FORM 10-QSB

Q

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

For the quarterly period ended September 30, 2007

£

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

For the Transition Period From _________ to _________

0-12536
(Commission File Number)

Nevada
(State or Other jurisdiction of Incorporation or Organization)

90-0093373
(IRS Employer Identification No.)

429 Guangdong Road
Shanghai, People's Republic of China 200001
(Address of Principal Executive Offices)

Issuer's Telephone Number, Including Area Code: (86 21) 6336-8686

Check whether the issuer (1) 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 the filing requirements for at least the past 90 days. Q Yes      £  No

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

As of September 30, 2007, there were 17,147,268 shares of $.001 par value common stock outstanding.

Transitional Small Business Disclosure Format: £ Yes      Q  No

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (Currency expressed in United States Dollars ("US$"), except for number of shares) (Unaudited)

See accompanying notes to condensed consolidated financial statements.

F-5

See accompanying notes to condensed consolidated financial statements.

CONDENSED CONSOLDIATED STATEMENT OF STOCKHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 (Currency expressed in United States Dollars ("US$"), except for number of shares) (Unaudited)

See accompanying notes to condensed consolidated financial statements.

F- 7

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

These unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to our audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes thereto contained in our Annual Report on Form 10-KSB for the year ended December 31, 2006.

China Recycling Energy Corporation (the "Company" or "CREG") (formerly China Digital Wireless, Inc.) was incorporated on May 8, 1980, under the laws of the State of Colorado. The Company, through its subsidiary, currently commences the recycling energy business in the provision of energy saving and recycling products and services. Consequently, the businesses of mobile phone distribution and provision of pager and mobile phone value-added information services were discontinued. On March 8, 2007, the Company changed its name to "China Recycling Energy Corporation".

On September 6, 2001, the Company re-domiciled its state of incorporation from Colorado to Nevada.

On June 23, 2004, the Company entered into a stock exchange agreement with Sifang Holdings Co. Ltd. ("Sifang Holdings") and certain shareholders. Pursuant to the stock exchange agreement, the Company issued 13,782,636 shares of its common stock in exchange for a 100% equity interest in Sifang Holdings, making Sifang Holdings a wholly owned subsidiary of the Company. Sifang Holdings was established under the laws of the Cayman Islands on February 9, 2004 for the purpose of holding a 100% equity interest in Shanghai TCH Data Technology Co., Ltd. ("TCH"). TCH was established as a foreign investment enterprise in Shanghai under the laws of the People’s Republic of China (the "PRC") on May 25, 2004.

Since January 2007, the Company has gradually phased out and substantially scaled down most of its business of mobile phone distribution and provision of pager and mobile phone value-added information services. In the first and second quarter of 2007, the Company did not engage in any substantial transaction and activity in connection to these businesses. On May 10, 2007, the Company approved and announced that it completely ceased and discontinued these businesses. These businesses are reflected in continuing operations for all periods presented based on the criteria for discontinued operations prescribed by Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".

On February 1, 2007, the Company’s subsidiary, TCH, entered into two TRT Project Joint-Operation Agreements ("Joint-Operation Agreement") with Xi’an Yingfeng Science and Technology Co., Ltd. ("Yingfeng"). Yingfeng is a joint stock company registered in Xi’an, Shaanxi Province, the PRC, and engages in the business of designing, installing, and operating TRT systems and sales of other renewable energy products.

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Under the Joint-Operation Agreement, TCH and Yingfeng jointly operate a top gas recovery turbine projects ("TRT Project") which is to design, construct, install and operate a TRT system and lease to Zhangzhi Iron and Steel Holdings Ltd. ("Zhangzhi"). The total investment costs contributed by TCH is approximately $1,426,000 (equivalent to RMB10,690,000). TCH provides various forms of investments and properties into the TRT Project including cash, hardware, software, equipments, major components and devices. The construction of the TRT Project was completed and put into operation in August 2007. TCH became entitled to the rights, titles, benefits and interests in the TRT Project and received a monthly rental payment of $58,700 (equivalent to RMB440,000) from Zhangzhi for a lease term of thirteen years. At the end of the lease term, TCH transfers the rights and titles of the TRT Project to Zhangzhi without cost.

Under another Joint-Operation Agreement, TCH and Yingfeng jointly operate a TRT Project which is to design, construct, install and operate a TRT system and lease to Xingtai Iron and Steel Company Ltd. ("Xingtai"). TCH provides various forms of investments and properties into the TRT Project including cash, hardware, software, equipments, major components and devices. The total estimated investment cost of this TRT Project is approximately $3,900,000 (equivalent to RMB30,000,000). The construction of the TRT Project was completed and put into operation in February 2007. TCH became entitled to all the rights, titles, benefits and interests of the TRT Project and received a monthly rental payment of $116,930 (equivalent to RMB900,000) from Xingtai for a lease term of five years. At the end of the lease term, TCH transfers all the rights and titles of the TRT Project to Xingtai without cost.

On September 21, 2007, the Company’s subsidiary, TCH changed its name to "Shanghai TCH Energy Technology Co., Ltd.".

Except as indicated, amounts reflected in the condensed consolidated financial statements or the notes thereto relate to our continuing operations.

Comprehensive income

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Income taxes

Net income (loss) per share

Foreign currencies translation

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the consolidated statement of operations.

The functional and reporting currency of the Company is the United States dollars ("U.S. dollars"). The accompanying condensed consolidated financial statements have been expressed in U.S. dollars. In addition, the Company’s operating subsidiary in the PRC, TCH maintains its books and records in its local currency, the Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which its operations are conducted.

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●

Segment reporting

SFAS No.131 "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. The Company operates in one reportable operating segment.

●

Fair value of financial instruments

The carrying value of the Company’s financial instruments, which include cash and cash equivalents, accounts receivables, inventories, advances and deposits to suppliers, accounts payable, other current liabilities, approximate their fair values due to the short-term maturity of these instruments.

The balances due to a director represented unsecured advances which are interest free and repayable in the next twelve months.

Accrued liabilities and other payables consist of the following:

The Company is registered in the United States of America and has operations in the United States of America and the PRC. For the three and nine months ended September 30, 2007, there was no operation in the United States of America.

The Company’s subsidiary generated substantially all of its net income from its PRC operation and has recorded income tax provision of $53,803 and $100,417 for the three and nine months ended September 30, 2007 respectively. Its effective income tax rates for the three and nine months ended September 30, 2007 were 15%. There were no effective income tax rates for the three and nine months ended September 30, 2006 since the PRC operation was incurred net operating losses during the period.

(a)

Major customers

For the nine months ended September 30, 2007, customer who accounts for 10% or more of revenues is presented as follows:

(b)

Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial condition, but does not require collateral to support such receivables.

Comparative figures included in prior year’s consolidated balance sheet and the consolidated statements of operations and cash flows have not been included in these condensed consolidation financial statements as they were not comparable because the Company had discontinued its business in mobile phone distribution and provision of pager and mobile phone value-added information services and changed to recycling energy business in the provision of energy saving and recycling products and services.

On November 13, 2007, the Company approved the 2007 Non-statutory Stock Option Plan (the "2007 Plan") under the Form S-8 Registration Statement. Pursuant to the 2007 Plan, the Company may issue stock, or grant options at $1.23 per share to acquire the Company's common stock at par value $0.001 (the "Stock"), with an aggregate amount of 3,000,000 shares of the Stock, from time to time to employees and directors of the Company or other individuals, including consultants or advisors, all on the terms and conditions set forth in the 2007 Plan. The vesting terms of options grant under the 2007 Plan is subject to the Non-Statutory Stock Option Agreements for managerial and non-managerial employees. For managerial employees, no more than 15% of the total stock options shall vest and become exercisable on the six month anniversary of the grant date. An additional 15% and 50% of the total stock options shall vest and become exerciable on the first and second year anniversary of the grant date, respectively. The remaining 20% of the total stock options shall vest and become exercisable on the third year anniversary of the grant date. For non-managerial employees, no more than 30% of the total stock options shall vest and become exercisable in the first year anniversary of the grant date. An additional 50% of the total stock options shall vest and become exercisable in the second year anniversary of the grant date. The remaining 20% of the total stock options shall vest and become exercisable on the third year anniversary of the grant date. Each stock option shall become vested and exercisable over a period of no longer than five years from the grant date.

On November 13, 2007, the Company granted stock options with an aggregate amount of 3,000,000 shares of the Stock to twenty (20) managerial and non-managerial employees under the 2007 Plan. The fair value of all options granted is determined approximately as $2,383,430, using the Black-Scholes option pricing model.

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On November 14, 2007, the Company entered into an Assets Transfer and Share Issuance Agreement (the "Agreement A") with Mr. Zheng Hanqiao ("Mr. Zheng"), the President and major shareholder of the Company and TCH. Under the Agreement A, Mr. Zheng sold and transferred two TRT systems (the "Assets") valued at $9,677,420 (equivalent to RMB 72,000,000) to the Company in exchange for 7,867,821 shares of common stock of the Company at a 23-days weighted average market price of $1.23 per share. Under the same Agreement A, the Company subsequently sold and transferred to TCH the aforementioned Assets for a total price of $9,677,420 (equivalent to RMB 72,000,000). Currently, the management of TCH has no intention to engage the Assets to any new direct financing projects.

Also on November 14, 2007, the Company entered into a Share Purchase Agreement (the "Agreement B") with Mr. Zheng for a cash investment of $4,032,258 in exchange for 3,278,259 shares of common stock of the Company issued at a 23-days weighted average market price of $1.23 per share.

As a result of the Agreement A and the Agreement B, Mr. Zheng acquired a total of 11,146,080 shares of common stock of the Company at a 23-days weighted average market price of $1.23 per share and these shares were fully issued on November 14, 2007. As of 19 November 2007, Mr. Zheng owned approximately 68% of the issued and outstanding shares of the Company’s common stock.

On November 16, 2007, the Company entered into a Stock and Notes Purchase Agreement with two investors (the "Investors") pursuant to which the Company agreed to sell and issue, and the Investors agreed to purchase, (i) $5,000,000 principal amount of 10% Senior Secured Convertible Promissory Note (the "First Note"), plus accrued interest thereon, expiring on November 16, 2009; (ii) 4,066,706 shares of newly issued common stock, $0.001 par value, of the Company at an offering price of $1.23 (the "Purchased Shares"); and (iii) $15,000,000 principal amount of 5% Senior Secured Convertible Promissory Note (the "Second Note").

Both the First Note and the Second Note were secured by a perfected first priority lien on 50% of all of the equity interests of the pledgor under the Share Pledge Agreement. Under the Share Pledge Agreement dated as of November 16, 2007, its principal shareholder of the Company, Mr. Hanqiao Zheng agreed to pledge 50% of his shareholding in an aggregate of 19,306,943 shares of common stock (equivalent to 9,653,471 of pledged shares) as collateral to the Investors.

The Company paid a placement fee up to a maximum of $400,000. Proceeds of the financing will be used to fund the capital investments required under its Business Plan and for its other working capital needs.

The Company has agreed to file a registration statement with the Securities and Exchange Commission in order to register the resale of the shares issuable upon conversion of the First Note and the Second Note and the Purchased Shares under the Registration Rights Agreement dated as of November 16, 2007.

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This report contains certain forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," or "continue," or the negative of such terms or other comparable terminology. These statements are only predictions and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein.

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this document. We do not undertake to publicly update or revise any of its forward-looking statements even if experience or future changes show that the indicated results or events will not be realized. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Overview of Business Background

On May 8, 1980, China Recycling Energy Corporation (the "Company") (formerly known as China Digital Wireless, Inc.) was incorporated under the laws of the State of Colorado.

On September 6, 2001, the Company re-domiciled its state of incorporation from Colorado to Nevada.

On June 23, 2004, the Company entered into a stock exchange agreement with Sifang Holdings Co. Ltd. ("Sifang Holdings") and certain shareholders. Pursuant to the stock exchange agreement, the Company issued 13,782,636 shares of its common stock in exchange for a 100% equity interest in Sifang Holdings, making Sifang Holdings a wholly owned subsidiary of the Company. Sifang Holdings was established under the laws of the Cayman Islands on February 9, 2004 for the purpose of holding a 100% equity interest in Shanghai TCH Data Technology Co., Ltd. ("TCH"). TCH was established as a foreign investment enterprise in Shanghai under the laws of the PRC on May 25, 2004.

From May 2004 to December 2006, the Company through TCH engaged in the business of mobile phone distribution, advertising services and other provisions of pager and mobile phone value-added information services under the Company’s previous name "China Digital Wireless, Inc."

Since January 2007, the Company has gradually phased out and substantially scaled down most of its business of mobile phone distribution and provision of pager and mobile phone value-added information services. In the first quarter of 2007, the Company did not engage in any substantial transaction and activity in connection to these businesses.

On February 1, 2007, the Company's subsidiary, TCH, entered into a TRT Project Joint-Operation Agreement ("Joint-Operation Agreement") with Xi'an Yingfeng Science and Technology Co., Ltd. ("Yingfeng"). Yingfeng is a Chinese company that is located in Xi'an, Shaanxi Province, China, and is engaging in the business of designing, selling, installing, and operating TRT systems and other renewable energy products.

Under the Joint-Operation Agreement, TCH and Yingfeng will jointly pursue a top gas recovery turbine project ("Project") which is to design, construct, install and operate a TRT system in Xingtai Iron and Steel Company, Ltd. ("Xingtai"). This project was originally initiated by a Contract to Design and Construct TRT System ("Project Contract") entered by Yingfeng and Xingtai on September 26, 2006. TCH provides various forms of investments and properties into the Project including cash, hardware, software, equipments, major components and devices. In return, TCH becomes entitled to all the rights, titles, benefits and interests that Yingfeng originally had under the Project Contract, including but not limited to the cash payment made by Xingtai on regular basis and other property rights and interests. TCH also entered direct financing lease with Xingtai. Under the direct financing lease, TCH provides various forms of investments and properties into the Project including cash, hardware, software, equipments, major components and devices to complete a TCH system and leases the TRT system to Xingtai with a term of five years. The total future minimum lease receivables under the direct financing lease are $ 6,781,863. In February and March 2007, the Company and TCH have taken several preliminary actions in preparation for the full pursuit of the Project, including selecting and purchasing necessary components and software for TRT system, organizing and training the technician team for the Project and developing the construction and installation plan for the TRT system. On April 08, 2007, the Board of the Company approved and made effective this Joint-Operation Agreement.

On March 8, 2007, the name of the Company was changed to "China Recycling Energy Corporation" and engages in recycling energy business, providing energy saving and recycling products and services. Consequently, the businesses of mobile phone distribution and provision of pager and mobile phone value-added information services were discontinued.

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On May 10, 2007, the Company officially announced that it changed its main business operations to energy saving and recycling systems and services. The new business operations include developing and constructing recovered energy power systems such as TRT(Blast-Furnace Top Pressure Recovery Turbine Unit), CHPG (Power generation by recovering cement residual heat without additional fuel), GTPG(Gas turbine power generation) and CGGE(Comprehensive utilization of coal gangue generating electricity);selling the electricity generated by the recovered energy power systems to steel plants and other customers; constructing power plants on a turnkey - EPC (Engineering, Procurement and Construction) basis for developers, industrial users and public facilities; developing flexible, custom-tailored ECO-Energy solutions that enable customers to quickly and easily improve energy efficiency and educe fossil fuel consumption and Green House Gases emission.

In connection with the change of business operations, the Company has established a technical team that is composed of recognized experts and technicians specialized in the development and construction of energy saving and recycling systems.

On September 21, 2007, TCH changed its name to "Shanghai TCH Energy Technology Co., Ltd.".

Discussion and Analysis of Operating Results

Nine months ended September 30, 2007 Compared to Nine months Ended September 30, 2006

Discontinued Operation

Since January 2007, the Company has gradually phased out and substantially scaled down most of its business of mobile phone distribution, advertising services and provision of pager and mobile phone value-added information services. On May 10, 2007, the Company approved and announced that it completely ceased and discontinued these businesses. For the nine months ended September 30, 2007, the Company did not engage in any substantial transaction and activity in connection to these businesses. Accordingly, the results of the discontinued operations have been segregated from continuing operations in the consolidated statements of operations and cash flows for the nine-month periods ended September 30, 2007 and 2006. For the nine months ended September 30, 2007, there was no substantial sales revenue from product sales, product sales to related parties, and net information and advertising service revenue related to the discontinued operations and there was no cost of goods sold and cost of service related to discontinued operations, either. The discontinued operations incurred an income of $44,578 and $85,782 for nine months ended September 30, 2007 and 2006, respectively and the basic income per share from discontinued operations was $0.00 and $0.01 for the respective periods. This income represented the write down of deferred revenue generated from the provision of pager value-added information services.

Revenues from direct financing lease

Revenues for the nine months ended September 30, 2007 were $810,803, which represents the revenue received from Xingtai and Zhangzhi under the direct financing leases.

Cost of Revenues

Total cost of revenue for the nine months ended September 30, 2007 consists primarily of related business tax of 5% on revenues from direct financing leases between the Company, Xingtai and Zhangzhi. Total cost of revenue for the nine months ended September 30, 2007 was $58,076.

Gross profit

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After taking into account the cost of revenues, our gross profit for the nine months ended September 30, 2007 was $752,727. The gross profit generated from the operation in the business of energy saving and recycling systems and services for the nine months ended September 30, 2007.

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2007 decreased by $82,956 to $106,191, compared to $189,147 for the same period of the prior year, representing a 44% decrease. The decrease was mainly due to the discontinuance of the business of mobile phone distribution advertising services and provision of pager and mobile phone value-added information services.

Interest income, net

During the nine months ended September 30, 2007, the interest income derived from bank deposits decreased by $45, compared to $152 for the same period of the prior year.

Income from operations of discontinued components

Since January 2007, the Company has gradually phased out and substantially scaled down most of its business of mobile phone distribution and provision of pager and mobile phone value-added information services. For the nine months ended September 30, 2007, the Company did not engage in any substantial transaction and activity in connection to these businesses. On May 10, 2007, the Company approved and announced that it completely ceased and discontinued these businesses. Accordingly, the results of the discontinued operations have been segregated from continuing operations in the statements of operations and cash flows for the nine months ended September 30, 2007 and 2006. The discontinued operations incurred an income of $44,578 and $85,782 for the nine months ended September 30, 2007 and 2006, respectively and the basic income per share from discontinued operations was $0.00 and $0.01 for the respective periods. The income represented the write down of deferred revenue generated from the provision of pager value-added information services.

Net income from continuing operation in energy saving and recycling businesses

For the nine months ended September 30, 2007, we recorded a net income of $590,798 received from our new operations in energy saving and recycling businesses. Compared to the second quarter of 2007, the net income from these new operations was increased by $315,356, due to the growth of our energy saving and recycling businesses.

Foreign currency translation gain

Foreign currency translation gain for the nine months ended September 30, 2007 increased by $636,383 to $758,236 compared to $121,853 for the same period of the prior year, representing a 522% increase. The increase was mainly due to the continuous appreciation of RMB Yuan against US Dollars.

Comprehensive income

We recorded comprehensive income of $1,349,034 for the nine months ended September 30, 2007, a $1,330,394 increase in comprehensive income compared to comprehensive income of $18,640 for the same period of the prior year, representing an increase of approximately 7,137%. The increase in comprehensive income was attributable to (i) the revenues received from the direct financing leases related to the Company’s continuing operation in energy saving and recycling businesses and (ii) the increase of foreign currency translation.

Net income from continuing operations per share

For the nine months ended September 30, 2007, our net income from continuing operation per share was $0.03 compared to the $0.01 net loss from continuing operation per share for the same period of the prior year, representing a net increase of $0.04 per share. The increase in net income per share is attributable to the revenues and earnings received from our new operations in energy saving and recycling business.

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ITEM 6. EXHIBITS