ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion contains forward-looking statements. Forward looking statements are identified by words and phrases such as "anticipate", "intend", "expect" and words and phrases of similar import. We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict, including those set forth in Item 1A above. We encourage you to read those risk factors carefully along with the other information provided in this Report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.

You should read this MD&A in conjunction with the Consolidated Financial Statements and Related Notes in Item 7.

OVERVIEW

Sancon Resources Recovery, Inc. is an industrial waste recycling company with operations based in Australia, Hong Kong and China. Sancon currently exports more than 25,000 tons of recycled industrial waste material annually to its processing partners and manufacturers in China. Sancon's main operations and services include industrial waste management consulting, collection and reprocess of recyclable materials such as glass, plastic, cardboard, and paper before its re-entry into manufacture cycles as raw materials. The use of recycled material is both environmentally friendly and is a key part of today's competitive manufacturing process to lower costs. As China gains global manufacturing dominance and current economic crisis, Chinese manufacturers are increasingly turning to recycled materials to lower costs, resulting tremendous demand for recycled materials import. The major customers for Sancon are Chinese manufacturers and recycled material traders such as Pernod Ricard, Wei Er Sha and San Jiang etc, which are located mainly in the Chinese provinces of Guangdong, Zhejiang, Fujian and Hong Kong.

PLAN OF OPERATION

During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations:

o We intend to continue with our marketing strategies to deliver our products in China and provide our waste management service to clients;
o Along with the continued plastic and glass materials products we are now processing, we are also developing to process other materials, such as electronic materials.
o During the next twelve months, the Company expects to set up larger network of collection and sales in China.
o During the next twelve months, the Company is planning to raise additional US$1-2 million cash to facilitate our processing capacity. The capital will be used to some or all of the following activities: 1) acquisition of other companies running similar business in China; 2) purchase of new equipment to satisfy increasing new type of materials requirements; 3) marketing and general administrative expenses for new operation in China. We may raise such capital through issuing our common stocks or warrants.

Our aggressive expansion plan will be replied on such capital support. We cannot assure the successful result of fund raising. As such, we may not execute our initial business strategy or plan as expected, and furthermore, our competitors may stand in a better position than us, which results in an adverse effect on our business, although we believe that currently, even without such funds, we can still run a healthy business within our already occupied markets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments: allowance for doubtful accounts; income taxes; stock-based compensation; asset impairment.

REVENUE RECOGNITION

In accordance with generally accepted accounting principles ("GAAP") in the United States, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collection of the resulting receivable is reasonably assured. Noted below are brief descriptions of the product or service revenues that the Company recognizes in the financial statements contained herein.

The Company is organized into three business segments: material recycling, material trade and waste management service. Their revenue recognition is as follows:

(1) Material Recycling refers to the activities of collecting and processing of waste materials, then selling them to customers in China. The plant is located in Australia. The revenue is recognized when delivery of the material is occurred and invoice issued.
(2) Material Trade refers the activities of buying and selling of materials with operations located in Hong Kong. The revenue is recognized when delivery to customer is occurred and invoice is issued.
(3) Waste management Service refers the activities of providing waste management service with operations located in Shanghai China. The revenue is recognized when service is completed and invoice is issued.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts to reduce amounts to their estimated realizable value. A considerable amount of judgment is required when we assess the realization of accounts receivables, including assessing the probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful accounts could be required. We initially record a provision for doubtful accounts based on our historical experience, and then adjust this provision at the end of each reporting period based on a detailed assessment of our accounts receivable and allowance for doubtful accounts. In estimating the provision for doubtful accounts, we consider: (i) the aging of the accounts receivable; (ii) trends within and ratios involving the age of the accounts receivable; (iii) the customer mix in each of the aging categories and the nature of the receivable; (iv) our historical provision for doubtful accounts;
(v) the credit worthiness of the customer; and (vi) the economic conditions of the customer's industry as well as general economic conditions, among other factors.

INCOME TAXES

We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS 109 prescribes the use of the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance, or increase or decrease this allowance in a period, we increase or decrease our income tax provision in our statement of operations. If any of our estimates of our prior period taxable income or loss prove to be incorrect, material differences could impact the amount and timing of income tax benefits or payments for any period. In addition, as a result of the significant change in the Company's ownership, the Company's future use of its existing net operating losses may be limited. The Company operates in several countries. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations.

We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are reflected net of realized tax loss carry forwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary.

Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.

STOCK-BASED COMPENSATION

During December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS 123". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the exercise price of the related option. The Company has adopted the annual disclosure provisions of SFAS No. 148 in its financial reports for the year ended December 31, 2005 and has adopted the interim disclosure provisions in its financial reports for the subsequent periods.

Effective January 1, 2006, the beginning of Sancon's first fiscal quarter of 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified-prospective transition method. Under this transition method, stock-based compensation expense was recognized in the consolidated financial statements for granted stock options, since the related purchase discounts exceeded the amount allowed under SFAS 123R for non-compensatory treatment. Compensation expense recognized included: the estimated expense for stock options granted on and subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R; and the estimated expense for the portion vesting in the period for options granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123. Results for prior periods have not been restated, as provided for under the modified-prospective method.

As of December 31, 2008 and 2007, the Company did not issue or make provision through the issuance of stock options to employees and directors.

For other items paid for by common stock, the value of the transaction is determined by the value of the goods or services received, measured at the time of the transaction. The corresponding stock value, used to determine the number of share to be issued, is the value of the average price for the 20 to 30 days prior to the transaction date.

ASSET IMPAIRMENT

We periodically evaluate the carrying value of other long-lived assets, including, but not limited to, property and equipment and intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flows from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Significant estimates are utilized to calculate expected future cash flows utilized in impairment analyses. We also utilize judgment to determine other factors within fair value analyses, including the applicable discount rate.

RESULTS OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER, 2008 AND 2007

Revenue

Revenues for the year ended December 31, 2008 were $12,707,896 as compared to $4,782,109 of 2007, an increase of $7,925,787 or 166%. The sharp increases were mainly due to the significant sales amount contributed from Sancon SH, CS and Sancon AU. The revenues of Sancon SH increased sharply from $1,101,652 for the year ended December 31, 2007 to $6,254,559 for the year ended December 31, 2008, an increase of $5,152,907 or 468%. CS contributed $1,906,912 revenue during the fiscal year 2008 while it was not in operations for the year ended December 31, 2007. The revenue of Sancon AU also increased $940,492 or 64% from $1,467,867 for the year ended December 31, 2007 to $2,408,359 for the year ended December 31, 2008. However, the revenue of Guangcheng decreased $74,524 or 3% from $2,212,590 for the year ended December 31, 2007 to $2,138,066 for the year ended December 31, 2008.

Cost of revenue

Cost of revenue for the year ended December 31, 2008 increased to $6,753,173 from $3,378,941 for the year ended December 31, 2007, an increase of $3,374,232 or 100%. The significant increase of cost of sales was in line with the sales during the year ended December 31, 2008. Among which, cost of revenue in Sancon SH increased $3,063,169 or 531% from $577,048 for the year ended 2007 to $3,640,217 for the year ended 2008. The increase mainly contained $1,036,146 of shipping expenses, $1,129,374 of work outsourcing expenses and $556,348 of salary expenses. Cost of revenue in Sancon AU for the fiscal year ended 2007 and 2008 was $647,390 and $1,012,393 respectively, an increase of $365,003 or 56%. Cost of revenue in Guangcheng decreased from $2,154,503 for the fiscal year ended 2007 to $2,093,063 for the fiscal year ended 2008, a decrease of $61,440 or 3%.

For the fiscal year ended 2007, cost of revenue was 71% of revenue compare to 53% for the fiscal year ended 2008. The mainly reason for the dramatically decrease was CS contribute $$1,906,912 sales but no cost of sales.

Gross profit

The gross profit for the year ended December 31, 2008 was $5,954,723, representing $4,551,555 or 324% increase compared to $1,403,168 for the year ended 2007. And the gross margin rose from 29% for the year ended 2007 to 47% for the year ended 2008. The rise of the gross profit is mainly due to the high margin business in Sancon SH, CS and Sancon AU. The gross profit of Sancon SH increased $2,089,738 or 398% from $524,604 for the year ended 2007 to $2,614,342 for the year ended 2008. CS contributed $1,906,912 increase of gross profit because there is no operation for the year ended 2007. The gross profit of Sancon AU was $820,477 for the year ended 2007 while it increased $575,489 or 70% to $1,395,966 for the year ended 2008. The gross profit of Guangcheng decreased $13,084 or 23% from $58,087 for the year ended 2007 to $45,003 for the year ended 2008.

Selling, general and administrative expenses

Selling, general and administrative expenses increased to $4,272,076 for the year ended December 31, 2008, from $1,308,221 for the year ended 2007, an increase of $2,963,855 or 227%. The significant increase of selling, general and administrative expenses is mainly resulted from the business expanding of Sancon SH and Sancon AU during 2008. The SG&A expenses of Sancon SH was $176,567 for the year ended 2007, however, this number increased sharply to $2,666,303 for the year ended 2008. It increased $2,489,736 or 1,410% during the period. The increase was mainly contained $1,662,114 of consulting fee which is for developing new market and customer, $220,283 of salary expenses and $94,214 of travelling expenses. The SG&A expenses of Sancon AU increased $413,229 or 48% from $863,852 for the year ended 2007 to $1,277,081 for the year ended 2008. The increase was mainly contained $307,599 of wages expenses. The increase of selling, general and administrative expenses from the year ended December 31, 2007 to 2008 also included potential payment to Dragon Wings of $85,654.

The SG&A expenses was 34% of the revenue for the year ended 2008 while it was 27% for the year ended 2007.

Depreciation Expense

Depreciation expense increased to $121,999 for the year ended 2008 from $80,656 for the year ended 2007. The expenses increased $41,343 or 51% during the year ended on December 31, 2008 as compared to that in 2007. The increases were mainly due to the purchase of plant and machinery in Sancon SH for the year ended 2008. The depreciation expense of Sancon SH increased $55,021 or 497% from $11,065 for the year 2007 to $66,086 for the year ended 2008. For the year ended 2007, depreciation expense was 2% of the revenue while it was 1% for the year ended 2008.

Other Income (Expense)

For the year ended December 31, 2008, the Company booked other income of $77,062 compared to other income of $26,488 for the year ended 2007. The increase in other income is $50,574 or 191% during the period. The mainly other income happened in the year 2008 is net interest income of $31,092 and Grand income of $50,666.

For the year ended 2007 and 2008, other income was 0.6% of the revenue.

Minority Interest

On August 15, 2007, the Company completed the acquisition of 70% of the equity interest in Sancon Resources Recovery (Shanghai) Co., Ltd by exercising its option to convert $200,000 of convertible promissory note. Minority Interest was minus $67,947 for the year ended 2007 while it was $25,391 for the year ended 2008. For the year ended 2008 and 2007, minority interest was 0.2% and 1% of the revenue respectively.

Discontinued Operation

On March 31, 2008, the company sold 100% equity interest of Digital Financial Service Limited ("DFSL") for $7.8 plus the assumption of certain liabilities. Gain on discontinued operation was $1,865 for the year ended December 31, 2008. During the same period in 2007, the Company booked loss on discontinued operation was $27,753.

Income Tax

The income tax decreased to $12,453 for the year ended 2008 from $112,922 for the year ended 2007, a decrease of $100,469 or 89%. That is because Sancon SH has no income tax for the year ended 2008 due to its loss. However, it booked $111,554 income tax for the year ended 2007. For the year ended 2008 and 2007, income tax was 0.1% and 2% of the revenue respectively.

Net loss/income

Net income for the year ended 2008 was $1,652,513, compared to a net loss of $167,843 in 2007, an increase of $1,820,356 or 1,085%. The increase is mainly contributed to the significant net income from CS of $1,896,273 for the year ended 2008. Net profit margin for the year ended 2008 was 13% while net loss margin for the year ended 2007 was 4%.

Liquidity and Capital Resources

As shown in the accompanying financial statements, the Company booked accumulated income of $1,367,955 as of December 31, 2008 compares to accumulated loss of $284,558 for the year ended 2007. In addition, our working capital is $1,265,713 for the year ended 2008 and it was negative $489,589 for the year ended 2007. That is mainly because of the increase of cash and cash equivalents. It increased to $2,220,509 from $238,644 during the period.

Our ability to continue as a going concern depends on the successful execution of our business plan to maintain the current profitability of the company as a whole.

Operating Activities

The net cash provided by operating activities for the year ended December 31, 2008 amounted to $2,556,250 compared to $218,237 for the year ended December 31, 2007, and increase $2,338,013 or 1,071%. The increase mainly included net income of $1,820,356, depreciation and amortization of $41,343, shares issued for compensation of $114,600, trade receivables of $666,187 and trade payable of $138,096. These increases were offset by tax payable of $223,648 in which Sancon SH decreased $223,591and other current assets of $109,103. The payment terms of our accounts receivable is about one month and will not be more than two months.

Investing Activities

Net cash used in investing activities amounted to $586,132 for the year ended December 31, 2008 compared to $172,283 for the year ended 2007, an increase of $413,849 or 240%. The increase mainly included purchase of property and equipment of $276,981 and investment in marketable securities of 128,400.

Financing Activities

Net cash obtained by financing activities amounted to $9,954 for the year ended December 31, 2008 compared to $143,469 for the year ended 2007, a decrease of $133,515 or 93%. The decrease mainly included shares issued for cash of $350,000 and payment of mortgage loan of $8,898. This decrease was offset by shareholders' loan of $225,383.

The Company has financed its growth by utilizing cash reserves and loans from directors. Loans from directors are unsecured, and deferred payment term and without interest bearing. The Company's primary use of funds is for the purchase of equipment for operation expansion and working capital.

Inflation

In the opinion of management, inflation has not had a material effect on the Company's financial condition or results of its operations

Trends and uncertainties

Management believes there are no known trends, events, or uncertainties that could, or reasonably be expected to, adversely affect the Company's liquidity in the short and long terms, or its net sales, revenues, or income from continuing operations. However the management observed increased competition in the material trading business has resulted in decrease margin in these businesses.

The Company's operations are not affected by seasonal factors.

OFF-BALANCE SHEET ARRANGEMENTS

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that are material to investors.