
											16,835
General and administrative expenses		408,199									(26,706	)		(63,690	)		334,638
Selling expenses		-									-			50,500			50,500
Registration rights penalties		-									450,000			-			450,000

Total operating expenses		408,199			-		-		-		(440,129	)		(13,190	)		835,138

Loss from Operations		(345,682	)		-		-		-		(440,129	)		(13,190	)		(785,811	)

Other Income (Expenses):
Change in fair value of warrant liabilities		-									(11,712,514	)					(11,712,514	)
Interest income		8,357															8,357
Interest expense		(671	)														(671	)
Other Income		93															93
Total other income (expense)		7,779			-		-		-		(11,712,514	)		-			(11,704,735	)

Loss From Continuing Operations, Before Income Tax		(337,903	)		-		-		-		(12,152,643	)		-			(12,490,546	)

Income Tax		(997	)														(997	)

Loss From Continuing Operations, net of Income Tax		(338,900	)		-		-		-		(12,152,643	)		-			(12,491,543	)

Income From Discontinued Operations, net of Income Tax		-															-
Net Loss		(338,900	)		-		-		-		(12,152,643	)		-			(12,491,543	)

Less: Net Loss Attributable to Non-controlling Interest		20,955															20,955

Add: Net Loss Attributable to China New Energy Group		(317,945	)		-		-		-		(12,152,643	)		-			(12,470,588	)

Dividend and Deemed Dividend on Preferred Stock		-									(135,000	)					(135,000	)

Net Loss Attributable to Common Stockholders	$	(317,945	)		-		-		-		(12,287,643	)		-		$	(12,605,588	)

Other Comprehensive Loss
Net Loss		(338,900	)								(12,152,643	)					(12,491,543	)
Foreign currency translation		(10,789	)								110						(10,679	)
Comprehensive Income Attributable to Non-controlling Interest		5,026															5,026

Comprehensive loss attributable to the Company	$	(344,663	)		-		-		-		(12,152,533	)		-		$	(12,497,196	)

Income (Loss) per share - Basic
Loss from continuing operations	$	(0.00	)								(0.13	)				$	(0.13	)
Income (Loss) from discontinued operations		-									-						-
Total loss per share	$	(0.00	)		-		-		-		(0.13	)		-		$	(0.13	)

Income (Loss) per share - Diluted
Loss from continuing operations	$	(0.00	)								(0.13	)				$	(0.13	)
Income (Loss) from discontinued operations		-									-						-
Total loss per share	$	(0.00	)		-		-		-		(0.13	)		-		$	(0.13	)

Weighted average common shares outstanding
Basic		100,000,041															100,000,041
Diluted		176,709,543															176,709,543

CHINA NEW ENERGY GROUP COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

18. Restatement and reclassification of financial statements (Continued)

	For The Three Months Ended March 31
	As reported															As restated
	2009			Note 1		Note 2		Note 3		Note 4			Note 5			2009
Cash flows from operating activities
Net loss attributable to China New Energy Group	$	(317,945	)								(12,152,643	)		(20,955	)	$	(12,491,543	)
Loss attributable to non-controlling interest		(20,955	)											20,955			-
Adjustments to reconcile net (loss) to net cash used in operating activities:
Depreciation and amortization		94,029									16,834						110,863
Change in fair value of warrant liabilities		-									11,712,514						11,712,514
Registration right payable											450,000						450,000

Changes in operating assets and liabilities:																	-
Accounts receivable		497,969															497,969
Other receivables		(111,480	)											93,015			(18,465	)
Inventories		(29,838	)														(29,838	)
Prepayment		(316,117	)											73,005			(243,112	)
Other current assets		1,002															1,002
Accounts payable		114,362															114,362
Accrued expense		(3,002	)											3,002			-
Other payables		(1,798,281	)											1,793,740			(4,541	)
Tax payable		(471,940	)														(471,940	)

Net cash used in operating activities		(2,362,196	)		-		-		-		26,705			1,962,762			(372,729	)

Cash flows from investing activities
Addition to property, plant and equipment		(128,133	)											(73,006	)		(201,139	)
Payment made to acquire subsidiary -Chensheng														(1,838,946	)		(1,838,946	)
Repayment from related parties		77,515												(77,515	)		-
Net cash used in investing activities		(50,618	)		-		-		-		-			(1,989,467	)		(2,040,085	)

Cash flows from financing activities
Change from restricted cash		-												415			415
Contribution from non-controlling interest		438,852												-			438,852

Net cash flows provided by financing activities:		438,852			-		-		-		-			415			439,267

Effect of exchange rate changes in cash and cash equivalents		(4,777	)														(4,777	)

Net (decrease) in cash and cash equivalents		(1,978,739	)								26,705			(26,290	)		(1,978,324	)

Cash and cash equivalents - beginning of period		5,833,508												(221,152	)		5,612,356

Cash and cash equivalents - end of period	$	3,854,769			-		-		-		-			(220,737	)	$	3,634,032

ITEM 2.

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

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q/Aincluding the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; any statements of belief or intention; any of the factors and risks mentioned in the “Risk Factors” sections of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2010 and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are based on information available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

Overview of Our Business

We are a natural gas company engaged in the development of natural gas distribution networks, and the distribution of natural gas to residential, industrial and commercial customers in small and medium sized cities in China.

We currently own the exclusive rights to develop distribution networks to provide natural gas to industrial, commercial and residential consumers in the cities of Dashiqiao, Nandaihe and Zhanhua. Currently, these distribution networks provide natural gas to an aggregate of approximately 64,000 consumers in these cities.

We procure our natural gas by purchasing natural gas from third-party suppliers. Once natural gas is extracted by the supplier, all water content and impurities are removed. Natural gas is then delivered by truck to either (1) our natural gas supply stations, where the gas is either depressurized and then delivered to households through pipelines or delivered directly to customers in pressurized tanks, or (2) to gas stations where the gas is sold for use in motor vehicles.

Our major business activities include development and construction of local gas distribution networks, transportation of natural gas from suppliers to our storage facilities in a given operational location, and operating and maintaining the gas distribution networks.

Our Organizational Structure

China New Energy Group Company was incorporated on March 28, 2008 in the state of Delaware USA, under the name of Travel Hunt Holdings, Inc. On May 27, 2008, Travel Hunt changed its name to China New Energy Group Company in connection with a share exchange transaction as described below.

Willsky Development was incorporated on May 31, 2005 in the British Virgin Islands. On March 28, 2008, Travel Hunt Holdings, Inc. completed a reverse acquisition transaction with Willsky whereby Travel Hunt Holdings, Inc. issued to the shareholder of Willsky 94,908,650 shares of Travel Hunt Holdings, Inc. common stock in exchange for all of the issued and outstanding capital stock of Willsky Development. Simultaneous with the consummation of the share exchange agreement, the shareholder of Willsky, Eternal International Holding Group Ltd, a Hong Kong corporation, or Eternal International, distributed 85,417,785 shares of Travel Hunt Holdings, Inc. common stock as a dividend. Accordingly, following this distribution, Eternal International beneficially owns approximately 9.49% of Travel Hunt Holdings, Inc. outstanding capital stock. Willsky thereby became Travel Hunt Holdings, Inc.’s wholly-owned subsidiary and the former shareholders of Willsky became Travel Hunt Holdings, Inc. controlling stockholders.

For accounting purposes, the acquisition was accounted for as a recapitalization effected by a share exchange, and the transaction treated as a reverse acquisition with Willsky as the acquirer and Travel Hunt Holdings, Inc. as the acquired party. The assets and liabilities of the acquired entity (Willsky) were brought forward at their book value and no goodwill was recognized.

In 2005, Willsky acquired a 99% shareholding of Tianjin Sing Ocean Public Utility Development Co., Ltd. (“Singocean”) which was formed in the PRC as an equity joint venture to be operated for a period of 50 years until January 18, 2054 with registered capital of $4.5 million (RMB31,897,000). Singocean has two branch divisions, namely Acheng SingOcean and Dashiqiao SingOcean, and established in the PRC to be operated for a period of 5 years until December 28, 2010 and 50 years until January 18, 2054, respectively.

ChenSheng - On September 16, 2008, we, through our 99%-owned subsidiary SingOcean entered into an Equity Swap Agreement with Mr. Xiu Hai Tian, whereby we acquired from Mr. Tian a 49% ownership interest in Chensheng, in exchange for our 99% ownership in Hunchun Sing Ocean. The parties to the Equity Swap Agreement determined that the value of the 49% interest in Chensheng Gas and the 99% interest in Hunchun Sing Ocean were approximately equal and therefore there was no cash or other consideration involved in the transaction from either party.

On December 10, 2008, the Company entered into an Agreement for Equity Transfer with the holders of the remaining 51% outstanding equity in Chensheng. Pursuant to the Agreement for Equity Transfer, the Company agreed to purchase the remaining 51% of the outstanding equity of Chensheng Gas from 17 individuals for an aggregate purchase price of RMB 12.56 million (approximately $1.84 million). The transaction was consummated on December 30, 2008, following which the Company now owns 51% of the equity of Chensheng, and Tianjin Sing Ocean now owns 49% of the equity of Chensheng.

On January 12, 2009, Tianjin Investment was established in the PRC and engaged in the business of investment holding.

On January 23, 2009, Yingkou Zhongneng was established in the PRC and engaged in the business of natural gas distribution network in the city of Dashiqiao.

Critical Accounting Policies

Accounting policies discussed in this section are those that we consider to be most critical to an understanding of our financial statements because they inherently involve significant judgment and uncertainties. For all of these estimates, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue Recognition

1. Persuasive evidence of an arrangement exists;

2. Delivery has occurred or services have been rendered;

3. The seller's price to the buyer is fixed or determinable; and

4. Collectibility is reasonably assured.

Gas connection revenue

Gas connection revenue is recognized when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably.

During the three months ended March 31, 2009 and 2008, all the contracts for connection services were started and completed.

Revenue from sale of gas

All of the Company’s products that are sold in the PRC are subject to Chinese value-added tax of 3% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. The Company recorded VAT payable and VAT receivable net of payments in the financial statements.

Use of Estimates

Significant Estimates

These consolidated financial statements include some amounts that are based on management's best estimates and judgments. The most significant estimates relate to revenue recognition of gas connection contracts, depreciation of property, plant and equipment, the valuation allowance for deferred taxes, impairment testing of intangible assets and various contingent liabilities. It is reasonably possible that the above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.

Reportable Operating Segments

For the three months ended March 31, 2009, we had sales revenue of $0.33 million of which $0.15 million was from connection services while $0.18 million, or 55%, was from gas sales.

Our revenue for the three months ended March 31, 2009 was contributed by the connection services and providing natural gas to commercial and residential customers. Connection services is provided by Chensheng,

First Quarter Financial Performance Highlights

The following are some financial highlights for the three months ended March 31, 2009:

Revenues : Our revenues were $0.33 million for the three months ended March 31, 2009, an increase of 219% from the same period of 2008.

Gross Margin : Gross margin was 15% for the three months ended March 31, 2009 compared to gross margin of 25% for the same period of 2008, representing a percentage decrease of 10%.

Operating Expenses : Operating expenses (including selling, general and administrative expenses) were $0.84 million for the three months ended March 31, 2009, an increase of 239% from the same period of 2008.

Net Income / (Loss) : A net loss of $12.47 million resulted for the three months ended March 31, 2009. The net loss was due to some major expenses incurred during the period which included: (1) change in fair value of warrant liabilities, $11.71 million and (2) registration rights penalties of $0.45 million.

Fully diluted net income per share : Fully diluted net loss per share was $0.13 for the three months ended March 31, 2009, as compared to net income per share of $0.00 for the same period of 2008.

Taxation

As a Delaware company, the Company is subject to United States taxation, but no provision for income taxes was made for the three months ended March 31, 2009 and 2008 as the Company did not have reportable taxable income for the period.

Willsky, a wholly-owned subsidiary of the Company, is subject to BVI taxation, but no provision for income taxes was made for the three months ended March 31, 2009 and 2008 as Willsky did not have reportable taxable income for the period.

SingOcean is subject to the tax laws of the PRC at the prevailing statutory rate of enterprise income tax of 25%. SingOcean did not have reportable taxable income for the period.

Yingkou Zhongneng was funded as an independent legal entity in January 2009 from a division of SingOcean which is subject to the tax laws of the PRC at the prevailing statutory rate of enterprise income tax of 25%. Yingkou Zhongneng did not have reportable taxable income for the period.

Chensheng is subject to the tax laws of the PRC being taxed on 0.8% of annual sales. Starting from January 1, 2009, the tax rate was changed to 1% on sales. On July 1, 2009, the tax rate was changed to 25% on net income. For the three months ended March 31, 2009, the amount of income tax was $997.

Results of Operations

Comparison of Three Months Ended March 31, 2009 and 2008

The following table summarizes the results of our operations during the three months ended March 31, 2009 and 2008:

(All amounts, other than percentages, in thousands of U.S. dollars)

	(Unaudited)
	For the three months ended
	March 31,
	2009			2008			Change			Change%
	Restated

Revenue:	$	325		$	102		$	223			219	%

Cost of Sales:		276			76			200			263	%

Gross Profit		49			26			24			91	%

Total operating expenses		835			246			589			239	%

Loss from Operations		(786	)		(221	)		(565	)		256	%

Other Expenses:

Change in fair value of warrants liabilities		(11,713	)		-			(11,713	)

Interest income (expense)		8			-			8			100	%

Loss From Continuing Operations, Before Income Tax		(12,491	)		(221	)		(12,270	)		5552	%

Income Tax		(1	)		-			(1	)

Income (loss) From Discontinued Operations, net of Income Tax		-			(18	)					100	%

Non controlling Interest		21			1			20		2000%

Net Loss		(12,471	)		(237	)		(12,234	)		5612	%

Revenues . Revenues are derived primarily from connection fees and sales of natural gas. Revenues increased $0.23 million, or 219%, to $0.33 million for the three months ended March 31, 2009 from $0.10 million for the same period in 2008. This increase was mainly attributable to an increase in number of connection households.

Cost of Sales . Cost of sales consists primarily of connection costs and purchase of natural gas from our suppliers and depreciation.

Our cost of sales increased by $0.20 million, or 263%, to $0.28 million for the three months ended March 31, 2009 from $0.08 million during the same period in 2008. Such increase was mainly attributable to a increase in the number of households connected to our distribution network.

Gross Profit . Our gross profit increased by $0.02 million, or 91%, to $0.05 million for the three months ended March 31, 2009 from $0.03 million during the same period in 2008. Gross profit as a percentage of revenues, or gross profit margin, was 15% for the three months ended March 31, 2009. The gross profit margin during the same period in 2008 was 25%. Such decrease in gross profit margin was mainly due to the increase of operating assets and thus the increase in the cost allocation of depreciation.

Total Operating Expenses . The total operating expenses consist of two components, the first one is registration right penalties and the other is general and administrative expenses (“SG&A”). For the three months ended March 31, 2009, the total operating expenses were $0.84 million while the amount was $0.25 milloion for the same period of 2008, or increased by 239%. This increase was mainly due to the fact that we are expanding our company. Management believes that the relatively high SG&A expenses will continue as we endeavor to expand our business.

Loss from Operations . Our loss from operations increased by $0.57 million, or 256%, to $0.79 million for the three months ended March 31, 2009 from $0.22 million during the same period in 2008. This increase in loss from operations was mainly due to increase in SG&A expense and registration right penalties.

Other Income (Expenses)

Change In Fair Value of Warrant Liability: For the three months ended March 31, 2009, the change in fair value of warrant liability was recorded as other income of $11.71 million while the one incurred in the same period of Year 2008 was nil.

The Company adopted a FASB accounting standard, which defines determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. This FASB accounting standard provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception.

As a result of adopting this FASB accounting standard, warrants previously treated as equity pursuant to the derivative treatment exemption are no longer afforded equity treatment because the warrants have a downward ratchet provision on the exercise price. As a result, the warrants are not considered indexed to the Company’s own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expired.

On August 20, 2008, the fair value of the 13,001,608 warrants issued with the Series A Convertible Preferred Stock to China Hand was $1.97 million and the fair value of 6,500,804 warrants issued to Kuhns Brothers was $0.98 million. The fair value was computed using the Cox-Ross-Rubinstein (“CRR”) Binomial Model under the following assumptions: (1) expected life of 5 years, (2) volatility of 66%, (3) risk free interest rate of 3% and dividend rate of 0%.

In year 2009, the Company changed the assumption of volatility of 66% to 90%. As at March 31, 2009 and December 31, 2008, the fair value of the warrants was $17.22 million and $5.51 million, respectively. Therefore, the Company recognized a loss of $11.71 million loss from the change in fair value for the quarter ended March 31, 2009.

Loss From Continuing O perations, Before Income Tax. Our loss from continuing operations before income tax increased by $12.27 million, to $12.49 million, for the three months ended March 31, 2009 from $0.22 million during the same period in 2008. Such increase was mainly due to the fact that the company recorded a $11.71 million loss from the change in fair value of the warrants which put through according to EITF 07-05.

Income (Loss) From Discontinued Operation

The income (loss) from the discontinued operation was due to the fact that, on September 26, 2008, the Company entered into an asset swap in which it disposed of the subsidiary Hunchun, including substantially (99%) of the net assets, for a 49% ownership in Qinhuangdao Chensheng Gas Co. Ltd.

In accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets”, Hunchun Singocean operation is being accounted for as discontinued operations and, accordingly, its operating results are segregated and reported as discontinued operations in the accompanying consolidated statement of operations in 2008. There were no assets or liabilities of Hunchun in the consolidated balance sheet as of March 31, 2008.

Disposal of Hunchun in 2008

The following table displays summarized activity in the Company's consolidated statements of operations for discontinued operations of Hunchun during the three months ended March 31, 2008.

	2009 (million)	2008 (million)

Revenue	$	$	-
Operating income	$	$	(0.02	)
Income before income taxes	$	$	(0.02	)
Income tax expense	$	$
Income from discontinued operations, net of tax	$	$	(0.02	)

Net Loss . Net loss increased by $12.23 million to a net loss of $12.47 million for the three months ended March 31, 2009, from a net loss of $0.24 million for the same period of 2008, which is mainly due to: (1) increase in total operating expenses by $0.59 million; and (2) loss from the change in fair value of the warrants, $11.71 million.

Liquidity and Capital Resources

As of March 31, 2009, we had cash and cash equivalents of approximately $3.63 million. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.

Cash Flow

(All amounts in thousands of U.S. dollars)

	For the three months ended
	March 3 1
	2009				2008
Net cash provided by (used in) operating activities		$	(373	)		$	(210	)
Net cash used in investing activities			(2,040	)			(228	)
Net cash provided by financing activities			439				60
Effect of exchange rate changes in cash			(5	)			60
Net cash provided (used)		$	(1,978	)		$	(318	)

Operating Activities

Net cash used in operating activities was $0.37 million for the three months ended March 31, 2009, compared to net cash used in operating activities of $0.21 million during the same period of 2008. This increase in funds used in our operating activities was primarily due to the increase in prepayment which was paid to the construction team and tax payables.

Investing Activities

Our main use of cash in investing activities was mainly for the construction of gas pipelines and acquisition of assets.

Net cash used in investing activities for the three months ended March 31, 2009 was $2.04 million, which was an increase of $1.81 million from $0.23 million for the same period of 2008. This increase was due to payments made for the increased construction in progress and fixed assets.

Financing Activities

Our debt to equity ratio was 523 % as of March 31, 2009. Net cash provided by financing activities for the three months ended March 31, 2009 was $0.44 MM. The financing was mainly attributable to contribution from Non-controlling interest.

Capital Expenditures, Contractual Obligations, Commitments and Contingences

For the three months ended March 31, 2009, the company spent about $2.04 million in capital expenditures which was mainly for the construction of gas pipelines, gas station and acquisition. The company settled the payments according to the terms of the contract and fulfilled of its contractual obligations. Other than the operating leases stated in Note 16 to Unaudited Condensed Consolidated Financial Statements, we have no other commitments and contingencies. As disclosed in Note 16, the Company is obligated under operating leases to pay minimum lease payments of approximately $0.21 million.

Seasonality

Our pipeline distribution networks are primarily located in northeastern China, which is extremely cold during the winter months. Additionally, gas consumption by residential customers is higher in the winter months for heating purposes, and there is a corresponding increase in usage during winter. However, due to the cold weather we are unable to construct primary gas pipelines. If a primary pipeline is already in place, we are able to connect new customers to our distribution network during this time.

Effects of Inflation

Our business, revenues and operating results have not been affected in any material way by inflation.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including Mr. Yangkan Chong, our Chief Executive Officer and Mr. Eric Yu, our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2009. Based on that evaluation, Mr. Chong and Mr. Yu concluded that as of March 31, 2009, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective in that certain of the “significant deficiencies” first identified in the process of preparing our financial statements for the fiscal year ended December 31, 2008 continue to exit despite the implementation of the remedial measures described below.

C hanges in Internal Control over Financial Reporting.

Under the supervision and with the participation of our management, including our Chief Executive officer and Chief Financial Officer, identified a number of “significant deficiencies” in the process of preparing our financial statements for the fiscal year ended December 31, 2008 related to (i) the U.S. GAAP expertise of our internal accounting staff, and (ii) our internal audit functions. Based on that evaluation, management concluded that our internal control over financial reporting were not effective, as of December 31, 2008.

During the quarter ended March 31, 2009, we continued to take the remedial measures described below that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Because our current accounting department is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies, our management has determined that they require additional training and assistance in U.S. GAAP matters. Management has determined that our internal audit function is also significantly deficient due to insufficient qualified resources to perform internal audit functions.

In order to correct the foregoing significant deficiencies, we continue to take the following remediation measures:

We continue to arrange necessary training for our accounting department staff;

We continue to engage external professional accounting or consultancy firms to assist us in the preparation of the US GAAP accounts;

We remain committed to the establishment of effective internal audit functions; however, due to the scarcity of qualified candidates with extensive experience in U.S. GAAP reporting and accounting in the region, we were not able to hire sufficient internal audit resources before the end of our reporting period. However, we will increase our search for qualified candidates with assistance from recruiters and through referrals;

In addition, we have allocated significant financial and human resources to strengthen the internal control structure and we have been actively working with external consultants to assess our data collection, financial reporting, and control procedures and to strengthen our internal controls over financial reporting.

We believe that the foregoing steps will remediate the significant deficiencies identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any such legal proceedings or claims that we expect will have a material adverse affect on our business, financial condition or operating results. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 5.

OTHER INFORMATION.

None.

ITEM 6.

EXHIBITS.

Exhibit No.		Description

31.1		Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: May 24, 2010

CHINA NEW ENERGY GROUP COMPANY

By:	/s/ Yangkan Chong
	Yangkan Chong
	Chief Executive Officer
	(Principal Executive Officer)

By:	/s/ Eric Yu
	Eric Yu
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit No.		Description

31.1		Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Principal Executive Officer and Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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