ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Item 2(a). Discussion for the Interim Operations and Financial Condition

Introduction

Management's discussion and analysis of results of operations and financial condition ("MD&A") is provided as a supplement to the accompanying financial statements and footnotes to help provide an understanding of our financial condition, changes in financial condition and results of operations. The MD&A is organized as follows:

o Caution concerning forward-looking statements and risk factors. This section discusses how certain forward-looking statements made by us throughout the MD&A and in the financial statements are based on our present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.
o Overview. This section provides a general description of our business, as well as recent developments that we believe are important in understanding the results of operations and to anticipate future trends in those operations.
o Results of operations. This section provides an analysis of our results of operations for the three months and six months period ended June 30, 2009 compared to the same period in 2008. A brief description is provided of transactions and events, including any related party transactions that affect the comparability of the results being analyzed.
o Liquidity and capital resources. This section provides an analysis of our financial condition and cash flows for the six months period ended June 30, 2009 and 2008.
o Critical accounting policies. This section provides an analysis of the significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

Caution Concerning Forward-looking Statements and Risk Factors

We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our Common Stock.

The following discussion should be read in conjunction with our financial statements and the notes thereto, and the other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other parts of this document contain certain forward-looking information. When used in this discussion, the words "believes", "anticipates", "expects", and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of factors beyond our control. We do not undertake to publicly update or revise any of our forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers are also urged to carefully review and consider our discussions regarding the various factors, which affect our business, included in this section and elsewhere in this report.

Factors that might cause actual results, performance or achievements to differ materially from those projected or implied in such forward-looking statements include, among other things: (i) the impact of competitive products; (ii) changes in law and regulations; (iii) limitations on future financing; (iv) increases in the cost of borrowings and unavailability of debt or equity capital; (v) our inability to gain and/or hold market share; (vi) managing and maintaining growth; (vii) customer demands; (viii) market and industry conditions, (ix) the success of product development and new product introductions into the marketplace; (x) the departure of key members of management; as well as other risks and uncertainties that are described from time to time in our filings with the Securities and Exchange Commission.

We provide the following cautionary discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business and our products. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could adversely affect us.

Potential Fluctuations In Periodic Operating Results

Our periodic operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside our control, including: the demand for our products; seasonal trends in purchasing, the amount and timing of capital expenditures and other costs relating to the development of our products; price competition or pricing changes in the industry; technical difficulties or system downtime; general economic conditions, and economic conditions specific to the industry. Our results may also be significantly impacted by the impact of the accounting treatment of acquisitions, financing transactions or other matters. Particularly at our early stage of development, such accounting treatment can have a material impact on the results for any period. Due to the foregoing factors, among others, it is likely that our operating results will fall below our expectations or those of investors in some future period.

Dependence Upon Management

Our future performance and success is dependant upon the efforts and abilities of our Management. To a very significant degree, we are dependent upon the continued services of Jack Chen, CEO & Director of the Company. If the Company lost the services of Mr. Chen, or other key employees before we could get qualified replacements that loss could materially adversely affect our business. We do not maintain key man life insurance on any of our Management.

Limitation of Liability and Indemnification of Officers and Directors

Our officers and directors are required to exercise good faith and high integrity in our Management affairs. Our Articles of Incorporation provide, however, that our officers and directors shall have no liability to our shareholders for losses sustained or liabilities incurred which arise from any transaction in their respective managerial capacities unless they violated their duty of loyalty, did not act in good faith, engaged in intentional misconduct or knowingly violated the law, approved an improper dividend or stock repurchase, or derived an improper benefit from the transaction. Our Articles and By-Laws also provide for the indemnification by us of the officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate our business or conduct the internal affairs, provided that in connection with these activities they act in good faith and in a manner that they reasonably believe to be in, or not opposed to, the best interests of the Company, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations. To further implement the permitted indemnification, we have entered into Indemnity Agreements with our officers and directors.

Management of Potential Growth

We anticipate rapid growth, which will place a significant strain on our managerial, operational, and financial systems resources. To accommodate our current size and manage growth, we must continue to implement and improve our financial strength and our operational systems, and expand, train and manage our sales and distribution base. There is no guarantee that we will be able to effectively manage the expansion of our operations, or that our facilities, systems, procedures or controls will be adequate to support our expanded operations. Our inability to effectively manage our future growth would have a material adverse effect on the Company.

Limited Market Due To Penny Stock

The Company's stock differs from many stocks, in that it is a "penny stock". The Securities and Exchange Commission has adopted a number of rules to regulate "penny stock". These rules include, but are not limited to, Rules 3a5l-l, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and Exchange Act of 1934, as amended. Because our securities probably constitute "penny stock" within the meaning of the rules, the rules would apply to us and our securities. The rules may further affect the ability of owners of our stock to sell their securities in any market that may develop for them. There may be a limited market for penny stocks, due to the regulatory burdens on broker-dealers. The market among dealers may not be active. Investors in penny stock often are unable to sell stock back to the dealer that sold them the stock. The mark-ups or commissions charged by the broker-dealers may be greater than any profit a seller may make. Because of large dealer spreads, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold the stock to the investor. In some cases, the stock may fall quickly in value. Investors may be unable to reap any profit from any sale of the stock, if they can sell it at all. Stockholders should be aware that, according to the Securities and Exchange Commission Release No. 34- 29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. These patterns include: - Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; - Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; - "Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; - Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and - The wholesale dumping of the same securities by promoters and broker- dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. Furthermore, the "penny stock" designation may adversely affect the development of any public market for the Company's shares of common stock or, if such a market develops, its continuation. Broker-dealers are required to personally determine whether an investment in "penny stock" is suitable for customers. Penny stocks are securities (i) with a price of less than five dollars per share; (ii) that are not traded on a "recognized" national exchange;
(iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an issuer with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average annual revenues of less than $6,000,000 for the last three years. Section 15(g) of the Exchange Act and Rule 15g-2 of the Commission require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor`s account. Potential investors in the Company`s common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock". Rule 15g-9 of the Commission requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement

setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for the Company's stockholders to resell their shares to third parties or to otherwise dispose of them.

Overview of the Company and its Operations

Sancon Resources Recovery, Inc. is an environmental service and waste management company that operates recycling facilities in China and Australia. Sancon specializes in the collection and recovery of industrial and commercial solid wastes such as plastic, paper, cardboard, and glass. The recycled materials are re-used by Sancon's manufacturing customers in China to make a wide variety of new products including outdoor furniture, construction materials, building materials, road surface, and various new products. Sancon's China operation is licensed by the Chinese government for waste management services, and is certified with ISO 9001 and ISO14001 standards. Sancon currently ships more than 25,000 tons of recycled industrial and commercial waste material annually to its customers in China. Sancon's main operations and services include industrial waste management consulting, collection and reprocess of recyclable materials such as plastic, glass, cardboard, and paper before its re-entry into manufacture cycles as raw materials. Sancon also provides its full waste management services to large consumer products maker such as Pernod Ricard. 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 its costs, resulting tremendous demand for recycled materials import. The major customers for Sancon are Chinese manufacturers and recycled material traders which are located mainly in the Chinese provinces of Guangdong, Zhejiang and Fujian.

THE TREND IN CHINESE MARKET

According to China National Resources Recycling Association, recyclable solid waste import to China has experienced a dramatic increase in the last 2 decades. During early 1990's, China imported 1-2 million tons of recyclable wastes per year. By 1999, China imported 10 million tons of recyclable solid wastes per year. In 2006 China imported 37 million tons of recyclable wastes. China's total domestic recycled volume is estimated to have reached over 50 million tons in 2007, with an estimated total worth of US$6 billion.

The State Development and Reform Commission of China promotes the recycling industry with a four-pronged solution ranging from energy saving and clean production to integrated use of resources and developing environmental protection industry, to accelerate the development of the recycling economy. The concept of recycling economy is included in the 11th Five-year Plan.

The Chinese Government is emphasizing environmental policies & projects for all sectors and entities. On August 2008, China's top legislature passed a law to promote circular economy and will come into force on January 1, 2009. The aim of the law is to boost sustainable development through energy saving and reduction of pollutant discharges. At present China's environmental industry is highly fragmented and at its infancy stage.

Due to the serious environment pollution problems faced in China, the 11th Five-year plan emphasis energy saving, emission reduction and environmental protection at the highest level ever. At the end of the 11th Five-year plan, the annual production of the environmental industry will exceed 1.1 trillion RMB, of which environmental equipment spending is 120 billion RMB, environmental services is 100 billion RMB, resources recovery is 660 billion RMB, cleaning products spending is 250 billion RMB.

In the past 30 years of development, environmental production value in China increased from 0.5% of GDP to the current 1.6%. China will expedite the demonstration and promotion of technologies for energy saving and emission reduction; actively promote the development of the environmental services industry; and also intensify the financial services for the environmental industry; and tax benefit policies for the environmental industry. During the 11th Five-year period, investment for environmental protection will reach 1.4 trillion RMB. Central government financing is investing in environmental industry at annual compound growth rate of 18%. Chinese government set out policies supports 4 key areas: developing a resources recovery and recycling economy; pollution reduction and ecological protection; environment testing instruments; environmental services and the development of the environmental industry.

Sancon is uniquely position to benefits from these initiatives as an early mover in the industry and one of the few foreign companies being awarded a waste management license in China. Sancon has for the past years developed one of the largest collection and recovery network in China for commercial wastes and expects to expand into other areas of environmental services.

SANCON'S VISIONS AND GOALS

The long-term objective of Sancon is to seek and develop further alternative resources recovery solutions, which will protect our environment and maximize sustainable usage for industrial waste materials. At Sancon we believe reducing the environmendal impact of manufactured products is through both professional services offered to manufacturers and commercial entities to increase recyclability of waste materials, and efficient redeployment of waste materials.

SERVICES OFFERED TO OUR CLIENTS

Sancon strives to take an all-inclusive approach to provide eco-friendly solutions leading to the sustainable use of waste materials. Our services include collection from manufacturing and commercial sites, re-process waste materials to increase recyclability, end-of-life disassembly, redeployment of recyclable materials, and destruction of sensitive materials and products.

COMPETITION

The markets for the Company's products and services are competitive, and the Company faces competition from a number of sources. Many of the Company's competitors have substantially greater resources than the Company. Those resources may include greater name recognition; larger product lines; complementary lines of business; and greater financial, marketing, information systems, and other resources. The Company can give no assurance competitive pressures will not materially and adversely affect the Company's business, financial condition, and results of operations.

But the management has identified several key points which will give Sancon the competitive edge in the market place:

1) Sancon offers large selection of plastic and glass raw materials to our customers.
2) With the expansion of our operations in Melbourne Australia, Sancon will be able to serve greater number of customers and sell direct to our customs in both Australia and China.
3) Sancon has 6 strategically positioned recycling plants and about 40 depots in China and it will enable Sancon to meet the demand for nationwide environmental services.
4) Industry know-how and management team's ability to ensure all operating and environmental standards are achieved. Our team's experience in logistic management and waste management operations are key factors enabling the delivery of a high standard of service to Sancon's clients.

EMPLOYEES

As of June 30, 2009, the Company employed 15 people in Australia subsidiaries. Our joint venture in China employed 20 people full time, and all other personnel of the China joint venture are employed as sub contractors. To make our work more efficient, we outsourced a few other functions, such as logistics, bookkeeping and administration, to certain professional firms to enable our resource being focused on sales and processing functions.

FACTORS THAT MAY AFFECT FUTURE RESULTS

The business in which the Company is engaged is capital supportive. Accordingly, the Company's ability to execute its business strategy and to sustain its operations depends upon its ability to maintain or procure capital. There can be no absolute assurance the necessary amount of capital will continue to be available to the Company on favorable terms, or at all. The Company's inability to obtain sufficient capital or to renew its credit facilities would limit the Company's ability to: (i) add new equipment to its portfolio, (ii) fund its working capital needs, and (iii) finance possible future acquisitions. The Company's access to capital may have a material adverse effect on the Company's business, financial condition and/or results of operations.

There can be no absolute assurance the Company will be able to effectively manage its existing or the possible future expansion of its operations, or the Company's systems, procedures or controls will be adequate to support the Company's operations. Consequently, the Company's business, financial condition and/or results of operations could be possibly and adversely affected.

The Company does not foresee changes in tax laws for the jurisdictions in which the Company and its subsidiaries operate. There can be no absolute assurance that changes will not occur, and therefore no absolute assurance such changes will not materially and adversely affect the Company's business, financial condition and results of operations.

As a public company, Sancon is subject to certain regulatory requirements including, but not limited to, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX404"). Such compliance results in significant additional costs to the Company by increased audit and consulting fees, and the time required by management to address the regulations. The SEC has recently delayed the implementation date of SOX404 for non-accelerated filers until the fiscal year ended December 31, 2009. However, should the Company successfully fulfill its plans to procure financing and expand its operations; the Company may come under the accelerated filer definition, and be required to comply with SOX404 before December 31, 2009. In any case, such cocts will likely affect adversely the Company's business, financial condition and results of operations.

Results of Operations - Comparison between the three and six months ended June 30, 2009 and the same periods of 2008.

Sales

Sales are generated by service charges and the sale of recyclable materials. The sales for the three months period ended June 30, 2009 were $2,743,132, representing $329,849 or 14% increase compared to the sales of $2,413,283 in the same period of 2008. The sales of Sancon SH increased from $1,514,421 for the three months period ended June 30, 2008 to $1,666,090 for the three months period ended June 30, 2009, an increase of $151,669 or 10%. CS contributed $541,023 sales during the three months period ended June 30, 2009 while it was $157,586 for the three months period ended June 30, 2008, representing $383,437or 243% increase. However, the sales of Sancon AU decreased $205,257 or 28% from $741,276 for the three months period ended June 30, 2008 to $536,019 for the three months period ended June 30, 2009. The decrese of sales in Sancon AU was mainly due to the reduce of economic activities which caused by current economic crisis.

The sales for the six months period ended June 30, 2009 were $5,337,627, representing $345,241 or 7% increase compared to the sales of $4,992,386 in the same period of 2008. The sales of Sancon SH increased from $3,062,357 for the six months period ended June 30, 2008 to $3,275,518 for the six months period ended June 30, 2009, an increase of $213,161 or 7%. The sales of CS was $1,143,708 during the six months period ended June 30, 2009 while it was $588,086 for the six months period ended June 30, 2008, representing $555,622or 94% increase. The sales of Sancon AU decreased $423,542 or 32% from $1,341,943 for the six months period ended June 30, 2008 to $918,401 for the six months period ended June 30, 2009.

Cost of Sales

The cost of sales is the direct cost for sale of the recycling materials. For the three months period ended June 30, 2009, the cost of sales was $1,324,657. It was $255,185 or 24% increase as compared to the cost of sales of $1,069,472 for the three months period ended June 30, 2008. Among which, the cost of sales in Sancon SH increased $289,988 or 35% from $832,002 for the three months period ended June 30, 2008 to $1,121,990 for the three months period ended June 30, 2009. The increase mainly contained $228,445 of shipping expenses and $43,739 of labor service fee for sub contractors. All these costs were related to our chinese market expandant. Cost of revenue in Sancon AU for the three months period ended June 30, 2008 and 2009 was $226,220 and $202,667 respectively, a decrease of $23,553 or 10%. The decrease of cost of sales in Sancon AU was in line with the sales.

For the three months period ended June 30, 2008 and 2009, cost of sales was 44% and 48% of sales respectively.

For the six months period ended June 30, 2009, the cost of sales was $2,606,589. It was $501,846 or 24% increase as compared to the cost of sales of $2,104,743 for the six months period ended June 30, 2008. Among which, the cost of sales in Sancon SH increased $608,891 or 37% from $1,651,841 for the six months period ended June 30, 2008 to $2,260,732 for the six months period ended June 30, 2009. The increase mainly contained $444,390 of shipping expenses, $67,255 for worshop rental fee and $74,263 of labor service fee for sub contractors. Cost of revenue in Sancon AU for the six months period ended June 30, 2008 and 2009 was $430,402 and $345,857 respectively, a decrease of $84,545 or 20%.

For the six months period ended June 30, 2008 and 2009, cost of sales was 42% and 49% of sales respectively.

Gross profit

The gross profit for the three months period ended June 30, 2009 was $1,418,475, representing $74,664 or 6% increase compared to $1,343,811 for the three months period ended June 30, 2008. The gross margin reduced from 56% for the three months period ended June 30, 2008 to 52% for the three months period ended June 30, 2009. The increase of the gross profit is mainly due to its rise in CS of $383,437 or 243% although the gross profit in Sancon SH decreased $138,319 or 20% and in Sancon AU of $181,704 or 35%.

The gross profit for the six months period ended June 30, 2009 was $2,731,038, representing $156,605 or 5% decrease compared to $2,887,643 for the six months period ended June 30, 2008. The gross margin reduced from 58% for the six months period ended June 30, 2008 to 51% for the six months period ended June 30, 2009. The decrease of the gross profit is mainly due to its reduce in Sancon SH of $395,730 or 28% and Sancon AU of $338,997 or 37% although gross profit of CS increased $555,622 or 94% from $588,086 for the six months period ended June 30, 2008 to $1,143,708 for the six months period ended June 30, 2009.

Selling, general and administrative expenses

Selling, general and administrative expenses increased to $821,652 for the three months period ended June 30, 2009, from $813,162 for the three months period ended June 30, 2008, an increase of $8,490 or 1%. The SG&A expenses of Sancon SH was $344,159 for the three months period ended June 30, 2008, this number increased to $487,995 for the three months period ended June 30, 2009. It increased $143,836 or 42%. The increase was mainly contained $107,663 of consulting fee and $60,031 of travelling fee which is for developing new market and customer. The SG&A expenses of Sancon AU decreased $125,686 or 31% from $410,736 for the three months period ended June 30, 2008 to $285,050 for the three months period ended June 30, 2009. The decrease was mainly due to the

falling of sales. The SG&A expenses also included investor relationship expenses which decreased $13,867 or 24% from $58,267 for the three months period ended June 30, 2008 to $44,400 for the three months period ended June 30, 2009.

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