**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB/A**
 
 (
        X )
        ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        the
        fiscal year ended December 31, 2006
 
 (
        )
        TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF
        1934
  For
        the transition period from ____________ to
        ____________
   Commission
        File Number 000-51364
 
 
 **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
 (Name
        of
        small business issuer in its charter)
 
 **Utah**
              **32-0028823**(State
                  or other jurisdiction
              (IRS
                  Employer Identification No.)of
                  incorporation or organization)
 
 The
        Farmhouse
 558
        Lime
        Rock Road
 Lime
        Rock, Connecticut 06039
 (Address
        of Principal Executive Offices) (Zip Code)
 
 Issuer's
        Telephone Number:  (860)
        435-7000
 
 Securities
        registered under Section 12 (b) of the Act: NONE
 
 Securities
        to be registered under Section 12 (g) of the Act:
 
 COMMON
        STOCK, PAR VALUE $.001 PER SHARE
 (Title
        of
        Class)
 
 Check
        whether the issuer is not required to file reports pursuant to Sections 13
        or
        15(d) of the Exchange Act. |_|
  Check
        whether the issuer (1) filed all reports required to be filed by Sections
        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 |_|
 
 Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of registrant's knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB. |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|
 
 State
        Issuer’s revenue for its most recent fiscal year: $10,870,718
  
  As
        of
        March 26, 2007 the aggregate market value of the common stock held by
        non-affiliates was approximately $ 6,792,498 based upon the last reported
        closing price on March 6, 2007 of $4.99. As of March 26, 2007, there were
        14,920,346 shares of common stock outstanding.
 
 Documents
        incorporated by reference: None
 
 Transitional
        Small Business Disclosure Format: Yes |_| No |X|
 TABLE
          OF
          CONTENTS
 PART
                    IPAGEItem
                    1.
                Description
                    of Business
                2Item
                    2.
                Description
                    of Property
                20Item
                    3.
                Legal
                    Proceedings
                21Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                21PART
                    IIItem
                    5.
                Market
                    for Common Equity and Related Stockholder Matters
                22Item
                    6.
                Managements
                    Discussion and Analysis or Plan of Operation
                23Item
                    7.
                Financial
                    Statements
                32Item
                    8.
                Changes
                    in and Disagreements With Accountants on Accounting and Financial
                    Disclosure
                32Item
                    8A.
                Controls
                    and Procedures
                32Item
                    8B.
                Other
                    Information
                32PART
                    IIIItem
                    9.
                Directors,
                    Executive Officers, Promoters and Control persons; Compliance
                    with Section
                    16(a) of the Exchange Act.
                32Item
                    10.
                Executive
                    Compensation
                35Item
                    11.
                Security
                    ownership of Certain Beneficial Owners and Management
                35Item
                    12.
                Certain
                    Relationships and Related Transactions
                37PART
                    IVItem
                    13.
                Exhibits
                    and Reports on Form 8-K
                40Item
                    14.
                Principal
                    Accountant Fees and Services
                41Signatures
                42
  1
  **PART
        I**
 
 **Item
        1.**  **Description
        of Business**
 
 **Information
        regarding forward-looking statements and other information in this annual
        report**
 
 Our
        disclosure and analysis in this annual report contains some forward-looking
        statements. Certain of the matters discussed concerning our operations, cash
        flows, financial position, economic performance and financial condition,
        including, in particular, future sales, demand, the market for natural gas
        in
        the People's Republic of China, competition, exchange rate fluctuations and
        the
        effect of economic conditions include forward-looking statements within the
        meaning of section 27A of the Securities Act and Section 21E of the Exchange
        Act.
 
 Statements
        that are predictive in nature, that depend upon or refer to future events
        or
        conditions or that include words such as "expects," "anticipates," "intends,"
        "plans," "believes," "estimates" and similar expressions are forward-looking
        statements. Although we believe that these statements are based upon reasonable
        assumptions, including projections of orders, sales, operating margins,
        earnings, cash flow, research and development costs, working capital, capital
        expenditures and other projections, they are subject to several risks and
        uncertainties, and therefore, we can give no assurance that these statements
        will be achieved.
 
 Investors
        are cautioned that our forward-looking statements are not guarantees of future
        performance and the actual results or developments may differ materially
        from
        the expectations expressed in the forward-looking statements.
 
 As
        for
        the forward-looking statements that relate to future financial results and
        other
        projections, actual results will be different due to the inherent uncertainty
        of
        estimates, forecasts and projections may be better or worse than projected.
        Given these uncertainties, you should not place any reliance on these
        forward-looking statements. These forward-looking statements also represent
        our
        estimates and assumptions only as of the date that they were made. We expressly
        disclaim a duty to provide updates to these forward-looking statements, and
        the
        estimates and assumptions associated with them, after the date of this filing
        to
        reflect events or changes in circumstances or changes in expectations or
        the
        occurrence of anticipated events.
 
 We
        undertake no obligation to publicly update any forward-looking statement,
        whether as a result of new information, future events or otherwise. You are
        advised, however, to consult any additional disclosures we make in our reports
        on Form 10-KSB, Form 10-QSB, Form 8-K, or their successors. We also note
        that we
        have provided a cautionary discussion of risks and uncertainties under the
        caption "Risk Factors" in our registration statement filed with the SEC on
        October 27, 2006. These are factors that we think could cause our actual
        results
        to differ materially from expected results. Other factors besides those listed
        here could also adversely affect us.
 
 Information
        regarding market and industry statistics contained in this annual report
        is
        included based on information available to us which we believe is accurate.
        We
        have not reviewed or included data from all sources, and cannot assure
        stockholders of the accuracy or completeness of the data included in this
        annual
        report. Forecasts and other forward-looking information obtained from these
        sources are subject to the same qualifications and the additional uncertainties
        accompanying any estimates of future market size, revenue and market acceptance
        of products and services. This discussion is provided as permitted by the
        Private Securities Litigation Reform Act of 1995.
 
 Unless
        otherwise noted, all currency figures in this filing are in U.S. dollars.
        References to the “PRC” or “China” are to the People’s Republic of China.
        References to "yuan" or "RMB" are to the Chinese yuan (also known as the
        renminbi). According to the currency exchange website www.xe.com, on March
        26,
        2007, $1.00 = 7.74730 yuan.
 
 “Sino
        Gas,” “we” and “the Company” refer to Sino Gas International Holdings, Inc. and
        our subsidiaries or, as context requires, Sino Gas International Holdings,
        Inc.
        alone. “Exchange Act” refers to the Securities Exchange Act of 1934, as
        amended.
 
 Unless
        otherwise indicated, “2006” and “2005” refer to the fiscal years ended December
        31, 2006 and December 31, 2005, respectively.
  2
 Overview
        of Our
        Business
  We
        are
        engaged in the development of natural gas distribution systems in small-
        and
        medium-sized cities in China, as well as the distribution of natural gas
        to
        residential, commercial and industrial customers in China through our indirectly
        owned subsidiaries in the PRC, Beijing Zhong Ran Wei Ye Gas Co., Ltd. (“Beijing
        Gas”) and its subsidiaries.
 
 We
        own
        and operate 23 natural gas distribution systems serving approximately 63,000
        residential and five commercial and industrial customers. Our facilities
        include
        approximately 700 kilometers (“km”) of pipeline and delivery networks with a
        designed daily capacity of approximately 70,000 cubic meters of natural gas.
        Currently, we are constructing an additional four natural gas distribution
        systems. We own and operate natural gas distribution systems primarily in
        Hebei,
        Jiangsu, Shandong and Anhui Provinces. The following table presents, for
        the
        periods indicated, selected operating data:
 
 At
                  and for the year ended December 31,2006
              
              2005Total
                  gas distributed and supplied (yuan)
              
              
              29,132,897.35
              
              
              22,167,785.79Distribution
                  network (km)
              
              
              390
              
              
              187.8Number
                  of industrial customers
              
              
              5
              
              
              4Number
                  of residential customers
              
              
              48,199
              
              
              23,700
  We
        buy
        natural gas for distribution in three forms: (i) piped natural gas—we use piped
        natural gas (“PNG”) if the gas source, or long distance pipeline, is located
        within a reasonably short distance of our system; (ii) compressed natural
        gas
        (“CNG”); and (iii) liquefied natural gas (“LNG”). Both CNG and LNG are natural
        gas that has been compressed into canisters so as to enable transportation,
        usually by truck, to the point of distribution or consumption. Typically
        CNG is
        compressed under 200 times pressure and transported at normal temperature,
        while
        LNG is compressed at 600 times pressure and transported at sub zero degree
        temperature. CNG is generally transported within a distance of 300 km. There
        is
        no distance restriction in transporting LNG. As LNG is compressed at much
        higher
        pressure and transported at much lower temperature than CNG, the cost of
        compression and processing of LNG is higher than that of CNG.
  Generally,
        if a customer is located within 300 km of our natural gas supplier, we transport
        CNG to the customer. We transport LNG to a customer if the customer is located
        more than 300 km away from a supplier. Approximately 99% of the natural gas
        we
        purchase is CNG and approximately 1% is LNG.
 
 We
        generate revenues in two ways: (i) connection fees for the sale of
        interconnections to our natural gas distribution system and (ii) the sale
        of
        natural gas. In 2004, we also generated sales from the sale of natural gas
        appliances and equipment, gas meters, and repair, maintenance and related
        services. In 2005, we ceased supplying gas appliances, equipment and gas
        meters
        as sales of such items were not very profitable and our customers can find
        more
        varieties of these items readily available on the open market. We have two
        types
        of customers: (i) residential and (ii) commercial or industrial. The following
        table presents, for the periods indicated, the revenues generated from each
        of
        our major categories of operations:
 
 At
                  and for the year ended December 31,2006
                (in
                  US$ millions)
              
              2005
                (in
                  US$ millions)Connection
                  fees (as % of total Sales)
              
              
              7.22(66
              %)
              
              8.2
                  (75.2
              %)Gas
                  sales
              
              
              3.65(34
              %)
              
              2.7
                  (24.8
              %)Other
                  sales
              
              
              —
              
              
              —
 
 Our
        cost
        of sales consists of cost of gas sales and cost of connection. Cost of gas
        sales
        consists of cost of natural gas purchased from the suppliers, transportation
        cost, depreciation of plant and equipment, and amortization of the capitalized
        construction costs as our expenditures in constructing our pipeline
        infrastructure are generally capitalized as fixed assets and amortized over
        a
        period of time. Cost of connection includes certain construction costs that
        are
        expensed.
  3
  The
        following table presents Beijing Gas’s costs of sales for the periods
        indicated:
 
 At
                  and for the year ended December 31,2006
                (in
                  US$ millions)
              
              2005
                (in
                  US$ millions)Gas
                  cost
              
              
              2.84
              
              
              2.53Connection
                  cost
              
              
              1.55
              
              
              1.57
 
 Our
        business is generally affected by two seasonal factors: First, between December
        and March, the weather is too cold in northern China for construction. For
        a
        given gas distribution project, to avoid running into this time period, we
        generally start the process of pipeline installation, which has a duration
        of
        six to eight months, in April so as to complete the process before December.
        As
        a result, most of our revenues from connection fees are recorded in the fourth
        quarter. Second, winter is our peak season for gas sales, as our customers
        tend
        to consume more natural gas for heating purposes.
  **Our
        Strategy**
 
 Our
        strategy involves a four-part plan: (i) serve smaller cities each with a
        population of no more than one million, where there is little competition
        to
        obtain a franchise, and where our franchise grants us exclusivity; (ii) contract
        for long term supplies of natural gas on favorable prices and terms; (iii)
        finance our Company using a well-designed financing plan that will give us
        a
        favorable cost of capital; and (iv) employ the best management.
 
 ***(i)
        Small Cities; Exclusive Franchises.*** We focus
        on small- to medium-sized cities, generally near a larger metropolitan area.
        In
        such places in the PRC, we are in a better position to obtain exclusive natural
        gas distribution system development and supply franchise agreements in
        negotiating with the cities, which urgently need to provide their citizens
        with
        energy, and usually don’t have the leverage of very large cities, which can
        attract multiple bidders for their franchises. Accordingly, we require and
        receive an exclusive franchise entitling us to be the sole natural gas utility
        in such city. Usually, our franchises are for a period of 25-30
        years.
 
 ***(ii)
        Favorable Natural Gas Contracts.*** We
        have
        established and developed stable and long term contracts with China’s major
        natural gas suppliers, including close cooperation with such major state-owned
        entities in the petroleum and natural gas industry as Petro China Company
        Limited and Sinopec Corporation.
 
 ***(iii)
        Financing Plan.*** We
        anticipate using our financing plan as a competitive tool. Our goal is to
        duplicate the type of financing plan and related financial instruments used
        by
        utilities in the United States, including the issuance of subsidiary level,
        non-recourse debt, preferred stock and holding company fixed income issuances.
        Such a financing plan can not only give us a favorable cost of capital, but
        enhance investor returns and keep investor dilution at a minimum.
 
 We
        are in
        a very capital-intensive business. Our income will depend on our ability
        to
        issue the above-mentioned financial instruments. There can be no assurance,
        however, that we will be successful in issuing or selling such instruments
        to
        investors which would have a direct and negative impact on our future
        earnings.
 
 ***(iv)
        Employ the Best Management.*** **** We
        have a
        team of senior executives who are industry experts each with a track record
        of
        success in managing larger Chinese petroleum and/or gas companies. Our founder
        and Chief Executive Officer, Mr. Yu-Chuan Liu, is a natural gas industry
        expert
        with over 20 years experience in senior management positions at Petro China
        and
        China Gas Holdings Limited, a Hong Kong Stock Exchange-listed PRC company.
        Our
        Chief Operating Officer, Mr. Zhou Zhi Cheng, served as the director and General
        Manager of Beijing Chenguang Gas Co., Ltd. from late 2002 to 2006. Prior
        to
        that, Mr. Zhou served as the Associate General Manager and later General
        Manager
        of Beijing Zhong Ran Xiang Ke Petroleum and Oil Technology Co., Ltd. from
        2001
        to 2002. Our Chief Engineer, Mr. Shu-Kui Bian, is one of the draftsmen of
        the
        PRC national standard for urban gas supply, and was previously the chief
        executive officer of the First Oil Extraction Plant of North China Oilfield.
 
 4
 **Organization
        and Structure of the Company**
 
 We
        operate through our indirectly-owned subsidiaries in the PRC, Beijing Gas
        and
        its subsidiaries. A separate subsidiary with nominal operations, Pegasus
        Tel,
        owns and operates payphones. We plan to spin off Pegasus Tel in the form of
        a dividend to our shareholders of record as of August 30,
        2006.
  As
        of
        December 31, 2006, our corporate structure is set forth
        below:
 
 
  (1)
        The
        subsidiaries of Beijing Gas are set forth below:
  **Subsidiary**
              
              **Beijing**
                **Gas’s**
                **Equity**
                **Interest**Yu
                  Tian county Zhong Ran Wei Ye Gas Ltd.
              
              
              90
              %Ning
                  Jing Wei Ye Gas Ltd.
              
              
              95
              %Xing
                  Tang County Wei ye Gas Ltd.
              
              
              95
              %Lin
                  Zhang County Wei Ye Gas Ltd.
              
              
              85
              %Jin
                  Zhou Wei Ye Gas Ltd.
              
              
              95
              %Wu
                  Qiao County Gas Ltd.
              
              
              95
              %Long
                  Yao County Zhong Ran Wei Ye Gas Ltd.
              
              
              95
              %Shen
                  Zhou Wei Ye Gas Ltd.
              
              
              95
              %Pei
                  County Wei Ye Gas Ltd.
              
              
              90
              %Si
                  Hong Wei Ye Gas Ltd.
              
              
              95
              %Si
                  Shui Wei Ye Gas Ltd.
              
              
              95
              %Lang
                  Fang Development Zone Wei Ye Dangerous Goods Transportation
                  Ltd.
              
              
              95
              %Beijing
                  Zhong Ran Xiang Ke Gas Technology Ltd.
              
              
              40
              %Zhangjiakou
                  City Xiahuayuan Jinli Gas Ltd. Co.
              
              
              100
              %Yuxian
                  Jinli Gas Ltd. Co.
              
              
              100
              %Beijing
                  Chenguang Gas Ltd., Co.
              
              
              100
              %Changli
                  Gas Co. Ltd.
              
              
              100
              %Hengshui
                  Gas Co. Ltd.
              
              
              100
              %
  5
  **Organizational
        History**
 
 Sino
        Gas
        International Holdings, Inc. was incorporated under the laws of the State
        of
        Utah on August 19, 1983 as Evica Resources, Inc. On April 5, 1984, we changed
        our name to American Arms, Inc. American Arms, Inc. commenced the manufacture
        and sale of weapons and laser sights. On December 31, 1984, our Articles
        of
        Incorporation were suspended for failure to file an annual report. Our Articles
        of Incorporation were reinstated on December 19, 1985 by the Utah Department
        of
        Commerce, Division of Corporations. On October 1, 1984, our Articles of
        Incorporation were suspended a second time for failure to file an annual
        report.
        Our Certificate of Incorporation was reinstated on November 21, 1986 again
        by
        the State of Utah, Department of Commerce, Division of
        Corporations.
 
 On
        April
        12, 1988, we changed our name to American Industries, Inc. as we were no
        longer
        engaged in the manufacturing and sale of weapons and laser sights. American
        Industries, Inc. was in the business of providing room safes for
        hotels.
 
 On
        February 19, 2002, we formed a subsidiary corporation named Pegasus Tel,
        Inc.
        under the laws of the State of Delaware, in order to enter into the
        telecommunications business. On March 28, 2002, Pegasus Tel, Inc. merged
        with
        Pegasus Communications, Inc., a New York corporation, with Pegasus Tel, Inc.
        as
        the surviving entity. On January 14, 2002 we purchased payphone assets
        consisting of 29 payphones and associated equipment from the Margaretville
        Telephone Company for $11,600.00. On May 21, 2002, we changed our name to
        Dolce
        Ventures, Inc.
  On
        September 7, 2006, we consummated a share exchange transaction with the
        shareholders of GAS Investment China Co., Ltd. (“Gas (BVI)”), the parent company
        of Beijing Gas, whereby we exchanged 14,361,646 shares of our series A
        convertible preferred stock, par value $0.001 per share, for all of the issued
        and outstanding stock of Gas (BVI) held by the shareholders of Gas (BVI).
        As a
        result of the share exchange transaction, Gas (BVI) became our wholly-owned
        subsidiary, and Beijing Gas became our indirectly wholly-owned subsidiary.
        In
        addition, as a result of the share exchange transaction, we ceased being
        a shell
        company as such term is defined in Rule 12b-2 under the Exchange Act and
        are now
        engaged in the development of natural gas distribution systems and the
        distribution and supply of natural gas in the PRC.
 
 On
        November 17, 2006, we changed our name to Sino Gas International Holdings,
        Inc.,
        announced our new trading symbol, SGAS, and effected a 304.44-for-1 reverse
        stock split.
  **Organizational
        History of Gas (BVI) and Beijing Gas**
 
 Gas
        (BVI)
        was incorporated on June 19, 2003 in the Territory of the British Virgin
        Islands
        with Mr. Liu Yu Chuan as its sole shareholder. Gas (BVI) is the holding company
        for Beijing Gas. Prior to the acquisition of all of the equity interests
        of
        Beijing Gas by Gas (BVI) as described below, Gas (BVI) had no business
        operations, assets or liabilities, apart from organizational expenses and
        fees.
  Beijing
        Gas was originally formed as a limited liability company under the laws of
        the
        PRC in 2001 under the name Beijing Yuan Wang Yu Cheng Construction Ltd.,
        and
        changed its name to its current name, Beijing Zhong Ran Wei Ye Gas Co. Ltd.,
        in
        June 2003.  On February 17, 2004, Gas (BVI) acquired all the outstanding
        capital stock of Beijing Gas from its then shareholders. On July 14, 2004,
        Gas
        (BVI) transferred 1% of the capital stock of Beijing Gas to Shen Zhen Shen
        Qi
        Cheng Tong Investment Ltd., a limited liability company organized under the
        laws
        of the PRC (“Shen Zhen Shen Qi”), and, simultaneously, Shen Zhen Shen Qi
        invested RMB 20 million in Beijing Gas in exchange for 50% of its capital
        stock.
        As a result, Gas (BVI) and Shen Zhen Shen Qi held 49% and 51% of the capital
        stock of Beijing Gas, respectively. On April 30, 2006, Gas (BVI) acquired
        all of
        the capital stock of Beijing Gas held by Shen Zhen Shen Qi in exchange for
        RMB
        20.4 million. As a result of this transaction, Beijing Gas is now a “wholly
        foreign owned entity” under PRC law by virtue of its status as a wholly-owned
        subsidiary of Gas (BVI).
  Beijing
        Gas has subsidiaries, known as project companies, in four provinces, and
        four
        branch offices in Beijing. The project companies are the operating subsidiaries
        of Beijing Gas. Each project company operates as a local natural gas distributor
        in a city or county, which we refer to as an operational location, pursuant
        to
        an exclusive franchise agreement with the local government or entities
        responsible for administering and/or regulating gas utilities, pursuant to
        which
        Beijing Gas is granted the exclusive right to develop and operate natural
        gas
        distribution systems and distribute natural gas at the operational location.
  6
 Each
        of
        the project companies is organized as a limited liability company under PRC
        law
        with Beijing Gas holding an equity interest of 85% to 100% and an individual
        shareholder nominally holding the remainder of the equity interest in such
        project company. Each such individual shareholder has relinquished any and
        all
        rights, power and interest of a shareholder in the respective project companies
        under enforceable contracts. This structure was intended to comply with a
        PRC
        law that required a limited liability company to have at least two shareholders,
        which requirement was removed in January 2006. Beijing Gas intends to cause
        the
        individual shareholders to transfer their shares in each of the project
        companies back to Beijing Gas in the near future.
 
 In
        addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang
        Ke
        Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
        venture entity engaged in the business of development, licensing and sale
        of oil
        and gas technologies and equipment, and sale of self-produced
        products.
 
 Set
        forth
        below are the subsidiaries of Beijing Gas:
  **Subsidiary**
              
              **Beijing**
                **Gas’s**
                **Equity**
                **Interest**Yu
                  Tian county Zhong Ran Wei Ye Gas Ltd.
              
              
              90
              %Ning
                  Jing Wei Ye Gas Ltd.
              
              
              95
              %Xing
                  Tang County Wei ye Gas Ltd.
              
              
              95
              %Lin
                  Zhang County Wei Ye Gas Ltd.
              
              
              85
              %Jin
                  Zhou Wei Ye Gas Ltd.
              
              
              95
              %Wu
                  Qiao County Gas Ltd.
              
              
              95
              %Long
                  Yao County Zhong Ran Wei Ye Gas Ltd.
              
              
              95
              %Shen
                  Zhou Wei Ye Gas Ltd.
              
              
              95
              %Pei
                  County Wei Ye Gas Ltd.
              
              
              90
              %Si
                  Hong Wei Ye Gas Ltd.
              
              
              95
              %Si
                  Shui Wei Ye Gas Ltd.
              
              
              95
              %Lang
                  Fang Development Zone Wei Ye Dangerous Goods Transportation Ltd.
              
              
              95
              %Beijing
                  Zhong Ran Xiang Ke Gas Technology Ltd.
              
              
              40
              %Zhangjiakou
                  City Xiahuayuan Jinli Gas Ltd. Co.
              
              
              100
              %Yuxian
                  Jinli Gas Ltd. Co.
              
              
              100
              %Beijing
                  Chenguang Gas Ltd., Co.
              
              
              100
              %Changli
                  Gas Co. Ltd.
              
              
              100
              %Hengshui
                  Gas Co. Ltd.
              
              
              100
              %
 
  **Recent
        Developments**
 
 In
        January, 2007, we formed two companies incorporated under the laws of the
        British Virgin Islands: Sino Gas Construction Ltd. and Sino Gas Investment
        Development Ltd., both of which are 100% owned by Sino Gas. Sino Gas
        Construction Ltd. acquired 100% of the common stock of Beijing Chenguang
        Gas
        Co., Ltd. in January 2007.
 
 On
        November 30, 2006, we granted an option to purchase 100,000 shares of our
        common
        stock at $3.00 per share to CCG Partners, LLC, as partial consideration for
        investor relations services it is providing to us.
 
 On
        October 19, 2006, our Board of Directors met and approved the establishment
        of
        an Audit Committee and a Compensation Committee of the Board. At the same
        meeting, the Board approved the resignation of Shu-wang Li from the position
        of
        Chief Operating Officer of the Company, and appointed Zhi-cheng Zhou as the
        new
        Chief Operating Officer of the Company.
 
 7
  On
        December 17, 2006, Beijing Gas acquired 100% of the common shares of two
        natural
        gas companies operating in Hebei Province, Hebei Jinli Xiahuayuan Gas Co.,
        Ltd.,
        and Hebei Jinli Yuxian Gas Co., Ltd., both of which became its operating
        subsidiaries.
 
 In
        December 2006, Beijing Gas set up two new domestic subsidiaries: Changli
        Gas
        Co., Ltd. and Hengshui Gas Co., Ltd.
 
 In
        December 2006, our board of directors approved an employee compensation plan,
        which granted to employees options to purchase a total of 1.86 million
        shares of our common stock over a three-year period.
 
 
 **PRC Natural
        Gas Industry Overview**
 
 ***Sources
        of Energy***
 
 Although
        the PRC is the world’s second largest energy consumer, its energy consumption
        per capita is lower than the per capita level in most other countries. This
        is
        largely due to the fact that a large portion of the Chinese population lives
        in
        rural areas where access to energy sources is limited and the energy supply
        infrastructure in the PRC is still relatively underdeveloped. Energy consumption
        is concentrated in the urban areas where there is greater access to energy
        sources.
 
 Traditionally,
        the PRC has relied heavily on coal and crude oil as its energy sources.
        According to the China Statistical Yearbook, in 2004, coal, crude oil,
        hydro-electricity and natural gas accounted for 65.0%, 23.2%, 8.8% and 3%,
        respectively, of the PRC’s total energy consumption. In 2003, the ratios were
        68.0%, 23.0%, 7.9% and 2.5% respectively. Traditionally, natural gas has
        been
        primarily used as a raw material for chemical fertilizer and to operate oil
        and
        gas fields. Accordingly, most natural gas is consumed for production of
        fertilizer. Only a little over 10% of natural gas is consumed as a fuel for
        cogeneration and residential use. (Source: The Institute of Energy Economics
        of
        Japan).
 
 The
        PRC’s
        heavy reliance on coal is out of line with world consumption rates for the
        same
        time period which was 22.2% (Source: Energy Information Administration, U.S.
        Department of Energy). The use of coal, however, causes air pollution and
        other
        negative consequences to the environment. In the PRC, the heavy use of unwashed
        coal has lead to large emissions of sulfur dioxide and particulate matter.
        An
        air pollution study conducted by the World Health Organization in 1998 showed
        that seven of the 10 most polluted cities in the world were located in the
        PRC.
        As such, there have been serious environmental concerns in many countries
        around
        the world and resulted in a global trend to reduce coal usage. In consideration
        of such trends, the PRC set out a policy to raise the share of natural gas
        in
        the country’s energy mix in its Ninth 5-Year Plan (1996-2000). At the local
        government level, in many locations where natural gas supply is available,
        local
        governments often require all new residential buildings to incorporate piped
        gas
        connections in their designs as a condition to the issuance of the construction
        or occupancy permits. Before 2000, the gas distribution had principally been
        served by local municipal governments. Since then, the industry has been
        open to
        private sector, whose investments have fostered the wide use of natural gas
        in
        thePRC. The natural gas industry has been deemed by the PRC government as
        a
        suitable industry for public and private investments.
 
 ***China’s
        Natural Gas Reserves and Gas Pipeline Infrastructure***
 
 Recognizing
        the serious problems caused by heavy reliance on coal usage, the PRC government
        has aggressively moved to reduce coal usage by substituting coal with other,
        more environmentally friendly forms of fuel, such as natural gas. The PRC
        abounds in rich natural gas reserves, which are distributed principally in
        Xinjiang, Sichuan and Inner Mongolia in western and north-central China.
        According to the Second Oil and Gas Reserve Assessment published by the
        Geological and Mineral Resources Department of China, natural gas reserves
        in
        China are estimated to be 38,000 billion cubic meters with 30,000 billion
        cubic
        meters onshore and 8,000 billion cubic meters offshore. These reserves are
        sufficient for 74 to 120 years of Chinese consumption based on current
        consumption levels.
 
 Because
        the PRC’s largest reserves of natural gas are located in western and
        north-central China, it requires a significant investment in gas transportation
        infrastructure to carry natural gas to eastern cities and the rest of the
        PRC.
        Until recent years, the PRC’s natural gas consumption was limited to local
        natural gas producing provinces because of the lack of national long-distance
        pipeline infrastructure. For example, Sichuan province, which is well known
        for
        its production of natural gas, has a local gas transport network. In the
        northwest, areas near the Daqing field in Heilongjiang province and the Liaohe
        oil field in Liaoning province have benefited from associated gas sent via
        gas
        pipeline. Because natural gas transportation was limited to areas near
        production sites, low cost gas supply was possible.
  8
  The
        principal method for transportation of natural gas from a source to end users
        is
        by means of pipelines. In order to develop the natural gas industry, it is
        essential that the necessary pipeline infrastructure be in place so that
        natural
        gas is easily accessible for distribution to end users at affordable cost.
 
 In
        accordance with the PRC government’s Tenth 5-Year Plan (2001-2005), the
        country’s longest pipeline, known as the West-East Pipeline, was constructed and
        went into operation in January 2005. It transports natural gas to demand
        centers
        in the southeast from deposits in the western Xinjiang province to Shanghai,
        picking up additional gas in the Ordos Basin along the way. The West-East
        Pipeline starts at Lunnan in the Xinjiang Autonomous Region and ends at Baihe
        Town in Shanghai. It travels through 10 provinces including Xinjiang, Gansu,
        Ningxia, Shaanxi, Shanxi, Henan, Anhui, Jiangsu, Zhejiang and Shanghai. The
        full
        length of the pipeline is about 4,200 km with a designed annual throughput
        capacity of 20 billion cubic meters, a delivery pressure of 10 megapascals
        and 35 processing stations along the pipeline.
  There
        are
        other pipelines linking smaller natural gas deposits to consumers, such as the
        pipeline linking the Sebei natural gas field in the Qaidam Basin with consumers
        in the city of Lanzhou, Ganshu province in the northwest, and a pipeline
        linking
        natural gas deposits in Sichuan province in the southwest to demand centers
        in
        Hubei and Hunan provinces in the central PRC.
  In
        its
        Eleventh 5-Year Plan (2006 - 2010), the PRC government re-affirmed its
        commitment to making significant investments in the expansion of the natural
        gas
        pipeline infrastructure over a period of 20 years.
 
 ***The
        Gas Delivery Process***
 
 The
        natural gas delivery process is categorized by three segments: production,
        transmission and distribution. Production involves underground exploration,
        drilling, extraction and purification of the natural gas. After extraction
        from
        a gas well, natural gas is transported to nearby refineries for removal of
        water
        and other impurities. The natural gas is then transported from the refineries
        via long distance pipelines under extremely high pressure facilitating the
        supply to a large number of locations near these pipelines at high speeds.
        The
        long distance pipelines are owned and operated by PRC state owned oil and
        gas
        exploration and production companies.
 
 Distribution
        companies (such as Beijing Gas) distribute natural gas to end users and often
        own the gas pipeline infrastructure rights of an operational location (including
        the intermediate pipelines, the processing stations, the main pipelines and
        the
        branch pipelines). A distribution company purchases natural gas from oil
        and gas
        exploration and production companies. The distribution company determines
        the
        method of delivering natural gas to its desired destination after taking
        into
        account factors such as the distance between the collection and delivery
        points
        and the expected demand for gas from the relevant gas supply
        locations.
 
 The
        collection of CNG and LNG involves the delivery of the gas by truck from
        gas
        wells or stations located along the relevant long distance pipeline to a
        processing station. If an intermediate pipeline is constructed, the intermediate
        pipeline transports the natural gas under high pressure to a processing station.
        Such processing stations may contain CNG or LNG pressure regulating facilities
        which will depressurize the CNG or LNG to natural gas under medium pressure
        and/or natural gas pressure regulating facilities to reduce the pressure
        of
        natural gas from high pressure to medium pressure, before transferring the
        natural gas to a local pipeline.
 
 9
  The
        processing station is usually located on the outskirts of an operational
        location for safety reasons and it provides certain ancillary
        facilities:
 
 ·
              To
                  add bromine to the gas to enable the detection of leakages when
                  the gas is
                  transmitted through the main pipelines, and
  ·
              To
                  store gas under high, medium or low pressure to be used as reserves
                  for
                  future unexpected fluctuation in demand.
  High
        pressure gas storage tanks usually have thicker walls and therefore, are
        more
        expensive to construct than gas storage tanks for storage of gas under medium
        or
        low pressure.
 
 After
        processing, the gas is transmitted under medium pressure to the local pipelines.
        Local pipelines are laid within an operational location and represent the
        backbone of the local gas delivery system. Different sections of the local
        pipelines operate at slightly different pressures, with computer controlled
        regulators controlling the flow of natural gas for delivery to end users
        via the
        branch pipelines and customers’ pipelines.
  When
        there is a demand for a connection of gas to a particular area within a gas
        supply location, the distribution company will invest in the construction
        of the
        branch pipelines to connect the main pipelines to the pressure regulating
        boxes
        located in the end-users’ buildings or premises. The pressure regulating box
        reduces the natural gas to a lower pressure before the natural gas is
        transmitted to the customers’ pipelines. Customers’ pipelines transmit the
        natural gas through the pressure regulating box to the end users.
 
 ***Demand
        for Natural Gas***
  Currently,
        natural gas consumption in the PRC accounts for less than 3% of its total
        energy
        consumption. However, driven by environmental pressure from the demand side
        and
        improvements in social infrastructure with economic growth, in the west in
        particular, and stable energy supply, it is anticipated that the use of natural
        gas will grow very rapidly in the PRC over the next 20 years.
 
 ***Natural
        Gas Suppliers***
 
 There
        are
        approximately 60 natural gas supply companies in the PRC. Among them, China
        National Petroleum Corporation Group (“CNPC”), China Petroleum and Chemical
        Corporation Group (“Sinopec”), and China National Offshore Oil Corporation Group
        (“CNOOC”) account for more than 90% of the total national production. In 2002,
        production by CNPC, Sinopec and CNOOC accounted for 68.9%, 15.2% and 11.4%,
        respectively, of the total national production. CNPC and Sinopec own and
        primarily operate onshore pipelines while CNOOC owns and operates virtually
        all
        off shore pipelines. Before 2000, the gas distribution had been principally
        served by local municipal governments. Since then, natural gas industry has
        been
        designated by the PRC government as a suitable industry for public and private
        investment and has been open to private investment which has fueled the
        development of the industry and fostered a wider use of natural gas in the
        PRC.
 
 **Our
        Business Activities**
 
 Our
        business projects proceed in three stages, ending in our eventual ownership
        and
        operation of a natural gas distribution system in a given operational location:
 
 1.
        Development—(i) identifying distribution opportunities by conducting preliminary
        reviews and feasibility studies of new operational locations, and (ii) securing
        authorization by and/or franchise arrangements with local governments,
        negotiating supply agreements with potential customers, and implementing
        the
        related documentation;
 
 2.
        Construction—building both natural gas storage and distribution networks; and
 
 3.
        Operations—supply and sale of natural gas and related services to customers at
        the operating location.
 
 ***Development***
 
 (i) *Identifying
        distribution opportunities in new operational location:* Our
        business development team actively explores and identifies suitable areas
        of
        service by conducting market research on potential operational locations
        where
        the demand for piped natural gas is desired. Because of experience and ongoing
        cooperation with governmental authorities, we also receive invitations from
        local governments to bid for new natural gas projects or to take over existing
        natural gas projects.
  10
  As
        the
        piped natural gas supply industry in the PRC is still in the early stages
        of
        development, most areas in the PRC are not yet supplied with piped natural
        gas
        even though they may be in close proximity to natural gas sources. Due to
        the
        capital intensive nature of new natural gas distribution projects, we are
        very
        selective in our choices for new operational locations.
 
 The
        selection of new operational locations is determined after conducting
        preliminary evaluation and studies on the target locations, and return on
        investment. The criteria for any potential operational location that are
        investigated and documented by us are:
 
 1.
              Size
                  and density of population.
 
 2.
              Economic
                  statistics of the targeted
                  locations.
 
 3.
              Extent
                  and concentration of industrial and commercial
                  activities.
 
 4.
              New
                  property development in the target
                  location.
 
 5.
              Projected
                  levels of connection fees and gas usage
                  charges.
 
 6.
              Extent
                  of the local government’s commitment to environmental protection,
                  environmental policies in place, and the local population’s awareness of
                  environmental issues.
 
 7.
              A
                  determination of exclusive operational rights and preferential
                  treatment
                  on tax and governmental fees.
 
 8.
              Types
                  of gas supply (piped natural gas, CNG or LNG) and methods of delivery.
                  Intermediate pipeline is used if the gas source, or long distance
                  pipeline, is located within 100 km. CNG trucks are deployed if
                  the gas
                  source, or long distance pipeline, is located within 300 km. There
                  is no
                  distance restriction for LNG delivery. Generally, LNG trucks are
                  used if
                  the gas source, or long distance pipeline, is located beyond 300
                  km.
 
 9.
              For
                  an acquisition of existing natural gas projects, the cost of acquisition,
                  quality of assets and/or business are also valued. In addition,
                  the
                  liabilities of the business are analyzed along with any other perceived
                  or
                  actual problems encountered.
 
 Based
        on
        the findings of the investigation, our business development team will decide
        whether to make a recommendation to management for approval to proceed with
        discussions and negotiations on a new project. We have conducted dozens of
        preliminary evaluations since our inception in 2003. We have an aggregate
        of 26
        completed or partially completed operational locations and 12 operational
        locations under development.
 
 *(ii)
        Securing a New operational location.* Once
        we
        have approved a potential natural gas distribution project in an operational
        location, we normally set up a local independent subsidiary, also know as
        a
        project company, to administer the project for its lifetime. We then prepare
        and
        submit a detailed gas project proposal to the local government and commence
        negotiations on major issues such as the granting of exclusive rights or
        rights
        of first refusal to supply gas to that location, proposed connection fees
        and
        gas usage charges and whether any tax and other concessions or favorable
        policies will be granted by the local government. Once established, the project
        company will conduct a series of marketing and promotional campaigns (which
        may
        include joint promotional campaigns with the local government) to increase
        public awareness of piped natural gas in the operational location. Concurrently,
        we begin actively seek out potential customers in the operational location
        and
        negotiate the terms of supply contracts with the aim of entering into supply
        contracts as soon as possible with such customers.
 
 ***Construction***
  *(i)
        Design stage.* **** The
        design of the gas pipeline infrastructure for a natural gas distribution
        project
        includes the processing stations, the local pipelines and other ancillary
        facilities such as gas storage tanks. It is carried out by a government approved
        design institute in accordance with our requirements and specifications.
        It also
        takes into account the local population size, the development of the economy,
        the utilization of energy resources and the environmental conditions. The
        design
        takes into consideration our technical requirements, the needs of the local
        population and the environmental conditions of the area covered by the design.
        The master design is subject to approval by the local city construction
        department. The design stage normally takes two to three months.
  11
  *(ii)
        Construction Stage.* **** Once
        the
        design is approved, we invite independent qualified contractors to tender
        bids
        for the construction work. The selection criteria for the contractors include
        their qualifications, experience, expertise, reputation, familiarity with
        the
        local environment, prior experience with us and price. We generally enter
        into
        turnkey contracts with independent contractors for construction, installation
        and maintenance of the natural gas pipelines. We pay a down payment with
        the
        remainder to be paid upon completion of the project. At the time of entering
        into turnkey contracts, we source raw materials such as piping, gas regulating
        equipment and machinery. We have strict quality control procedures for the
        sourcing of supplies for all construction purposes.
 
 Our
        internal engineers and independent external inspectors monitor the entire
        construction process to ensure that each stage of construction meets our
        quality
        and safety standards and the relevant regulatory requirements.
 
 For
        a
        given operational location, although the gas pipeline infrastructure is designed
        to cover the entire operational location, our construction program focuses
        on
        early gas delivery to areas of concentrated customer demand within such
        operational location. This ensures that natural gas supply can begin as soon
        as
        the essential gas pipeline infrastructure and facilities such as the processing
        stations and the intermediate pipelines are completed. Construction work
        in a
        target area will gradually extend to cover the whole operational location,
        which
        typically takes two to five years.
 
 ***Operation***
 
 Once
        the
        necessary gas pipeline infrastructure is in place in a given operational
        location, we begin the design and construction of the branch pipelines and
        customers’ pipelines pursuant to gas supply contracts with customers. The
        designs of branch pipelines and customers’ pipelines are normally prepared by
        us, reviewed by a government approved design institute, and carried out by
        external contractors. Upon completion of the construction of the branch
        pipelines and customer pipelines in the operational location, we begin to
        supply
        and sale natural gas and related services to customers within the operational
        location pursuant to supply contracts with such customers.
 
 **Gas
        Distribution System**
 
 The
        chart
        below illustrates our gas distribution system. We purchase gas from our
        suppliers, which are state-owned petroleum companies, at their processing
        centers close to our operational locations. The natural gas we purchase is
        compressed from piped natural gas into CNG or LNG and placed in canisters.
        We
        then transport the CNG and LNG by truck to our processing stations in various
        operational locations for storage, decompression and gasification. From those
        locations, the gas is transported through our pipeline system to our end
        users.
  12
  
  **Products
        and Services**
 
 Presently,
        we generate revenues primarily from the sale of connection services to end
        users’ pipelines to our natural gas distribution system for which we charge
        connection fees, and sale of natural gas for which we charge the customers
        based
        on usage.
 
 Historically,
        connection fees and sales of natural gas have constituted more than 90% of
        our
        total revenues. We recorded connection fees in the amounts of $7.22 million
        and
        $8.2 million for the fiscal years ended December 31, 2006 and 2005,
        respectively, constituting 66% and 75.2% of total revenues for those years.
        Sales of natural gas were $3.65 million and $2.7 million for the fiscal years
        ended December 31, 2006 and 2005, respectively, constituting 34% and 24.8%
        of
        the total revenues for those years.
 
 **Sales
        and Marketing**
 
 Our
        main
        sales office, which is located in Beijing, is responsible for managing our
        overall sales and devising our marketing strategy. We establish a project
        company at each operational location and the local sales and marketing team
        for
        each project company works together with the main office team to structure
        an
        appropriate plan accommodating the specific needs and circumstances of the
        operational location. The sales and marketing team is responsible for company
        image and brand building, as well as promoting the advantages and concept
        of
        using natural gas as a necessary part of modern day life. Once established,
        a
        project company will implement a series of promotional campaigns (which may
        include joint promotional campaigns with the local government) to increase
        public awareness of piped natural gas in an operational location. At the
        same
        time, the project company begins to actively seek out potential customers
        in the
        operational location and negotiate the terms of supply contracts with the
        aim of
        entering into supply contracts with such customers as soon as
        possible.
  13
  Our
        marketing team plays an active role in lobbying the relevant government
        authorities during the negotiation stage.
 
 **Materials
        and Suppliers**
 
 ***Natural
        Gas***
 
 The
        principal supplies purchased for our business are natural gas, pipes, machinery
        and equipment. Purchase of natural gas represented 65% and 61.64% of our
        total
        purchase of supplies for the for the fiscal years ended December 31, 2006
        and
        2005, respectively. Generally, approximately 99% of the natural gas we purchase
        is CNG and approximately 1% is LNG.
 
 Our
        principal CNG supplier has been the Fourth Oil Extraction Plant of the North
        China Oilfield (the “North China Oilfield”), a subsidiary of Petro China. Our
        LNG supplier has been Henan Zhong Yuan Lu Ye Advanced Technology Ltd. Co.
        (“Henan Zhong Yuan”). Historically, we have purchased approximately 90% of our
        total purchases of CNG from North China Oilfield and 100% of our total purchases
        of LNG from Henan Zhong Yuan.
 
 We
        have
        long-term supply contracts with these suppliers and have not experienced
        any
        shortage of natural gas supply in the past. To prepare for growth, we have
        also
        entered into agreements with new suppliers to meet our growing demands.
 These contractual relationships with our suppliers allow us to pursue
        natural gas distribution projects in a wide range of operational locations.
 
 The
        wholesale price of natural gas is agreed upon between the suppliers and us
        with
        reference to the wellhead price, distance of transportation, purification
        fees
        and the supplier’s operating costs. The wellhead price of natural gas, which is
        determined by the PRC State Development and Planning with approval from the
        PRC
        State Council, is currently set at $0.12 per cubic meter with a 10% allowance
        for upward or downward adjustments as a result of negotiations between suppliers
        and distribution companies, such as Beijing Gas. Generally, we are only required
        to pay for the actual quantity purchased and there is no penalty should we
        purchase less than the stated amount.
 
 ***Pipes,
        Machinery and Equipment***
 
 We
        purchase pipes of various size and thickness domestically for installation
        in
        different segments of our natural gas pipeline infrastructure according to
        specifications that comply with PRC standards and regulations. We also purchase
        machinery and equipment, both domestically and abroad. Machinery and equipment
        are sourced domestically and internationally from the United States and Europe.
        Payments for equipment, pipes and machinery are purchased with credit terms
        ranging from 30 to 90 days.
 
 ***Gas
        Appliances***
 
 As
        residential customers often require us to provide gas appliances such as
        gas
        meters, we purchase gas appliances in bulk directly from manufacturers in
        China
        and maintain a limited inventory of them. We also provide repair and maintenance
        service to the gas appliances supplied. We generally provide a one-year warranty
        of our gas distribution system to our customers, during which time we provide
        free check-ups of the pipeline and repair for any appliances we provided.
 
 **Customers**
 
 We
        have
        two principal types of customers: (i) residential customers and (ii) commercial
        and industrial customers. Our connetion fee sales to residential customers
        and
        industrial customers represented 90% and 10% of our net sales for the fiscal
        year ended December 31, 2006, and 77% and 23% of our net sales for the fiscal
        year ended December 31, 2005, respectively. Sales to miscellaneous customers
        who
        are neither residential nor commercial and industrial customers accounted
        for
        the remainder of our sales.
 
 ***Residential
        Customers*** ****
 
 Natural
        gas is primarily used by residential owners for cooking as well as water
        and
        space heating. We market directly to property developers, government departments
        and organizations, private companies and state-owned enterprises, as these
        entities enter into master supply contracts with us for the connection of
        gas to
        all the units within a residential development (new or existing, owned by
        such
        entities or their respective employees). These entities are responsible for
        making, or they coordinate with the end users to facilitate our efforts in
        collecting the advance payment of, connection fees, while gas usage charges
        are
        paid by the individual end users. With new residential developments, connection
        fees are collected in advance by installment based on the ratio-of-completion
        of
        the pipeline construction work. We receive full payment of connection fees
        when
        construction is completed regardless of whether the units are sold or occupied.
        The actual supply of gas commences after the unit is occupied.
  14
  We
        also
        market to existing buildings without piped natural gas supplies. Representatives
        of the buildings will consult individual households as to whether they wish
        to
        have piped natural gas supply and coordinate the collection of connection
        fees
        from the end users on our behalf. Both connection fees and gas usage charges
        are
        payable in advance by the individual end users. We provide connection services
        and supply gas at market price after receiving payment. Pipelines and gas
        appliances are owned by the end users, with one-year quality guarantee by
        us. We
        maintain the pipelines outside the end user’s homes. The contracts are generally
        renewable on a yearly basis.
 
 At
        present, we have approximately 220 master supply agreements for the supply
        of
        gas to 63,000 end users in Beijing and Tian Jin Municipalities and Hebei,
        Jiangsu and Anhui Provinces. Our top five residential customers, who are
        developers or owners of residential areas, are Shanghai Datun Energy Holdings,
        Jinzhou Chengzhen Development Co., Xuzhou Ganglong Real Estate Development
        Co.,
        Kailun Weizhou Minerals Co., and Jinzhou Real Estate Co. The percentage of
        our
        connection fees for which each of them accounts is 36.43%,8.73%, 7.34%,7.2%
        and
        5.54%, respectively.
 
 ***Industrial
        and Commercial Customers*** ****
 
 Our
        industrial and commercial customers use natural gas primarily for heating,
        air
        conditioning, water heating and cooking purposes. These customers include
        owners
        of hotels, restaurants, office buildings, shopping centers, hospitals,
        educational establishments, sports and leisure facilities and exhibition
        halls.
        Natural gas has a wide variety of applications for industrial customers such
        as
        fuelling industrial boilers, furnaces, ovens, incinerators, foundries and
        steamers as well as water and space heating in staff canteens and dormitories
        within the industrial customers’ premises. We enter into supply contracts with
        these customers for the connection of gas to their premises, and both connection
        fees and gas usage charges are borne by such customers.
 
 The
        table
        below presents information about our industrial and commercial customers
        for the
        periods indicated:
  Percentage
                  of SalesFiscal
                  year ended December 31,Customers
              
              2006
              
              2005Hebei
                  Zhong Gang Steel
              
              
              51.78
              %
              
              15.1
              %Pei
                  County Tian Ma Wu Ye
              
              
              0
              %
              
              10.6
              %Elite
                  (Lang Fang) Textile
              
              
              0.2
              %
              
              0.4
              %Tang
                  Shan Chang Sheng
              
              
              9.04
              %
              
              1.0
              %Tang
                  Shang Heng Tong
              
              
              0
              %
              
              2.4
              %Total
              
              
              61.02
              %
              
              29.5
              %
 
 Our
        agreement with Tang Shang Heng Tong expired in March 2006.
 
 During
        the fiscal year ended December 31, 2006, our largest two customers were Heibei
        Zhong Gang Steel and Tang Shan Chang Sheng. Our sales generated from Beijing
        Zhong Ran Xiang Ke were $334,326 for the fiscal year ended December 31,
        2006.
 
 **Pricing
        and Regulations**
 
 We
        determine connection fees based on a detailed analysis of factors such as
        estimated capital expenditure, number of users, expected penetration rates,
        income levels and affordability to local residents. We arrive at gas usage
        charges after taking into consideration the wholesale price of gas, operating
        costs, price of substitute products, internal business model margins and
        the
        purchasing power of local residents. Connection fees and gas usage fees are
        subject to the approval of the local state price bureau. Future price increases
        are also subject to the same approval process. In considering applications
        for
        an increase in gas usage charges, the local state price bureau may consider
        factors such as increases in the wholesale price of gas or operating expenses,
        inflation, additional capital expenditure, and whether the profit margin
        remains
        fair and reasonable.
  15
  ***Connection
        Fees***
 
 We
        charge
        residential customers a flat connection fee for connections to each type
        of gas
        appliance, typically cooking stoves, water heaters and boilers. The level
        of
        connection fees varies among operational locations and is approved by the
        relevant local state price bureau. The average of these connection fees for
        the
        company in 2006 was approximately $267 per household.
 
 For
        commercial and industrial customers, the connection fee is determined based
        on
        the facility capacity (on a cubic meter per day basis). Should additional
        capacity be needed, these customers are required to pay additional connection
        fees for the additional capacity installed. When entering into master supply
        contracts for mass connections, we usually require the payment of deposit
        from
        customers while the balance is payable in accordance with the terms set out
        in
        the contracts. In the event customers default in the payment of connection
        fees,
        we will not start the supply of natural gas until the connection fees are
        paid.
  The
        deposit received from customers upon the signing of supply contracts generally
        funds the majority of our capital costs in any new operational location.
 
 ***Gas
        Usage Charges*** ****
 
 Gas
        usage
        charges are based on actual usage on a per cubic meter basis. The gas usage
        charges per cubic meter  vary
        between operational locations and the payment mechanism between different
        categories of customers varies.
 
 Since
        our
        inception, the majority of our residential customers have purchased gas units
        in
        cash at our sales outlets with details of the prepaid gas units stored
        electronically on a debit card. The debit card is inserted into a debit card
        debit gas meter installed at the end user’s premises to activate the gas supply.
        Units of gas used are deducted from the debit card. When the level of prepaid
        gas units drops to a certain level (currently pre-set at three cubic meters),
        the gas meter will produce a sound signal to remind the customer to replenish
        the value stored in the debit card. Over 70% of our residential customers
        utilize the debit card payment method. This payment method provides significant
        advantages to us as all gas purchases are prepaid - not at the point of sale
        or
        in arrears.
 
 For
        those
        residential customers without a debit card gas meter installed and for
        commercial and industrial customers, payments for natural gas usage are made
        in
        arrears. Gas meters that record actual gas consumption are installed at the
        end
        users’ premises and meter readings are taken physically by US every month.
        Monthly bills based on the prior month’s actual usage are then sent to
        customers. In the event customers default in payment of gas usage charges,
        gas
        supply will be suspended within one month of billing.
 
 **Regulatory
        Framework for Natural Gas Distribution Companies**
  ***Pricing
        Regulations*** ****
 
 We
        purchase natural gas from natural gas wholesalers, which are state-owned
        enterprises and which must comply with PRC natural gas pricing regulations.
        The
        wholesale price of natural gas payable by distribution companies, such as
        Beijing Gas, to the suppliers of natural gas is comprised of three components,
        the wellhead price, the pipeline transportation tariff and the purification
        fee.
        The wellhead price is fixed by the PRC State Development Planning Commission,
        and is currently set at $.12 per cubic meter with a 10% allowance for upward
        or
        downward adjustments for negotiation between suppliers and distribution
        companies. The pipeline transmission tariffs are determined by reference
        to the
        investment costs of the relevant long distance pipeline, depreciation, wear
        and
        tear and the distance of delivery. The purification fee is based on the actual
        purification costs of the suppliers. Both the pipeline transmission tariffs
        and
        the purification fee must also be approved by the PRC State Development Planning
        Commission.
  16
  **Pricing
        of Natural Gas - US$ per cubic meter**
  ****
                  **2002**
                  ****
                  **2003**
                  ****
                  **2004**
                  ****
                  **2005**
                  ****
                  **2006**
                  ****Wellhead
                  ****
                  $
                  0.08
                  ****
                  $
                  0.09
                  ****
                  $
                  0.09
                  ****
                  $
                  0.08
                  ****
                  $
                  0.11
                  ****Pipeline
                  ****
                  $
                  0.09
                  ****
                  $
                  0.09
                  ****
                  $
                  0.09
                  ****
                  $
                  0.09
                  ****
                  $
                  0.09
                  ****Purification
                  ****
                  $
                  0.01
                  ****
                  $
                  0.01
                  ****
                  $
                  0.01
                  ****
                  $
                  0.01
                  ****
                  $
                  0.01
                  ****Total
                  ****
                  $
                  0.18
                  ****
                  $
                  0.19
                  ****
                  $
                  0.19
                  ****
                  $
                  0.18
                  ****
                  $
                  0.21
  ***Operational
        and Construction Permits***
 
 In
        the
        PRC, companies in the gas distribution business must also obtain an operational
        permit from the PRC Ministry of Construction to begin operation. In addition,
        a
        construction permit must be obtained if such gas distribution company also
        engages in construction. In both cases, the PRC Ministry of Construction
        will
        review the qualifications and experience of the management and technical
        staff
        of the distribution company and consider whether the distribution company
        is
        capable of fulfilling the operational and construction standards.
 
 As
        of the
        date of this annual report, Beijing Gas and all of our project companies
        and
        branch offices have the necessary operational permits.
 
 ***Safety
        Regulations***
 
 As
        a
        natural gas distributor, Beijing Gas is regulated by the relevant stipulations
        of Administrative Rules on the City Gas Safety jointly promulgated by the
        PRC
        Ministry of Construction, PRC Ministry of Labor and PRC Ministry of Public
        Security effective in May 1991.  According to such rules, the manufacture,
        storage, transportation, operation, usage of city gas, design and construction
        of gas-related projects, and the manufacture of gas-related facilities shall
        be
        subject to relevant safety requirements and qualifications.
 
 ***Income
        Taxes***
  Pursuant
        to the tax laws of PRC, general enterprises are subject to income tax at
        an
        effective rate of 33%. Beijing Gas is in the natural gas industry, whose
        development is encouraged by the government. However, PRC income tax regulations
        provide that any company operating in the natural gas industry enjoys a
        favorable tax rate. In addition, Beijing Gas has been approved as a high
        technology company and as such has been enjoying preferential income tax
        treatment under the PRC’s income tax policies. Under these policies, Beijing Gas
        was exempt from corporate income taxes for the first two years commencing
        from
        its first profitable year, and thereafter will be entitled to a 50% tax
        reduction for the succeeding three years. Our first profitable tax year was
        2003. Accordingly, our income is subject to a reduced tax rate of 7.5% from
        2005
        to 2007. Beginning in 2008, our income tax rate will be 9%. The subsidiaries
        of
        Beijing Gas are subject to the effective rate of 33%, but almost all income
        is
        earned by Beijing Gas.
 
 
 **Safety
        and Quality Control**
 
 ***Safety
        Control***
 
 We
        are
        focused on safety, have implemented a safety system and set up a safety
        department to oversee safety issues for all of our operations. We carry out
        routine inspection of the branch pipelines, customers’ pipelines, gas meters and
        gas appliances at the customers’ premises twice annually. These semi-annual
        inspections are free unless major repairs are required in which case we charge
        the customers for labor, replacement parts and other materials used for the
        repairs.
 
 We
        believe in educating users about safety procedures. Before gas is actually
        supplied, we provide a thorough explanation of safety procedures to end users,
        hold regular seminars, and distribute brochures and booklets on safety. We
        have
        a 24-hour telephone help line for enquiries and reporting of emergency matters.
 
 17
 In
        order
        for us to monitor the operations of the pipelines for abnormal gas usage,
        gas
        leakages, or any other irregularities, we collect information about the
        temperature, pressure and volume of gas from key points along the main
        pipelines. The information is collated in the control center located in the
        head
        office of each operational location for analysis. We use process control
        instruments known as Supervisory Control and Data Acquisition systems, in
        which
        a number of small detectors are installed along the pipelines to collect
        information and process the data electronically in real time at the control
        center. Each project company conducts a major inspection of its pipelines,
        processing station(s) and other equipment at least once annually. If gas
        leakages or any other irregularities are detected, we will take remedial
        action
        immediately.
  Due
        to
        the strict implementation of safety control procedures, there have been no
        major
        accidents which have resulted in serious injury or death since our
        inception.
 
 ***Quality
        Control***
 
 Quality
        control begins in the design and construction phase of the natural gas supply
        infrastructure. Our quality control team regularly makes inspection visits
        and
        conducts tests to ensure that the construction work meets our required standards
        as well as national and local regulations.
 
 We
        also
        have strict quality control procedures for the sourcing of raw materials.
        We
        only purchase from our approved list of qualified suppliers and such suppliers
        have fulfilled the relevant requirements in accordance with national standards.
 
 In
        order
        to monitor the quality of gas purchased by us, we obtain gas composition
        reports
        regularly from our gas suppliers with data on important measures such as
        the
        heat content and composition of impurities in our gas supply. We also conduct
        regular tests on the gas purchased in order to verify its quality.
 
 **Research
        and Development**
 
 We
        have
        eight full-time employees engaged in the company-sponsored research and
        development efforts. These employees specialize in the fields of energy,
        mechanical and electronic engineering. For the fiscal year ended December
        31,
        2006 and 2005, $543,500 and $545,350, respectively, on R&D activities. Areas
        that are targets of our ongoing research and development activities
        include:
 
 ·
              Methodology
                  and practices to increase operating efficiency and safety
                  standards.
 
 ·
              Expansion
                  of the applications for natural gas, such as gas-fuelled air conditioners,
                  washing machines and dryers, and the use of CNG in motor
                  vehicles.
  ·
              Improvements
                  in gas storage and transportation
                  systems.
 
 Our
        research and development department stays abreast of natural gas-related
        developments domestically and internationally by regularly attending domestic
        and international natural gas conferences that include exchange programs
        with
        international natural gas companies.
 
 **Competition**
 
 Since
        our
        inception, we have focused on supplying natural gas to small cities in the
        PRC
        where the average population is 250,000 and below, where the natural gas
        penetration rate is typically 0%, and where we are able to obtain exclusivity
        for natural gas distribution from the local government. In entering into
        these
        small cities, we are generally authorized to be the sole supplier of natural
        gas
        by the local governments pursuant to franchise agreements for a typical term
        of
        25 to 30 years. This differs from the bigger natural gas distribution companies
        which have focused on a few areas with large populations. The larger cities
        are
        very competitive markets that tend to offer less flexibility for advantageous
        pricing arrangements. For a typical small city project, our initial investment
        is only about $500,000 with an average internal rate of return of 31% over
        the
        life of the project. Due to its small city focus where the operating cost
        is low
        and competition is much less intense, we believe we generate profit margins
        and
        returns at or above industry-average levels.
  18
  As
        we
        compete principally with small- to medium- sized private companies in the
        natural gas distribution industry, the information about our competition
        and
        competitive position is limited. Based on the information available to us,
        we
        estimate that there are approximately 200 hundred small- to medium- sized
        private gas distribution companies in the PRC. Most of these companies target
        local towns, rather than take the approach that we do, of targeting cities
        in
        different provinces. Also, most of these companies operate an average of
        three
        or four natural gas distributions systems, as compared to the 20 natural
        gas
        distribution systems that we operate.
 
 Based
        on
        the division of the administrative districts in the PRC as of December 31,
        2005,
        it has been estimated that there are approximately 2,862 small cities in
        the PRC
        with a population between 100,000 to 300,000. Among them, approximately 800
        small cities have the potential to be supplied with natural gas and 100 small
        cities have already been supplied with natural gas. Among the 100 small cities
        where natural gas is already available, Beijing Gas is the distributor to
        23 of
        them, and, therefore, we believe we have the largest market share among our
        peer
        businesses that target the natural gas market among small cities. Another
        favorable contrast between our peer businesses and us is that, many other
        gas
        distribution companies do not secure long-term stable supply contracts with
        natural gas suppliers and have few industrial customers, while we do secure
        long-term stable supply contracts and have many industrial
        customers.
 
 There
        are
        five gas distribution companies in China listed on the Hong Kong Stock Exchange:
        Xinao Gas Holdings Limited, China Gas Holdings Limited, Panva Gas Holdings
        Limited, Zhengzhou Gas Company Ltd., and Chinese People Gas Holdings Company
        Limited. **** These
        companies focus more on supplying natural gas in bigger metropolitan areas,
        and
        therefore do not compete with us directly. However, Beijing Gas operates
        very
        similarly to some of these publicly listed PRC gas companies (with the exception
        of Zhengzhou Gas Company Ltd. and Panva Gas Holdings Ltd.) where significant
        revenue and profit are generated from the construction of local gas pipeline
        and
        connection of the pipeline to end users. This is primarily due to the PRC’s
        extremely low natural gas penetration rate (below 3% on a national basis).
        Therefore, PRC gas companies behave very differently from traditional gas
        utilities elsewhere and exhibit financial characteristics such as high growth
        rate, high profit margin and relatively longer receivable collection periods
        due
        to the construction cycle. We plan to compete with some of these companies
        in
        the future as our operations grow.
 
 **Intellectual
        Property**
 
 We
        do not
        hold any registered trademarks or patents. **** *Please
        refer to “We may be exposed to intellectual property infringement and other
        claims by third parties, which, if successful, could cause us to pay significant
        damage awards and incur other costs,” in the section titled “Risk
        Factors” in our registration statement filed with the SEC on October 27,
        2006 for risks related to the technology we use.*
 
 We
        own
        and operate a website under the internet domain name www.sino-gas.com. The
        information contained in our websites is not incorporated by reference to
        this
        annual report or the registration statement of which this annual report forms
        a
        part.
 
 **Insurance**
 
 We
        currently do not carry any product liability or other similar insurance,
        nor do
        we have property insurance covering our plants, manufacturing equipment and
        office buildings. While product liability lawsuits in the PRC are rare and
        Beijing Gas has never experienced significant failures or accidents, there
        can
        be no assurance that Beijing Gas would not face liability in the event of
        any
        failure or accident. We plan to purchase property insurance to cover our
        manufacturing plants, equipment and office buildings in the near future.
  Beijing
        Gas and its subsidiaries maintain social insurance for their staff and employees
        in accordance with relevant requirements under PRC law and have compulsory
        insurance and fixed-sum insurance for cars and other vehicles.
 
 **Employees**
  As
        of
        March 7, 2007, we had approximately 246 full-time employees, including
        approximately 50 technicians, six management personnel, 32 department and
        branch
        managers, 30 engineers and 15 research and development personnel.
  19
  Government
        Regulation
  The
        pricing of natural gas in China is subject to central and local government
        regulation or approval. The wholesale price of natural gas payable by
        distribution companies, such as Beijing Gas, to suppliers of natural gas
        in the
        PRC is comprised of three components: the wellhead price, the pipeline
        transportation tariff, and the purification fee. The wellhead price is fixed
        by
        the PRC State Development Planning Commission (“SDPC”). Both the pipeline
        transmission tariffs and the purification fee must also be approved by SDPC.
        *Please refer to “Regulatory Framework for Natural Gas Distribution
        Companies” in the section titled “Description of Business” of this**annual report**for a more detailed
        discussion.*
 
 Under
        certain regulations in the form of public notices issued by the PRC State
        Administration of Foreign Exchange, or SAFE, our shareholders who are PRC
        resident entities or individuals are subject to certain registration
        requirements due to the status of GAS (BVI) and Sino Gas under Chinese law
        as
        offshore special purpose companies, or SPCs. These regulations would prohibit
        Beijing Gas from distributing dividends or profits to GAS (BVI) and/or Sino
        Gas
        as SPCs unless we comply with the registration requirements set forth by
        SAFE.
        As of the date hereof, Mr. Liu Yu Chuan, our President, Chief Executive Officer
        and Chairman of the Board, has completed the registration with the SAFE and
        has
        been issued a SAFE certificate in August 2006. We are in the process of
        determining whether there are additional shareholders who are subject to
        the
        SAFE regulations and whose compliance status will have a material effect
        on
        our ability to remit any of our profits out of the PRC as dividends or
        otherwise.*Please refer to “Recent PRC State Administration of Foreign
        Exchange (“SAFE”) Regulations regarding offshore financing activities by PRC
        residents, have undertaken continuous changes which may increase the
        administrative burden we face and create regulatory uncertainties that could
        adversely affect the implementation of our acquisition strategy, and a failure
        by our shareholders who are PRC residents to make any required applications
        and
        filings pursuant to such regulations may prevent us from being able to
        distribute profits and could expose us and our PRC resident shareholders
        to
        liability under PRC law” under “Risks Related to Doing Business in the PRC” in
        the section titled “Risk Factors” of this**annual report**for
        information regarding the risks related to the SAFE regulations that we are
        subject to.*
 
 We
        are
        subject to PRC regulations that require a company that is in the gas
        distribution business to obtain an operation permit, and a construction permit
        if such company also engages in construction, from the PRC Ministry of
        Construction to begin operation and/or construction, as the case may be.
        Fuel
        service station standards are subject to regulation by the PRC’s Ministry of
        Construction, General Administration of Quality Supervision, and Bureau of
        Inspection and Quarantine. Required certificates are issued upon satisfactory
        inspection of service stations. In addition, there are various standards
        that
        must be met for filling stations, including handling and storage of gas,
        tanker
        handling, and compressor operation. These standards are regulated by local
        construction and gas operations regulating authorities. Inspections are carried
        out and certificates for the handling of dangerous agents are issued by relevant
        local authorities.
 
 Other
        than the foregoing, Beijing Gas is not subject to any significant government
        regulation of its business or production, or any other government permits
        or
        approval requirements, except for the laws and regulations of general
        applicability for corporations formed under the laws of the PRC.
 
  **Item
        2.**  **Description
        of Property**
 
 We
        have
        offices at all operational locations. The facilities are added with each
        new
        project or operational location as part of the execution of the
        project.
 
 Under
        PRC
        law, most land is owned by the government, which sells "land use rights"
        to
        individuals or entities. A “land use right” allows the holder the right to use
        the land for a specified long-term period of time and confers to the holder
        all
        the incidents of ownership of the land during that period. Beijing Gas and
        its
        subsidiaries hold land use rights for two parcels of land registered under
        their
        names, and lease land use rights from third parties for additional parcels
        of
        land that are used for its gas distribution projects. In addition, Beijing
        Gas
        leases office buildings and warehouse facilities for its business operations.
 
 20
 Set
        forth
        below is the detailed information regarding these land use rights registered
        under the names of Beijing Gas or its subsidiaries:
 
 Registered
                  owner of land use right
              
              Location
                  & certificate of land use right
              
              Usage
              
              (approximate)
                  square meters
              
              Date
                  of Issuance or Grant
              
              Expiration
                  DateBeijing
                  Gas
              
              South
                  side of Huang He Road, Cai Yuan Town, Wu Qiao County
                
                Wu
                  Guo Yong (2003) Zi Di Chu No. 208
              
              Other
                  commercial use
              
              1,520
              
              November
                  25, 2003
              
              November
                  25, 2043Y
                  Yu Tian Country Zhong Ran Wei Ye Gas Ltd.
              
              Between
                  East side of Yu Zun West Road and South side of Guan Qu, Yu Tian
                  County
                
                Yu
                  Tian Guo Yong (2004) Zi Di No. 097
              
              Industrial
                  use
              
              2,674.5
              
              June
                  8, 2004
              
              May
                  21, 2054
  In
        addition to the land use rights described above, we have the right to use
        an
        aggregate of approximately 36,283 square meters for our operations either
        through grants or transfers of land use rights or lease arrangements. The
        rights
        range in duration from six to 20 years.
  As
        of the
        date of this annual report, Beijing Gas owns 700 km of high-pressure underground
        pipeline all with a diameter greater than 110 millimeters. Beijing Gas owns
        and
        operates 23 natural gas stations with accompanying buildings, gas compression
        facilities and other equipment. We own 17 cars, 13 trucks and 25 containers.
        We
        also lease trucks from PetroChina Company Limited.
 
 
 **Item
        3.**  **Legal
        Proceedings**
 
 To
        our
        knowledge, there is no material litigation pending or threatened against
        us.
*Please refer to “We may be exposed to intellectual property infringement and
        other claims by third parties, which, if successful, could cause us to pay
        significant damage awards and incur other costs” in the section titled “Risk
        Factors” in our registration statement filed with the SEC on October 27,
        2006**for information regarding risks related to the technology we
        use.*
  
 **Item
        4.**  **Submission
        of Matters to a Vote of Security Holders**
  On
          September 16, 2006 the majority shareholders of the Company resolved to
          approve
          and authorize the following actions:
  · to
          change
          the name of the Company from Dolce Ventures, Inc. to Sino Gas International
          Holdings, Inc. (the “Name Change”).
 
 · to
          authorize the Board of Directors to effect a three hundred four and forty-four
          one-hundredths-for-one (304.44:1) reverse stock split of the outstanding
          shares
          of Common Stock (the "Reverse Split", and together with the Name Change,
          the
“Corporate Actions”).
 
 The
          Corporate Actions did not become effective until the filing with, and acceptance
          by, the Office of the Secretary of State of Utah of an Amendment to the
          Company’s Articles of Incorporation (the “Amendment”) on November 17,
          2006.
 On
        October 16, 2006, the holder of the majority of our series B convertible
        preferred shares, Vision Opportunity Master Fund, Ltd., authorized, by written
        consent, the designation of some of the Company’s preferred stock as series B-1
        convertible preferred shares.
 
 21
 
 **PART
        II**
 
 **Item
        5.**  **Market
        for Common Equity and Related Stockholder Matters**
 
 Our
        common stock is currently quoted under the symbol "SGAS" on the National
        Association of Securities Dealers’ over-the-counter Bulletin Board. There is a
        limited trading market for our common stock. In 2007, through March 26, the
        bid
        price for our common stock ranged from $4.99 to $5.00, according to the Web
        site
www.otcbb.com. There has been no participation by a broker or dealer
        in the trading of our common stock.
 
 As
        of
        March 23, 2007, there were 658 holders of record of our common
        stock.
 
 Over
        the
        past two years, we have not declared any cash dividend on our common shares,
        and
        we have no plan to issue a cash dividend in the future.
  The
          following table sets forth for the respective periods indicated the prices
          of our common stock in the over-the-counter market, as reported and
          summarized by the OTC Bulletin Board. Such prices are based on inter-dealer
          bid
          and asked prices, without markup, markdown, commissions, or adjustments
          and may
          not represent actual transactions.
 
 CALENDAR
                    QUARTER ENDED
                
                HIGH
                    BID(S)
                
                LOW
                    BID(S)March
                    31, 2005
                
                $
                0.02
                
                $
                0.005June
                    30, 2005
                
                $
                0.10
                
                $
                0.005September
                    30, 2005
                
                $
                0.10
                
                $
                0.005December
                    31, 2005
                
                $
                0.10
                
                $
                0.005March
                    31, 2006
                
                $
                0.03
                
                $
                0.0061June
                    30, 2006
                
                $
                0.01
                
                $
                0.0075September
                    30, 2006
                
                $
                0.04
                
                $
                0.014December
                    31, 2006
                
                $
                5.00
                
                $
                3.60
  **Penny
        Stock Regulations**
 
 The
        SEC
        has adopted regulations which generally define "penny stock" to be an equity
        security that has a market price of less than $5.00 per share. Our common
        stock
        falls within the definition of penny stock and is subject to rules that impose
        additional sales practice requirements on broker-dealers who sell such
        securities to persons other than established customers and accredited investors
        (generally those with assets in excess of $1,000,000, or annual incomes
        exceeding $200,000 or $300,000, together with their spouse).
 
 For
        transactions covered by these rules, the broker-dealer must make a special
        suitability determination for the purchase of such securities and have received
        the purchaser's prior written consent to the transaction. Additionally, for
        any
        transaction involving a penny stock, other than an exempt transaction, the
        rules
        require the delivery, prior to the transaction, of a risk disclosure document
        mandated by the SEC relating to the penny stock market. The broker-dealer
        also
        must disclose the commissions payable to both the broker-dealer and the
        registered representative, current quotations for the securities and, if
        the
        broker-dealer is the sole market-maker, the broker-dealer must disclose this
        fact and the broker-dealer's presumed control over the market. Finally, monthly
        statements must be sent disclosing recent price information for the penny
        stock
        held in the account and information on the limited market in penny stocks.
        Consequently, the "penny stock" rules may restrict the ability of broker-dealers
        to sell our common stock and may affect the ability of investors to sell
        their
        common stock in the secondary market.
  **Dividends**
 
 Our
        board
        of directors has not declared a dividend on our common stock during the last
        two
        fiscal years or the subsequent interim period and we do not anticipate the
        payment of dividends in the near future, as we intend to reinvest our profits
        to
        grow operations. We rely on dividends from Beijing Gas for our funds and
        PRC
        regulations may limit the amount of funds distributed to us from Beijing
        Gas,
        which will affect our ability to declare any dividends. *Please
        refer to “Risk Factors - Risks Related to Doing Business in the PRC” and “Risk
        Factors - Risks Related to an Investment in our Common Stock - Beijing Gas
        is
        subject to restrictions on paying dividends and making other payments to
        us”,
“We are not likely to pay cash dividends in the foreseeable future” and
“Governmental control of currency conversion may affect the value of your
        investment” in the section titled “Risk Factors” in our registration statement
        filed with the SEC on October 27, 2006.*
 
 **Securities
        authorized for issuance under equity compensation plans**
  **Plan
                    category**
                **Number
                    of securities to be issued upon exercise of outstanding options,
                    warrants
                    and rights**
                  
                  **(a)**
                **Weighted-average
                    exercise price of outstanding options, warrants and
                    rights**
                  
                  **(b)**
                **Number
                    of securities remaining available for future issuance under equity
                    compensation plans (excluding securities reflected in column
                    (a))**
                  
                  **(c)****Equity;
                    compensation plans approved by security holders**
                --
                --
                --**Equity
                    compensation plans not approved by security
                    holders**
                400,000
                $3.00
                1,460,000**Total**
                400,000
                $3.00
                1,460,000
  22
  Item
        6.  **Management’s
        Discussion and Analysis or Plan of Operation**
  The
        following discussion and analysis of our consolidated financial condition
        and
        results of operations should be read in conjunction with the consolidated
        financial statements and related notes of Beijing Gas appearing elsewhere
        in
        this annual report. This discussion and analysis contains forward-looking
        statements that involve risks, uncertainties and assumptions. Actual results
        may
        differ materially from those anticipated in these forward-looking statements
        as
        a result of certain factors, including, but not limited to, those set forth
        under "Risk Factors" in our registration statement filed with the SEC on
        October
        27, 2006.
 
 **Overview**
 
 We
        are
        engaged in the development of natural gas distribution systems in small-
        and
        medium-sized cities in China, as well as the distribution of natural gas
        to
        residential, commercial and industrial customers in China, through our
        indirectly-owned subsidiaries in the PRC, Beijing Gas and its subsidiaries.
        We
        also have a subsidiary, Pegasus Tel, Inc. which owns and operates payphones.
        We
        plan to spin off our payphone operation by making a dividend of the Pegasus
        Tel,
        Inc. shares to our shareholders of record as of August 30, 2006. Because
        the
        operations of Pegasus Tel, Inc. are negligible, the discussion and analysis
        in
        this section is focused on our natural gas business operated by Beijing Gas
        and
        its subsidiaries in China. *Please refer to**the section titled
“Organization and Business of the Company”**of this annual report for
        more details regarding the reverse merger transactions and our corporate
        structure and history.*
 
 Beijing
        Gas is organized as a holding company with 18 subsidiaries, known as project
        companies, in four provinces, and four branches offices in Beijing, as shown
        on
        the corporate structure chart provided below. The project companies are the
        operating subsidiaries of Beijing Gas. Each project company operates as a
        local
        natural gas distributor in a city or county, known as an operational location,
        under an exclusive franchise agreement between Beijing Gas and the local
        government or entities in charge of gas utility, pursuant to which Beijing
        Gas
        formed the project company to operate the natural gas distribution project
        in
        the operational location.
 
 In
        addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang
        Ke
        Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
        venture entity engaged in the business of development, licensing and sale
        of oil
        and gas technologies and equipment, and sale of self-produced
        products.
 
 Beijing
        Gas owns and operates natural gas distribution systems primarily in Hebei,
        Jiangsu, Shandong and Anhui provinces in the PRC.
 
 Through
        its subsidiaries, Beijing Gas is a natural gas services operator, principally
        engaging in the investment, operation and management of city gas pipeline
        infrastructure, in the distribution of natural gas to residential an industrial
        users, in the construction and operation of oil stations and natural gas
        stations, and in the development and application of oil and natural gas related
        technologies. Beijing Gas and it subsidiaries own and operate 23 natural
        gas
        distribution systems serving approximately 63,000 residential and four
        commercial or industrial customers. Our facilities include approximately
        700 km
        of pipeline and delivery networks with a designed daily capacity of
        approximately 70,000 cubic meters of gas. Currently, we are constructing
        an
        additional four natural gas distribution systems. We own and operate natural
        gas
        distribution systems primarily in Hebei, Jiangsu, Shandong and Anhui provinces.
 
 23
 
  Below is our corporate structure:
 
 
 (1) *See
        “Organizational History of Gas (BVI) and Beijing Gas” under “Description
        of Business” of this annual report regarding the subsidiaries of Beijing
        Gas.*
 
 **RESULTS
        OF OPERATIONS**
 
 **Fiscal
        years ended December 31, 2006 and 2005**
 
 In
        the
        fiscal year ended December 31, 2006, our primary measures of financial health
        remained flat or decreased. As shown in the table below, our net sales remained
        approximately flat, due primarily to a decrease in connection fees from the
        previous year, although partly offset by a substantial increase in gas sales.
        Gross profit and gross margin decreased slightly, and operating income and
        net
        income decreased somewhat more significantly.
 
 For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              US$%Net
                  Sales
              
              
              10,870,718
              
              
              10,907,289
              
              
              -0.34
              %Gross
                  Profit
              
              
              6,481,576
              
              
              6,811,938
              
              
              -4.85
              %Operating
                  Income
              
              
              5,162,260
              
              
              5,800,949
              
              
              -11.01
              %Net
                  Income
              
              
              5,165,757
              
              
              5,702,433
              
              
              -9.41
              %Gross
                  Margin
              
              
              59.62
              %
              
              62.45
              %
              
              -2.83
              %Net
                  Margin
              
              
              47.52
              %
              
              52.28
              %
              
              -4.76
              %
 
 Due
        to
        the capital-intensive nature of our industry, the expansion rate of our business
        is closely related to capital availability. We received capital inflows from
        equity financing in September and November of 2006. We believe that these
        inflows occurred too close to the end of 2006 to have a substantial effect
        on
        our financial performance for that year. However, we expect that they will
        have
        a positive effect on our financial performance in 2007.
 
 As
        described below, we have reason to believe that the decrease in our income
        in
        2006 was only temporary and does not provide a reason to change our business
        strategies. With respect to the overall business in 2007, we expect to grow
        our
        business through active expansion into new cities and further penetration
        of
        existing markets. We are considering several potential acquisition targets,
        which would substantially contribute to our sales and net income if successfully
        acquired.
 
 24
 We
        plan
        continue to pursue the following strategies in 2006:
 
 (i)
        Focus
        on small- to mid-sized cities each with a population of no more than one
        million, where there is little competition to obtain a franchise, and where
        our
        franchise grants us exclusivity. We are a leading player in the small-to-mid
        sized city market. In the meantime, we do not exclude the possibility of
        expanding into big cities, so long as that we can gain competitive advantages
        through our expertise in the industry.
 
 (ii)
        Secure contracts for long-term supplies of natural gas from major gas suppliers
        in China at favorable prices and on favorable terms, which would support
        the
        continuous expansion of our customer base. Our current long-term gas supply
        contracts have given us a significant advantage in gaining new markets and
        building a reputation for guaranteed gas supply.
 
 (iii)
        Finance our operations using a well-designed financing plan that will give
        us a
        favorable cost of capital. The successful listing of our common stock on
        the
        National Association of Securities Dealers’ Over the Counter Bulletin Board has
        provided us with access to the international capital markets, a financing
        advantage that most of our competitors don’t have. As we are in a very
        capital-intensive business, our income will depend on our ability to issue
        financial instruments in a timely manner.
 
 (iv)
        Employ the best management with rich experience in the industry and improve
        operating efficiency and corporate governance. People factor is one of our
        core
        competitive advantages.
 
 
 **Net
        Sales**
 
 Net
        Sales, which consist of connection fees and gas sales, were $10.87 million
        for
        the year ended December 31, 2006, as compared to $10.91 million for the year
        ended December 31, 2005, representing a decrease of $40,000, or 0.37%. The
        slight decrease was primarily the result of a decrease in connection fees,
        which
        was largely offset by an increase in sales of natural gas. Connection fees
        declined nearly $1 million, or 12.6%, from $8.21 million in 2005 to $7.22
        million in 2006. Connection fees as a percentage of total net sales fell
        12%,
        from 75% in fiscal 2005 to 66% in fiscal 2006.
 
 (In
                  $ million)
              
              For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Net
                  Sales
              
              
              10.87
              
              
              100
              %
              
              10.91
              
              
              100
              %
              
              -0.37
              %Connection
                  Fees
              
              
              7.22
              
              
              66
              %
              
              8.21
              
              
              75
              %
              
              -12.06
              %Gas
                  Sales
              
              
              3.65
              
              
              34
              %
              
              2.70
              
              
              25
              %
              
              35.19
              %
 
 *Connection
        Fees*
 
 The
        decrease in connection fees is mainly due to our inability to take advantage
        of
        several business opportunities because of delay and reduction in size of
        our
        planned private financing transactions. Connection fees are generated in
        the
        early stages of development of a particular project location, and can be
        generated only after significant investment in distribution infrastructure,
        including pipelines and gas stations. Our business plan for 2006 included
        raising approximately $12.6 million in financing from the capital markets
        by
        mid-year to finance our investments in two industrial projects and expansion
        into one middle-sized city and three small-sized cities, which would have
        enabled us to record increased connection fees..
 
 The
        financing we did obtain in 2006 occurred later and provided a smaller amount
        of
        funds than we had intended. We received financing in two transactions completed
        on September 7 and October 20, 2006, The total net proceeds from these two
        transactions were $7.43 million, little more than half of the proceeds intended.
        The result of the reduced amount and later date of the financings was that
        we
        missed some of the opportunities we had originally targeted. Specifically,
        we
        were able to invest in only one of the two targeted industrial projects,
        and we
        were not able to expand into the targeted middle-sized city.
 
 25
 Had
        we
        been able to invest in the second industrial project as planned, our revenues
        would have increased by approximately $400,000. Expanding into the middle-sized
        city would have added approximately 4,000 residential household users to
        our
        customer base andcontributed approximately$1 million to our net sales in
        2006.
        We therefore would have had recognized approximately $1.4 million in additional
        net sales if our financing had occurred as planned and on schedule.
 
 
 (in
                  US$ millions)
              
              For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Connection
                  Fees
              
              
              7.22
              
              
              100
              %
              
              8.21
              
              
              100
              %
              
              -12.06
              %Residential
                  Users
              
              
              6.53
              
              
              90
              %
              
              6.31
              
              
              77
              %
              
              3.49
              %Industrial
                  Users
              
              
              0.69
              
              
              10
              %
              
              1.9
              
              
              23
              %
              
              -63.68
              %
 
 With
        regard to the source of connection fees, $6.53 million, or 90% of total
        connection fees, came from the development of new residential users in 2006,
        an
        increase of 3.49% from prior one-year period. We connected 24.5 thousand
        residential users in 2006, an increase of approximately 3,000 users from
        2005.
 
 Industrial
        users contributed a relatively small $0.69 million, or 10%, to our total
        connection fees in 2006, compared with $1.9 million, or 23% of total connection
        fees, in 2005. The main reason is that we developed only one new industrial
        project due to the delay of financing.
 
 Our
        top
        five residential customers, who are developers or owners of residential areas,
        are Shanghai Datun Energy Holdings, Jinzhou Chengzhen Development Co., Xuzhou
        Ganglong Real Estate Development Co, Kailun Weizhou Minerals Co., and Jinzhou
        Real Estate Co.
 
 The
        table
        below is a breakdown of our top five residential customers by connection
        fees:
 
 **Residential
                  Customers**
              
              **Connected
                  Household Users (thousand)**
              
              **Connection
                  Fees:**
                **($
                  million)**
              
              **Percentage
                  of Connection Fees (%)**Shanghai
                  Datun Energy Holdings
              
              
              12
              
              
              2.63
              
              
              36.43
              %Jinzhou
                  Chengzhen Development Co.
              
              
              0.25
              
              
              0.63
              
              
              8.73
              %Xuzhou
                  Ganglong Real Estate Development Co
              
              
              0.2
              
              
              0.53
              
              
              7.34
              %Kailun
                  Weizhou Minerals Co.
              
              
              0.16
              
              
              0.52
              
              
              7.20
              %Jinzhou
                  Real Estate Co.
              
              
              0.16
              
              
              0.4
              
              
              5.54
              %
 
 As
        the
        table shows, Shanghai Datun Energy Holdings alone contributed nearly 40%
        of our
        total connection fees. Given the size of this residential project, we expect
        it
        to generate 6,000 newly-connected household customers in 2007..
 
 We
        had
        one new industrial customer in 2006, Qingxian North China Petroleum Machineries
        Co. (“Qingxian”), which generated $0.69 million in connection fees in
        2006
  26
 
  *Gas
            Sales*
 
 Gas
            Sales
            accounted for 34% of total sales in 2006, nearly 10% higher than in 2005,
            due to
            Heibei Zhonggang steel company beginning to use gas in 2006.
 No
        gas
        sales were generated from Qingxian in 2006. Beginning on March 8, 2007, however,
        that customer has been using approximately 15,000 to 20,000 cubic meters
        of
        natural gas per day, placing it among our largest customers for gas sales
        as of
        the date of this annual report.
 
 In
        terms
        of volume, we sold 11.84 million cubic meters of natural gas in 2006, compared
        with 9.85 million cubic meters in 2005. In terms of value, gas sales in 2006
        were $3.65 million, an increase of $0.95 million, or 35%, from 2005. The
        increase of gas sales in both volume and value can be mainly attributed to
        our
        increased gas sales to Hebei Zhonggang Steel Co., Ltd., one of our existing
        industrial customers.
 
 The
        table
        below is a breakdown of our major industrial customers for gas consumption
        in
        2006:
 
 **Industrial
                  Customers**
              
              **Gas
                  Usage (cubic meters)**
              
              **Gas
                  Usage**
                **($
                  million)**
              
              **Percentage
                  of Gas Sales (%)**Hebei
                  Zhong Gang Co.
              
              
              5,243,079
              
              
              1.67
              
              
              45.75
              %Hebei
                  Tangshan Cangsheng Ceramics Co.
              
              
              990,314
              
              
              0.29
              
              
              7.95
              %
 
 
 Gas
        usage
        by Hebei Zhong Gang accounted for almost half of our total gas sales in 2006.
        Throughout 2006, daily gas consumption by Hebei Zhongguang was roughly 15,000
        cubic meters, and daily gas consumption by Hebei Tangshan Cangsheng Ceramics
        Co.
        was nearly 2,000 cubic meters. In 2007, daily gas consumption by Hebei
        Zhongguang has increased to roughly 20,000 to 30,000.
  In
        addition to these two industrial projects, we anticipate that in 2007,
        natural gas consumption by Qingxian may reach approximately 20,000 cubic
        meters per day, as Qingxian’s operation goes into full swing, further increasing
        our gas sales.
  Gas
        sales
        to residential users increased 14.86%, from $0.74 million in 2005 to $0.85
        million in 2006. Gas sales to industrial users increased 538.71%, from $0.31
        million in 2005 to $1.98 million in 2006. Gas sales of $1.89 million were
        contributed by a single industrial project, Hebei Zhong Gang, which started
        to
        use gas at the beginning of 2006. Other gas sales, primarily sales to our
        affiliates, decreased 50% in 2006, as we intentionally reduced gas sales
        to
        affiliates, where the profit margin is approximately 2%, much lower than
        the
        approximately 15% profit margin for sales to industrial and residential users.
 
 
 ($
                  million)
              
              For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Gas
                  Sales
              
              
              3.65
              
              
              100
              %
              
              2.7
              
              
              100
              %
              
              35.19
              %Residential
                  Users
              
              
              0.85
              
              
              23
              %
              
              0.74
              
              
              27
              %
              
              14.86
              %Industrial
                  Users
              
              
              1.98
              
              
              55
              %
              
              0.31
              
              
              12
              %
              
              538.71
              %Others
              
              
              0.82
              
              
              22
              %
              
              1.65
              
              
              61
              %
              
              -50.30
              %
  
 **Cost
        of sales**
 
 Cost
        of
        sales in fiscal 2006 was $ 4.39 million, an increase of $ 0.29 million, or
        7%,
        from $4.1 million in fiscal 2005.
 
 ($
                  million)
              
              For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Cost
                  of Sales
              
              
              4.39
              
              
              100
              %
              
              4.1
              
              
              100
              %
              
              7.07
              %Connection
                  Cost
              
              
              1.55
              
              
              35
              %
              
              1.57
              
              
              38
              %
              
              -1.27
              %Gas
                  Cost
              
              
              2.84
              
              
              65
              %
              
              2.53
              
              
              62
              %
              
              12.25
              %
  27
 
 Our
        cost
        of sales has two components, cost of connections and cost of gas sales. Cost
        of
        connections fell 1.3% to $1.55 million in 2006, as compared with $1.57 million
        in 2005. Cost
        of
        gas sales increased to $2.84 million in 2006 from $2.53 million in 2005,
        an
        increase of 12.25%. Given the 35% increase in gas sales, the cost of gas
        per
        cubic meter decreased significantly. This decrease is due primarily to our
        improved control over transportation costs and gas leakage during in 2006.
 
 We
        continued to purchase natural gas from wholesalers in 2006. One of our key
        competitive advantages is that we have a long-term gas supply contract with
        a
        major gas supplier in China. In 2006, our biggest gas supplier was PetroChina’s
        North China Oilfield Fourth Plant, with which we have signed long term gas
        supply agreement. The purchase price for natural gas from this plant is $0.21
        per cubic meters as of the end of 2006. We expect the price will remain
        unchanged in the short term
  The
        table
        below details our major gas suppliers in 2006 and 2005:
 Supplier
                
                2006
                
                2005North
                    China Oilfield, PetroChina
                
                $
                1,910,645.87
                
                $
                1,409,677.47Hebei
                    Natural Gas Co. Ltd
                
                $
                115,593.50
                
                $
                170,945.79
 
 **Gross
        Income**
 
 Gross
        income decreased slightly, from $6.81 million in 2005 to $6.48 million for
        2006.
 
 ($million)
              
              For
                  the 12 months ended December 31,2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Gross
                  Income
              
              
              6.48
              
              
              100
              %
              
              6.81
              
              
              100
              %
              
              4.26
              %Connection
              
              
              5.67
              
              
              88
              %
              
              6.64
              
              
              98
              %
              
              -14.61
              %Gas
              
              
              0.81
              
              
              12
              %
              
              0.17
              
              
              2
              %
              
              376.47
              %
 
 Gross
        income from connection operations decreased 14.6%, from $6.64 million in
        2005 to
        $5.67 million in 2006, and accounted for 88% of total gross income in 2006.
        The
        decrease was due to the lower-than-expected increase in industrial customers
        described above.
 
 Gross
        income from gas sales increased 376%, from $170,000 in 2005 to 810,000 in
        2006,
        accounting for 12% of total gross income in2006, . The substantial increase
        was
        due to effective cost-control measures, reduced gas leakage in transportation
        and storage, and achange in the make-up of our customer base to include a
        greater proportion of higher-margin customers.
 
 Our
        gross
        margin decreased slightly, from 62.45% in 2005 to 59.62% in fiscal
        2006.
 
 28
 
 **Selling,
        General and Administrative Expenses**
 
 Selling
        expenses remained largely unchanged at $0.1 million for fiscal 2006. We incurred
        $1.22 million in general and administrative expenses in 2006, an increase
        of
        $600,000, or 40%, from the same period one year ago. General and administrative
        expenses are composed of fees related to business trips, phone usages, social
        insurance, depreciation, and office equipment, among other expenses. The
        increase is due to the increase in our operational projects, subsidiaries
        and
        employees. The table below sets forth our of general and administrative expenses
        in 2006:
  ($
                  million)
              For
                  the 12 months ended December 31,2006
              2005
              ChangeUS$
              US$
              %General
                  & administrative expenses
              1.22
              0.87
              40.23%
 
 We
        expect
        that general and administrative expenses will continue to grow in year 2007,
        as
        we expand our business and engage in more financing activities.
 
 **Other
        Income**
  Other
        Income was $ 0.58 million in 2006, an increase of 33% from $ 0.44 million
        in
        2005. Other income represents the income for our investment in 40% equity
        of
        Beijing Zhongran Xiangke Oil & Gas Tech Co.
 
 **Income
        tax**
  Income
        tax was $ 0.42
        million in
        fiscal 2006, 20% lower than $0.58 million in fiscal 2005. Pursuant to the
        tax
        laws of the PRC, general enterprises are subject to income tax at an effective
        rate of 33%. Sino Gas is in the natural gas industry, whose development is
        encouraged by the government. According to income tax regulation, any company
        engaged in the natural gas industry enjoys a favorable tax rate. In addition,
        Sino Gas has been certified by regulatory authorities as a high technology
        company and as such has been enjoying preferential income tax treatment under
        the PRC’s income tax policies. Under such policies, Sino Gas was exempt from
        corporate income taxes for the first two years commencing from its first
        profitable year, and thereafter will be entitled to a 50% tax reduction for
        the
        succeeding three years. Our first profitable tax year was 2003. Accordingly,
        our
        income would be subject to a reduced tax rate of 7.5% from 2005 to 2007.
        From
        2008, the income tax rate will be 9%. The
        subsidiaries of Sino Gas are subject to the effective rate of 33%, but almost
        all income is earned by Sino Gas.
 
 **Net
        Profit**
  Net
        profit for the twelve months ended December 31, 2006 was $5.17
        million ,
        a
        decrease of 9.41% from
        $5.70 million in the same period one year ago. It was due to the slight decrease
        of our revenues and substantial increase of expenses.
 
 Net
        profit margin in 2006 was 47.52% ,
        as
        compared with 52.28% in 2005. The 4.76% decrease
        in net profit margin was primarily the result of the decrease of connection
        fees, the margin of which is relatively higher than the margin of gas sales.
 
 In
        2007,
        we plan to actively acquire small-to-mid sized cities while penetrating the
        existing markets. We expect both the connection fees and the percentage of
        connection fees to net sales in 2007 will increase sizably, as compared with
        the
        levels in fiscal 2006. We expect to add 40,000 household users and two
        industrial users, and sell 21 million cubic meters of natural gas in 2007.
        The
        projected growth rate of our net income in 2007 is above 30% on a year-on-year
        basis.
 
 29
 **Cash
        and cash equivalents**
  Cash
        and
        cash equivalents were $3.64 million as of December 31, 2006, an increase
        of
        $3.07 million over our $570,000 of cash and cash equivalents one year
        earlier. The major source of cash was from the Company’s financing activities.
        The money we use for investment and working capital normally comes from our
        shareholders and operating earnings. The Company completed two equity financings
        in September and November 2006 separately, with net proceeds of $7.43 million
        after deducting various fees related to financing. We used $1.48 million
        for the
        acquisitions of Yuxian Jinli and Xiahuayuan Jinli, and the rest for working
        capital and acquisitions in 2007.
 
 We
        borrowed RMB 19 million ($2,430,445) through a short-term loan from Shenzhen
        Development Bank for operational purposes in late 2006 by using $3 million
        from
        the two equity financings as collateral. Interest on the loan is payable
        at a
        rate of 5.022% per annum, and repayment of the loan is in May 2007. We repaid
        the loan in full in March 2007.
  **Cash
        Flows**
 
 Net
        Cash
        Flow from Financing Activities was $9.86 million in 2006, as compared with
        $0 in
        2005. We raised $7,430,965 by issuing common stock and $2,430,445 by borrowing
        debt from banks in 2006.
 
 Net
        Cash
        Flow from Operating Activities was $5.29 million in 2006, an increase of
        $2.43
        million from $2.86 million in 2005, primarily because we have successfully
        reduced accounts payable and other payables by $0.08 million in 2006, as
        compared with an increase of $3.56 million for the same period one year ago,
        and
        accounts receivable and other receivables decreased by $0.54 million in 2006,
        as
        compared with an increase of $6.14 million in 2005.
 Net
        Cash
        Outflow from Investment Activities was $12.27 million in 2006, an increase
        of
        nearly $9.3 million from $2.97 million in 2005. The table below is a breakdown
        of Cash Outflow from Investment Activities in 2006:
 
 Purchase
                  of plant and equipment
              
              $
              7,563,222Pledge
                  deposits
              
              
              3,124,541Payment
                  for the construction in progress
              
              
              1,556,579Payment
                  of cost of intangible assets
              
              
              21,511Net
                  cash used in investing activities
              
              $
              12,265,853
 
 We
        expect
        the returns on these investment activities will be visible on our financial
        statements in the near-to-middle term.
 
 **Accounts
        Receivable**
  Accounts
        Receivable as of December 31, 2006 were $6.44 million, a decrease of $1.33
        million from $7.77 million one year ago. The collection period for accounts
        receivable in the natural gas distribution industry is usually no more than
        one
        year. Approximately 80% of accounts receivable incurred in 2005 were collected
        in 2006, and most of them were collected in the second half of the year,
        when
        natural gas distribution companies traditionally collect the majority of
        the
        connection fees for the distribution systems they construct.
 
 The
        table
        below is a breakdown of our 10 largest accounts receivable as of December
        31,
        2006.
 
 Shanghai
                  Datun Energy Resources Co., Ltd
              
              $
              1,509,641Jinzhou
                  City & Town Development & Construction Co., Ltd
              
              
              639,591Xuzhou
                  Ganglong Real Estate Development Co., Ltd
              
              
              559,232Kailuan(Group)
                  Weizhou Coal Mining Co., Ltd
              
              
              532,139Hebei
                  Zhong Gang Steel Co., Ltd
              
              
              440,5861st
                  Machinery Works of North China Petroleum
              
              
              383,754Beijing
                  Kailong Real Estate Development Co., Ltd
              
              
              299,328Beijing
                  Xincheng Real Estate Development Co., Ltd
              
              
              282,604Pei
                  Xian Zheng Yuan Construction Engineering Co.
              
              
              258,906Beijing
                  Hong Ji Co., Ltd
              
              
              227,754$
              5,133,535
  30
 
 **Fixed
        Assets**
  Fixed
        Assets as of December 31, 2006 was $10.94 million, an increase of $7.59 million
        from $3.35 million in 2005. The table below is a breakdown of our fixed assets
        at cost:
 
 2006
              
              2005*At
                  Cost*Gas
                  Pipelines
              
              $
              8,255,231
              
              $
              2,819,341Motor
                  Vehicles
              
              
              2,204,621
              
              
              99,376Machinery
                  & Equipment
              
              
              273,943
              
              
              253,536Buildings
              
              
              89,799
              
              
              86,952Leasehold
                  Improvements
              
              
              47,543
              
              
              46,036Office
                  Equipment
              
              
              67,774
              
              
              41,607$
              10,938,911
              
              $
              3,346,848
 
 **Short
        term loans**
  Our
        short-term bank loans as of December 31, 2006 are as follows:
  2006
              
              
              2005Loans
                  from Shen Zhen Development Bank Co., Ltd.
              
              $
              2,430,445
 
 The
        half-year bank loan, with the interest rate of of 5.022% per annum, is due
        on
        May 22, 2007. Interest expense for the loan was $9,522 for the year ended
        December 31, 2006. We repaid the loan in full in March 2007.
  31
  **Item
        7.**  **Financial
        Statements**
 Our
        financial statements appear toward the end of this annual report beginning
        on
        page F-1.
  **Item
            8.**  **Changes
            In and Disagreements With Accountants on Accounting and Financial
            Disclosure**
 
 On
          August
          30, 2006, our Board of Directors approved the dismissal of Robison, Hill
&
Co. (“Robison") as our registered independent certified public accounting firm
          effective on September 7, 2006. Concurrent with this action, our board
          of
          directors appointed Samuel H. Wong & Co., LLP as our new registered
          independent certified public accounting firm. Samuel H. Wong & Co., LLP is
          located at Room 703, Nan Dao Commercial Building, 359-361 Queen’s Road Central,
          Hong Kong.
 
 Beijing
          Gas’s operating businesses have previously been audited by Samuel H. Wong &
Co., LLP and management elected to continue this existing relationship.
          There
          have been no disagreements with Robison during the previous two fiscal
          years or
          any subsequent interim period.
  The
          audit
          opinions of Robison, Hill & Co. on the financial statements for the fiscal
          years ended December 31, 2004 and 2005 did not contain an adverse opinion,
          a
          disclaimer of opinion, nor was it qualified or modified as to uncertainty,
          audit
          scope or accounting principles, except that the report of Robison, Hill
&
Co. for the fiscal years ended December 31, 2004 and 2005 indicated conditions
          which raised substantial doubt about our ability to continue as a going
          concern.
 
 **Item
          8A.**  **Controls
          and Procedures**
  At
            the
            conclusion of the fiscal year ended December 31, 2006, we carried out
            an
            evaluation, under the supervision and with the participation of our management,
            including our Chairman and Chief Executive Officer and Chief Accounting
            Officer,
            of the effectiveness of the design and operation of our disclosure controls
            and
            procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
            Act.
            Based on this evaluation, our officers concluded that, as of December
            31, 2006,
            our disclosure controls and procedures were effective and adequately
            designed to
            ensure that the information required to be disclosed by us in the reports
            we
            submit under the Exchange Act is recorded, processed, summarized and
            reported
            within the time periods specified in the applicable rules and forms and
            that
            such information was accumulated and communicated to our chief executive
            officer
            and chief financial officer, in a manner that allowed for timely decisions
            regarding required disclosure.
  **Item
          8B.**  **Other
          Information**
 
 None.
 
 **Part
          III**
 
 **Item
          9.**  **Directors,
          Executive Officers, Promoters, Control Persons and Corporate Governance;
          Compliance with Section 16(a) of the Exchange Act**
 
 In
          connection with the reverse merger transaction, there was a change of control
          of
          our board of directors and management. The following persons were appointed
          our
          executive officers and directors. Except for John D. Kuhns, each of our
          current
          directors and executive officers is a resident of the PRC. As a result,
          it may
          be difficult for investors to effect service of process within the United
          States
          or British Virgin Islands upon them, or to enforce court judgments obtained
          against them in the United States courts or British Virgin Islands’ courts.
 
 **Directors
          and Executive Officers of the Company**
 
 Directors
                    and Executive Officers
                
                Position/Title
                
                AgeLiu
                    Yu Chuan
                
                
                President
                    & Chief Executive Officer, director and Chairman of the
                    Board
                
                
                43Zhou
                    Zhi Cheng
                
                
                Chief
                    Operating Officer
                
                
                43Zhong
                    Zhi Min
                
                
                Marketing
                    Director
                
                
                52Bian
                    Shu Kui
                
                
                Vice
                    President & Chief Engineer
                
                
                43Chen
                    Fang
                
                
                Chief
                    Financial Officer, director
                
                
                34Chen
                    Guo Wei
                
                
                Director
                
                
                51Sun
                    Quan Dong
                
                
                Director
                
                
                41John
                    D. Kuhns
                
                
                Director
                
                
                56
  There
          are
          no family relationships among our directors or executive officers.
 
 All
          our
          directors hold office until the next annual meeting of our shareholders,
          and
          until their successors have been qualified after being elected or appointed.
          Officers serve at the discretion of our board of directors.
 
 Set
          forth
          below is the biographical information about our directors and executive
          officers:
  32
  *Mr.
          Liu Yu Chuan* Mr.
          Liu was appointed our Chairman, Chief Executive Officer and President on
          September 7, 2006. Mr. Liu graduated from North Industrial University,
          Beijing,
          PRC with a B.S. degree in electrical engineering. Mr. Liu has been a licensed
          Senior Engineer in the PRC since 1997. Mr. Liu was the Chairman of the
          board of
          directors and General Manager of Beijing Xiang Ke Jia Hua Petroleum and
          Natural
          Gas Co., Ltd. between 2000 and 2003. Prior to that, Mr. Liu served as CEO
          of
          Lang Fang Zhong Gong Petroleum and Natural Gas Technology Co., Ltd. from
          1997 to
          1999. Prior to that, Mr. Liu served as the Chief of Research and Development
          Department of Petro China from 1983 to 1997.
  *Mr.
          Zhou Zhi Cheng* Mr.
          Zhou Zhi Cheng was appointed our Chief Operating Officer on October 19,
          2006.
          Previously, Mr. Zhou served as the director and General Manager of Beijing
          Chenguang Gas Co., Ltd. from late 2002 to 2006. Prior to that, Mr. Zhou
          served
          as the Associate General Manager and later General Manager of Beijing Zhong
          Ran
          Xiang Ke Petroleunm and Oil Technology Co., Ltd. between 2001 and
          2002.
 
 *Mr.
          Zhong Zhi Min* Mr.
          Zhong
          was appointed our Marketing Director on September 7, 2006. ** Mr.
          Zhong
          graduated from Nanjing University with a B.S. in Philosophy. Mr. Zhong
          was Vice
          President of Shen Zhen Guo Qi Real Estate Co. Ltd from 1995 to 2004. Prior
          to
          that, Mr. Zhong served as a government official in several cities in Jiang
          Xi
          Province between 1978 and 1995.
 
 *Mr.
          Bian Shu Kui* Mr.
          Bian
          was appointed our Vice President and Chief Engineer on September 7, 2006.
          Mr.
          Bian graduated from Daqing Petroleum Institute with a B.S. and Petroleum
          University with a M.S. He served as Vice President of Beijing Zhong Ran
          Xiang Ke
          Petroleum and Oil Technology Co., Ltd. between 2000 and 2006. Prior to
          that, Mr.
          Bian had been with North China Oilfield The First Refinery Factory for
          fourteen
          years. Mr. Bian was one of the industry experts that drafted The National
          Standard of Natural Gas Usage in Cities in China.
  *Ms.
          Chen Fang* Ms.
          Chen
          was appointed our director and the Chief Financial Officer on September
          7, 2006. ** Ms.
          Chen
          graduated from Sun Yat-Sen University, PRC, with a B.A in law, and from
          Zhongnan
          University of Economics and Law, PRC, with an MBA. Ms. Chen has been a
          licensed
          attorney in PRC since 1995. She served as Vice-President and General Manager
          at
          Zhuhai Brightzone Securities Investment and Consulting Ltd. from 2000 to
          2002.
          Prior to that, Ms. Chen served as Manager of Investment Department at Zhuhai
          International Trust and Investment Ltd. from 1994 to 2000. Ms. Chen has
          a wide
          range of experience in the financial industry.
 
 *Mr.
          Chen Guo Wei* Mr.
          Chen was appointed our director on September 7, 2006 and a member of the
          auditor
          committee of our board and a member of the compensation committee of our
          board
          on October 19, 2006. Mr. Chen graduated from East China College of Metallurgy
          with a major in Accounting. From March 2006 to present, Mr. Chen has been
          the
          general manager and chairman of the board of Shen Zhen Jia Xin Real Estate
          Development Co., Ltd. Prior to that, he was the general manager of Hang
          Zhou
          Steal Group from 2001 to February 2006. Mr. Chen is very experienced in
          general
          and financial management.
 
 *Mr.
          Sun Quan Dong* Mr. Sun
          was appointed our director on September 7, 2006 and a member of the auditor
          committee of our board and a member of the compensation committee of our
          board
          on October 19, 2006. Mr. Sun graduated from Shanghai Maritime University
          with a
          B.S. Mr. Sun has been Chairman of Jidong Shipping Co., Ltd from 1995. Prior
          to
          that, Mr. Sun served as Manager in the Shipping Department of Shekou Shipping
          Co., Ltd between 1987 to 1994.
 
 *John
          D. Kuhns* Mr. John
          D. Kuhns was appointed a director of our company on September 7, 2006 and
          a
          member of the auditor committee of our board and a member of the compensation
          committee of our board on October 19, 2006. Mr. Kuhns has been a 95%
          shareholder, a director and chairman of Kuhns Brothers, Inc., a holding
          company
          founded in 1987 for its subsidiary, Kuhns Bros. & Co., Inc., an investment
          banking firm specializing in providing financing for power technology ventures,
          and, more recently, manufacturing operations within the PRC. Additionally,
          Kuhns
          Brothers, Inc. owns 100% of Kuhns Brothers Securities Corporation, a broker
          dealer, registered with the SEC, in which Mr. Kuhns is the Chairman. Since
          March
          2005, Mr. Kuhns has been a director and chairman of Deli Solar (USA), Inc.,
          a
          U.S. reporting company with solar hot water heaters manufacturing operation
          in
          the PRC. Since, December, 2005, Mr. Kuhns has served as a Director of Fushi
          International, Inc. Since 2002, Mr. Kuhns has been a director and chairman
          of
          Distributed Power, Inc., a public company that owns electric generating
          projects. Mr. Kuhns is also a director of China Sciences Conservational
          Power
          Limited, a company listed on the Hong Kong Stock Exchange. Neither of the
          foregoing Kuhns companies, nor Deli Solar (USA), Inc., Distributed Power,
          Inc.,
          Fushi International, Inc. or China Sciences Conservational Power Limited
          are
          affiliated with us. Mr. Kuhns holds a bachelors degree in sociology and
          fine
          arts from Georgetown University, a master's degree in fine arts from the
          University of Chicago and an MBA degree from the Harvard Business
          School.
  33
  To
          our
          knowledge, during the last five years, none of our directors and executive
          officers (including those of our subsidiaries) has:
 
 ·
                Had
                    a bankruptcy petition filed by or against any business of which
                    such
                    person was a general partner or executive officer either at the
                    time of
                    the bankruptcy or within two years prior to that
                    time.
 
 ·
                Been
                    convicted in a criminal proceeding or been subject to a pending
                    criminal
                    proceeding, excluding traffic violations and other minor
                    offenses.
 
 ·
                Been
                    subject to any order, judgment or decree, not subsequently reversed,
                    suspended or vacated, of any court of competent jurisdiction,
                    permanently
                    or temporarily enjoining, barring, suspending or otherwise limiting
                    his
                    involvement in any type of business, securities or banking
                    activities.
 
 ·
                Been
                    found by a court of competent jurisdiction (in a civil action),
                    the SEC,
                    or the Commodities Futures Trading Commission to have violated
                    a federal
                    or state securities or commodities law, and the judgment has
                    not been
                    reversed, suspended or vacated.
 
 **Audit
          Committee Financial Expert**
 
 Our
          board
          of directors appointed an audit committee on October 19, 2006. Because
          we only
          recently consummated the reverse merger transaction and appointed the current
          members of our board of directors, our board of directors has not yet appointed
          a member who qualifies as an "audit committee financial expert" as defined
          in
          Item 401(e) of Regulation S-B, and is "independent" as the term is used
          in Item
          7(d)(3)(iv) of Schedule 14A under the Exchange Act.
 
 **Audit
          Committee**
 
 Our
          board
          of directors appointed an audit committee on October 19, 2006. Our audit
          committee members are Sun Quan Dong, Chen Guo Wei and John D. Kuhns. At
          the
          present time, we believe that the members of our audit committee are
          collectively capable of analyzing and evaluating our financial statements
          and
          understanding internal controls and procedures for financial reporting.
          Our
          company, however, recognizes the importance of good corporate governance
          and
          intends to identify and appoint an audit committee comprised entirely of
          independent directors, including at least one financial expert, in the
          near
          future.
 
 34
 **Item
          10.**  **Executive
          Compensation**
 
 The
          following is a summary of the compensation paid by Beijing Gas to its named
          executive officers and directors for the three years ended December 31,
          2005,
          2004 and 2003, respectively.
 
 **Summary
          Compensation Table**
 
 Name
                      and Principal Position
                  
                  Year
                  
                  Salary
                    ($)
                  
                  Bonus
                    ($)
                  
                  Stock
                    Awards
                    ($)
                  
                  Option
                      Awards
                    ($)
                  
                  Non-equity
                      Incentive Plan Compensation
                    ($)
                  
                  Change
                      in Pension Value and Nonqualified Deferred Compensation
                      Earnings
                    ($)
                  
                  All
                      Other Compensation
                    ($)
                  
                  Total
                    ($)Liu
                      Yu-Chuan,
                    CEO
                  
                  2006
                    2005
                    2004
                  
                  $
                  100,000
                    22,800
                    19,000
                  
                  $
                  60,000
                    1,913
                    750
                  
                  
                  -
                    -
                    -
                  
                  
                  -
                    -
                    -
                  
                  
                  -
                    -
                    -
                  
                  
                  -
                    -
                    -
                  
                  
                  -
                    -
                    -
                  
                  $
                    $
                  60,000
                    24,713
                    19,750
                    -
  Each
          Director who does not serve as an executive receives a cash allowance in
          the
          amount of $10,000 annually, beginning in 2006.
  **Compensation
            Discussion and Analysis**
  Overview
            of Compensation Program and Philosophy
  The
            Company has three executive officers, Mr. Liu Yu Chuan, Mr. Zhou Zhi
            Cheng, and
            Ms. Chen Fang. Mr. Liu and Ms. Chen are also directors of the Company.  The
            Board of Directors also serves as the Company’s compensation
            committee.
 
 The
            Board
            of Directors’ goal in determining compensation levels is to adequately reward
            the efforts and achievements of executive officers for the management
            of the
            Company.  The Company has no pension plan or non-equity incentive plan or
            deferred compensation arrangement.  The Company has a limited equity option
            plan under which it will issue options to purchase 200,000 shares of
            the
            Company’s common stock to each of Mr. Zhou and Ms. Chen at an exercise price
            of
            $3.00 per share. The options will vest as follows: 45% will vest in early
            2008;
            30% will vest in early 2009; and 25% will vest in early 2010. The Company
            has
            not used a compensation consultant in any capacity but believes that
            its
            executive officer compensation package is comparable to similar businesses
            in
            its location of operations.
  Each
            of
            our executive officers has an employment agreement with the Company that
            outlines salary and benefit arrangements.  The three agreements have
            similar terms, which include, but are not limited to: base salaries of
            cash, the
            provision of labor-related insurance, termination for cause, termination
            on 30
            days’ notice and termination without notice and the provision of labor-related
            benefits in conformance with PRC labor laws. The agreements are for a
            term of
            three years. Officers serve at the discretion of our board of directors.
  Compensation
            of Directors
  Persons
            who are directors and employees are not currently additionally compensated
            for
            their services as a director.  Persons who are directors who are not
            employees receive a cash allowance of $10,000 per year. All our directors
            hold
            office until the next annual meeting of our shareholders, and until their
            successors have been qualified after being elected or appointed.
 **Item
          11.**  **Security
          Ownership of Certain Beneficial Owners and Management and Related Stockholder
          Matters**
 
 The
          following table sets forth, as of March 12, 2007, certain information with
          respect to the beneficial ownership of our equity securities, by (i) any
          person
          or group with more than 5% of any class of our voting securities, (ii)
          each
          director, (iii) our chief executive officer and each other executive officer
          whose cash compensation for the most recent fiscal year exceeded $100,000
          and
          (iv) all executive officers and directors as a group. The table reflects
          the
          ownership of our equity securities by the foregoing parties after the
          304.44-for-1 reverse stock-split of our common stock.
 
 As
          of the
          date of this annual report, we had outstanding (i) 14,920,346 shares of
          common
          stock, (ii) no shares of series A convertible preferred stock,
          (iii) 3,795,571 shares of series B convertible preferred stock, (iv) series
          A warrants to purchase an aggregate of 3,854,599 shares of common stock
          at $3.84
          per share, (v) series B warrants to purchase an aggregate of 1,693,723
          shares of
          common stock at $5.48 per share, (vi) series J warrants to purchase an
          aggregate
          of 3,083,588 shares of common Stock at $3.01 per share, (vii) series C
          warrants
          to purchase an aggregate of 3,083,588 shares of common stock at $4.22 per
          share,
          and (viii) series D warrants to purchase an aggregate of 1,541,794 shares
          of
          common stock at $6.03 per share.
  The
          series A and B warrants have a term of five years. Each series J warrant
          is
          exercisable for a period of twelve months following its issuance. Each
          series C
          or D warrant is only exercisable once the series J warrant of such holder
          is
          exercised and for such number of shares of common stock that have been
          exercised
          by such holder pursuant to the series J warrant of such holder. The terms
          of
          series C and D warrants are for five years following the date of issuance
          of
          such series C or D warrants, as applicable.
 
 Shares
          of
          Series A and Series B convertible preferred stock vote together with shares
          of
          common stock on all matters upon which stockholders are entitled to vote,
          except
          to the extent a class vote is required under Utah law or as otherwise provided
          in the certificate of designations creating such series. On those matters
          upon
          which the series A convertible preferred stock votes together with the
          common
          stock and the series B convertible preferred stock as a single class, each
          share
          of series A convertible preferred stock carries a number of votes equal
          to the
          number of shares of common stock issuable in a mandatory conversion based
          on the
          then applicable conversion rate. On those matters upon which the series
          B
          convertible preferred stock votes together with the common stock and series
          A
          convertible preferred stock as a single class, each share of series A
          convertible preferred stock carries a number of votes equal to the number
          of
          shares of common stock that would be issuable upon conversion. Each holder
          of
          series A convertible preferred stock or series B convertible preferred
          stock
          shall be entitled to notice of any stockholders’ meeting in accordance with our
          bylaws.
  35
 In
          determining beneficial ownership of the common stock after the 304.44-for-1
          reverse stock-split, the number of shares shown includes shares which the
          beneficial owner may acquire upon exercise of warrants or options which
          may be
          acquired within 60 days. In determining the percent of common stock owned
          by a
          person on March 12, 2007, (a) the numerator is the number of shares of
          the class
          beneficially owned by such person, including shares which the beneficial
          ownership may acquire within 60 days upon conversion of the series A convertible
          preferred stock or series B convertible preferred stock or exercise of
          the
          warrants and option, and (b) the denominator is the sum of (i) the total
          shares
          of that class outstanding on March 12, 2007, and (ii) the total number
          of shares
          that the beneficial owner has acquired or may acquire upon conversion
          of the series B convertible preferred stock or exercise of the warrants
          and
          option. Unless otherwise stated, each beneficial owner has sole power to
          vote
          and dispose of the shares.
 
 Except
          as
          otherwise stated, the address of the directors and executive officers listed
          in
          the table is:
 
 c/o
                    Beijing Zhong Ran Wei Ye Gas Co., Ltd.N0.18
                    Zhong Guan Cun Dong St.Haidian
                    DistrictBeijing,
                    China 10083
 Amount
                      and Nature of Beneficial
                    Ownership
                  
                  
                  
                  Percent
                      of ClassShareholder
                  
                  Series
                    B
                      Preferred
                    Stock(1)
                  
                  Common
                    Stock(2)
                  
                  
                  
                  Series
                    B
                      Preferred Stock
                  
                  Common
                      Stock**Owner
                      of More than 5% of Class**GAS
                      (BVI)
                  
                  
                  
                  
                  
                  238,371
                  
                  
                  
                  
                  
                  
                  
                  
                  1.62
                  %Eloten
                      Group Ltd.
                  
                  
                  
                  
                  
                  6,632,460
                  
                  
                  
                  
                  
                  
                  
                  
                  44.40
                  %Leading
                      King Investment Limited
                  
                  
                  
                  
                  
                  5,474,300
                  
                  
                  
                  
                  
                  
                  
                  
                  36.65
                  %Vision
                      Opportunity Master Fund, Ltd.
                  
                  
                  3,205,829
                  
                  
                  14,229,910
                  
                  
                  
                  
                  
                  79.68
                  %
                  
                  49.20
                  %**Directors
                      and Executive Officers**Liu
                      Yu Chuan
                  
                  
                  
                  
                  
                  6,632,460
                  
                  
                  (5)(6
                  )
                  
                  
                  
                  
                  45.14
                  %Sun
                      Quan Dong
                  
                  
                  
                  
                  
                  5,474,300
                  
                  
                  (7)(8
                  )
                  
                  
                  
                  
                  37.26
                  %Zhong
                      Zhi Min
                  
                  
                  
                  
                  
                  400,113
                  
                  
                  (3
                  )
                  
                  
                  
                  
                  2.72
                  %Zhou
                      Zhi Cheng
                  
                  
                  
                  
                  
                  -Bian
                      Shu Kui
                  
                  
                  
                  
                  
                  176,850
                  
                  
                  (3
                  )
                  
                  
                  
                  
                  1.20
                  %Chen
                      Fang
                  
                  
                  
                  
                  
                  66,693
                  
                  
                  (3
                  )
                  
                  
                  
                  
                  0.45
                  %Chen
                      Wei Guo
                  
                  
                  
                  
                  
                  -
                  
                  
                  (3
                  )
                  
                  
                  
                  
                  -John
                      Kuhns
                  
                  
                  
                  
                  
                  808,697
                  
                  
                  (4
                  )
                  
                  4.24
                  %
                  
                  4.16
                  %**All
                      Directors and Executive Officers**
                  
                  
                  
                  
                  
                  13,559,114
                  
                  
                  
                  
                  
                  4.24
                  %
                  
                  87.33
                  %
  36
  (1)
          The
          Series B convertible preferred stock and the warrants are assumed to be
          non-convertible and non-exercisable within 60 days of their date of
          issuance.
 
 (2)
          Includes the shares of common stock issuable upon conversion of series
          B
          convertible preferred stock and shares of common stock issuable upon exercise
          of
          the warrants.
 
 (3)
          Shares of common stock issued to Gas (BVI) as a result of the consummation
          of
          the share exchange agreement are beneficially attributed to each of the
          Gas
          (BVI) shareholders based on each shareholder's percentage ownership interest
          in
          Gas (BVI) immediately prior to execution of the share exchange
          agreement.
  (4)
          Includes common shares issued upon the conversion, on February 23, 2007,
          of (i)
          113,847 shares of series B convertible preferred stock issued to Kuhns
          Brothers,
          Inc., which are beneficially attributed to John Kuhns, and (ii) 56,925
          shares of
          series B convertible preferred stock issued to John Kuhns.
 
 (5)
          Includes 6,524,174 common shares issued upon conversion of series A convertible
          preferred stock to Eloten Group Ltd., which are beneficially attributed
          to Mr.
          Liu Yu Chuan. Mr. Liu and his wife hold an aggregate of 100% ownership
          interest
          in Eloten Group Ltd.
 
 (6)
          Includes 108,286 shares of common stock beneficially attributed to Eloten
          Group
          Ltd. based on Eloten Group Ltd.'s ownership interest in Gas (BVI).
 
 (7)
          Includes 5,384,923 common shares issued upon conversion of series A convertible
          preferred stock to Leading King Investment Limited, which are beneficially
          attributed to Mr. Sun Quan Dong. Mr. Sun holds 50% ownership interest in
          Leading
          King Investment Limited.
 
 (8)
          Includes 89,377 shares of common stock beneficially attributed to Leading
          King
          Investment Limited based on Leading King Investment Limited's ownership
          interest
          in Gas (BVI). Mr. Sun holds a 50% ownership interest in Leading King Investment
          Limited.
 
 
 **Item
          12.**  **Certain
          Relationships and Related Transactions, and Director
          Independence**
 
 **Share
          Exchange Agreement and the Issuance and Conversion of Series A
          Stock**
 
 On
          September 7, 2006, we entered into and consummated a share exchange agreement
          with the holders of all of the outstanding capital stock of Gas (BVI),
          which
          were: Eloten Group Ltd., Leading King Investment Limited, Zhong Zhi Min,
          Li Shu
          Wang, Chen Si, Xiang Shun Ying, Chong Shun, Liu Xiao Bing, Zhuo Qing Hui,
          Bian
          Shu Kui, Chen Fang, Shang Jian Zhong and Wang Wei Dong, or, collectively,
          the
          Gas (BVI) shareholders.
 
 Pursuant
          to the terms of the share exchange agreement, we issued an aggregate of
          14,361,646 shares of our series A convertible preferred stock in exchange
          for
          the 9,950,000 shares of common stock of Gas (BVI) held by the Gas (BVI)
          shareholders, which constituted all of Gas (BVI)’s capital stock. Each share of
          series A convertible preferred stock was converted automatically into one
          share
          of our common stock, par value $0.001 per share, upon the completion of
          the
          304.44-for-1 reverse stock-split of our common stock more as fully described
          in
“Reverse Stock-Split” in the section titled “Annual report Summary” of this
          annual report. Therefore, the shares of series A convertible preferred
          stock
          issued to the Gas (BVI) Shareholders were automatically converted into
          an
          aggregate of 14,361,646 shares of our common stock.
 
 As
          a
          result of the consummation of the share exchange transaction, we ceased
          being a
          shell company as such term is defined in Rule 12b-2 under the Exchange
          Act. Gas
          (BVI) is now our wholly-owned subsidiary, and Beijing Gas is now our indirectly
          wholly-owned subsidiary in the PRC.
 
 37
 The
          foregoing description of the share exchange agreement is qualified in its
          entirety by the text of the agreement, which is annexed hereto as Exhibit
          10.1.
 
 **Private
          Placement Offering of Series B Stock and Warrants**
  On
          September 7, 2006, we entered into and closed a stock purchase transaction
          with
          Vision Opportunity Master Fund, Ltd., SEI Private Trust Co. FAO - The JM
          Smucker
          Co. Master Fund, and Coronado Capital Partners LP, pursuant to which we
          issued,
          for an aggregate of $6,876,800 in gross cash proceeds, to the investors,
          an
          aggregate of 2,509,782 shares of our series B convertible preferred stock,
          and
          series A, B, J, C and D warrants to purchase shares of our common stock
          as
          described below, and to Kuhns Brothers, Inc. and its designees, an aggregate
          of
          635,822 shares of our series B convertible preferred stock, and warrants
          to
          purchase shares of our common stock as described below.
  On
          October 20, 2006, we entered into and closed a stock purchase transaction
          with
          Vision Opportunity Master Fund, Ltd., Nite Capital LP and Ijaz Malik, pursuant
          to which we issued to the investors, for an aggregate of $2,404,800 in
          gross
          cash proceeds, an aggregate of 877,664 shares of our series B convertible
          preferred stock, at $2.74 per share, and series A, B, J, C and D warrants
          as
          described below.
 
 The
          series A warrants allow their holders to purchase an aggregate of 3,854,599
          shares of our common stock at $3.84 per share. The series B warrants allow
          their
          holders to purchase an aggregate of 1,693,723 shares of our common stock
          at
          $5.48 per share. The series J warrants allow their holders to purchase
          an
          aggregate of 3,083,588 shares of our common stock at $3.01 per share. The
          series
          C warrants allow their holders to purchase an aggregate of 3,083,588 shares
          of
          our common stock at $4.22 per share. The series D warrants allow their
          holders
          to purchase an aggregate of 1,541,794 shares of our common stock at $6.03
          per
          share.
 
 The
          series A and B warrants are exercisable for a term of five years. Each
          series J
          warrant is exercisable for a period of twelve (12) months following its
          issuance. Each series C or D warrant is only exercisable once the holder
          has
          exercised his or its series J warrant, and for the same number of shares
          of
          common stock that the holder’s series J warrant was exercised for. The terms of
          the series C and D warrants are for five years following the date of issuance of
          such series C or D warrants, as applicable. *Please
          refer to “Recent Developments” in the section titled “Organization and Business
          of the Company” of this annual report for additional information regarding the
          private offerings of series B convertible preferred stock and the
          warrants.*
  The
          foregoing description of the stock purchase agreements is qualified in
          its
          entirety by the text of the agreement and amendments thereto, which are
          annexed
          hereto as Exhibits 4.1, 4.4, 4.5 and 4.6.
 
 **Registration
          Rights Agreements**
 
 In
          connection with the stock purchase agreements, we entered into registration
          rights agreements with the investors of the series B convertible preferred
          stock
          on September 7, 2006 (as amended on October 3, 2006) and October 20, 2006,
          respectively. Pursuant to these registration rights agreements, we are
          required
          to file with the SEC a "resale" registration statement on Form SB-2, providing
          for the resale of all share of our common stock issuable upon conversion
          of the
          series B convertible preferred stock and shares of our common stock issuable
          upon exercise of our warrants, and 1,314,405 shares of common stock issued
          upon
          conversion of series A convertible preferred stock issued to certain
          shareholders of Gas (BVI) pursuant to the share exchange transaction.
 
 The
          foregoing description of the registration rights agreements is qualified
          in its
          entirety by the text of the agreements, which are annexed hereto as Exhibits
          4.2
          and 4.7.
  38
 Please
          refer to “Recent Developments” under the section titled “Organization and
          Business of the Company” of this annual report for additional information
          regarding the registration rights agreement.
 
 **Lock-Up
          Agreement**
 
 Simultaneously
          and in connection with our entry into the stock purchase agreement on September
          7, 2006, we entered into a Lock-Up Agreement with the Gas (BVI) Shareholders,
          pursuant to which the Gas (BVI) Shareholders agreed to not transfer any
          of the
          shares of our common stock issuable upon conversion of the series A convertible
          preferred stock issued in the share exchange transaction described above
          during
          the period commencing on the closing date of the stock purchase agreement
          and
          expiring on the date that is the later of one year following the closing
          date of
          the stock purchase agreement or six months following the effective date
          of the
          registration statement filed by us with the SEC providing for the resale
          of the
          shares of common stock issuable upon conversion of the series A convertible
          preferred stock and exercise of any warrants; provided, however, that no
          Gas
          (BVI) Shareholder shall, during the twelve months following such period,
          sell
          more than one-twelfth of their total holdings of our common stock or series
          A
          convertible preferred stock during any one month.
 
 The
          foregoing description of the Lock-Up Agreement is qualified in its entirety
          by
          the text of the agreement, which is annexed hereto as Exhibit 4.3.
  **Placement
          Agent Compensation**
  In
          connection with the private financing transactions, Kuhns Brothers, Inc.,
          received the following compensation: (i) $80,000 cash as signing fee,
          documentation fee and purchase fee, (ii) $120,000 cash as purchase fees
          in
          connection with the purchase by Gas (BVI) of the common stock of Dolce
          Ventures,
          Inc. from certain shareholders of Dolce pursuant to a stock purchase agreement
          dated as of August 24, 2006, (iii) 10% of the total cash paid for the series
          B
          convertible preferred stock and warrants, and (iv) a warrant to purchase
          an
          aggregate of 467,153 shares of our common stock at $3.84 per share. In
          addition,
          Kuhns Brothers, Inc. is to receive 10% of the proceeds of any exercise
          of the
          warrants sold to investors of the series B convertible preferred stock.
          Upon the
          closing of the private financing transactions, a non-refundable monthly
          retainer
          of $10,000 per month will be paid to Kuhns Brothers for 24 months. Dolce
          Ventures, Inc. was the name of our company at an earlier stage of its
          development. See “Organizational History of Sino Gas” in the section of this
          annual report titled “Description of Business.”
  **Consulting
          Agreement**
 
 Pursuant
          to a Consulting Agreement dated as of August 8, 2006 that we entered into
          with
          Kuhns Brothers, Inc., Kuhns Brothers is entitled to receive an aggregate
          of
          635,822 shares of Series B Stock. Kuhns Brothers designated the following
          persons to receive a portion of these series B convertible preferred shares:
 **Name**
                  
                  **Shares**“James”
                      Tie Li
                  
                  
                  27,373Sam
                      Shoen
                  
                  
                  25,875Paul
                      Kuhns
                  
                  
                  5,175Kuhns
                      Brothers, Inc.
                  
                  
                  113,847John
                      Kuhns
                  
                  
                  56,925Mary
                      Fellows
                  
                  
                  56,925Vision
                      Opportunity Master Fund, Ltd.
                  
                  
                  286,120Belmont
                      Partners, LLC
                  
                  
                  31,791Guzov
                      Ofsink, LLC
                  
                  
                  31,791
 39
 
 **Beijing
          Chenguang Agreement**
 
 One
          of
          the selling shareholders under the Beijing Chenguang agreement described
          elsewhere in this annual report, Mr. Zhou Zhi Cheng, has been our Chief
          Operating Officer since October 19, 2006. Mr. Zhou owned 30% of the Beijing
          Chenguang stock immediately prior to the signing of the Beijing Chenguang
          Agreement. Mr. Zhou is also a shareholder and legal representative of another
          selling shareholder, Beijing Chenguang Weizhong Management Technology Consulting
          Ltd., Co., which owned 10% of the Beijing Chenguang stock immediately prior
          to
          the signing of the agreement.
 **Information
            relating to compliance with Section 16(a) of the Exchange
            Act**
 None.
 **ITEM
          13.**  **EXHIBITS**
  Exhibit
                          No.
                      Description
                          of Exhibit3.1
                      Articles
                          of Incorporation, as amended and corrected.*3.2
                      Bylaws.*3.3
                      Specimen
                          of Common Stock certificate.*3.4
                      Certificate
                          of Designations authorizing the Series A Convertible Preferred
                          Stock.*3.5
                      Certificate
                          of Designations authorizing the Series B Convertible Preferred
                          Stock.*3.6
                      Amended
                          and Restated Certificate of Designations authorizing the
                          Series B
                          Convertible Preferred Stock.*
 4.1
                      Form
                          of Series B Stock Purchase Agreement, dated as of September
                          7, 2006,
                          by and among, Dolce Ventures, Inc., Vision Opportunity
                          Master Fund, Ltd.
                          and each of the other investors party thereto.*4.2
                      Form
                          of Registration Rights Agreement, dated as of September 7,
                          2006, by
                          and between, Dolce Ventures, Inc., Vision Opportunity Master
                          Fund,
                          Ltd.*4.3
                      Form
                          of Lock-Up Agreement, dated as of September 7, 2006, by and
                          among,
                          Dolce Ventures, Inc., Leading King Investment Limited,
                          Eloten Group, Ltd.,
                          Cheng Fang and certain other parties named therein.*4.4
                      Form
                          of Series A Warrant*4.5
                      Form
                          of Series B Warrant*4.6
                      Form
                          of Series C Warrant*4.7
                      Form
                          of Series D Warrant*
 4.8
                      Form
                          of Series J Warrant*4.9
                      Form
                          of Warrant issued to Kuhns
                          Brothers*
 40
  Exhibit
                      No.
                    Description
                        of Exhibit10.1
                    Form
                        of Share Exchange Agreement dated as of September 7, 2006,
                        by and between,
                        Dolce Ventures, Inc., Yu-chuan Liu, and each of the other
                        parties named
                        therein.*10.2
                    Form
                        of Stock Purchase Agreement dated as of August 24, 2006,
                        by and between,
                        Gas Investment China Co., Ltd. and each of the other parties
                        named
                        therein.*10.3
                    Form
                        of Consulting Agreement dated August 8, 2006, by and between
                        Kuhns
                        Brothers, Inc. and Dolce Ventures, Inc.*10.4
                    Form
                        of Engagement Letter dated May 22, 2006, by and between,
                        Beijing Zhong Ran
                        Wei Ye Gas Co., Ltd. and Kuhns Brothers, Inc.*10.5
                    Form
                        of Escrow Agreement dated September 7, 2006, by and between,
                        Gas
                        Investment China Co., Ltd., Vision Opportunity Master Fund,
                        Ltd. and
                        Kramer Levin Naftalis & Frankel LLP.*16.1
                    Letter
                        dated September 7, 2006 from Dolce Ventures, Inc. to Robison,
                        Hill &
                        Co.*16.2
                    Letter
                        dated September 12, 2006 from Robison, Hill & Co. to the
                        SEC.*21.1
                    List
                        of Subsidiaries23.1
                    Consent
                      of Samuel H.
                      Wong & Co., LLP.*31.1
                    Certification
                        of Chief Executive Officer pursuant to Section 302 of the
                        Sarbanes-Oxley
                        Act of 2002.31.2
                    Certification
                        of Chief Financial Officer pursuant to Section 302 of the
                        Sarbanes-Oxley
                        Act of 2002.32.1
                    Certification
                        of Chief Executive Officer and Chief Financial Officer pursuant
                        to 18 U.S.C. Section 1350, as adopted pursuant to Section
                        906 of the
                        Sarbanes-Oxley Act of
                        2002.
  **Item
          14.**  **Principal
          Accountant Fees and Services**
  Aggregate
              fees billed by the Company's current principal accountants, Samuel H.
              Wong & Co., LLP, for audit services related to the most recent fiscal
              year, and for other professional services billed in the most recent fiscal
              year, were as follows:
 FISCAL
                          2006Audit
                          Fees (1)
                      $100,000Audit-Related
                          Fees
                      --Tax
                          Fees (2)
                      --All
                          Other Fees
                      --Total
                      $100,000
 (1)
                      Comprised
                          of the audit of the Company's  annual  financial 
                          statements  and  reviews of the Company's quarterly 
                          financial  statements,  as well as consents related to and
                          reviews of other documents filed with the Securities and
                          Exchange
                          Commission.
  (2)
                    Comprised 
                        of  preparation  of all federal and
                        state corporate income tax returns for the Company and its
                        subsidiaries.
  Under
              the
              Sarbanes-Oxley Act of 2002, all audit and non-audit services performed
              by the
              Company's independent  accountants must now be approved in
 advance
              by the Audit  Committee  to assure that such  services  do
              not impair the  accountants' independence  from the Company.  The
              Company  does not have an Audit  Committee; therefore,  the Board
              of Directors  reviews and approves  audit and  permissible
              non-audit  services  performed by Samuel H. Wong & Co.,
              L.L.P., as well as the fees charged by them for such services.
  41
 SIGNATURES
 
 Pursuant
              to the requirements of Section 13 or 15(d) of the Securities Exchange
              Act of
              1934, the Registrant has duly caused this Report to be signed on its
              behalf by
              the undersigned, thereunto duly authorized.
  **SINO
                        GAS INTERNATIONAL HOLDINGS, INC.**Date:
                      March 30, 2007
                    *By:*
                    */s/
                        Liu Yu Chuan**Liu
                        Yu Chuan**Chairman
                        of the Board, Director,*
                      *President
                        and Chief Executive Officer*
  Pursuant
              to the requirements of Section 13 or 15(d) of the Securities Exchange
              Act of
              1934, this Report has been signed below by the following persons on
              behalf of
              the Registrant and in the capacities and on the dates indicated.
  Date:
                      March 30, 2007
                    
                    */s/
                        Liu Yu Chuan**Liu
                      Yu Chuan**Chairman
                        of the Board, Director*
 Date:
                        March 30, 2007
                      
                      */s/
                            John D. Kuhns**John
                        D. Kuhns**Director*
 Date:
                          March 30, 2007
                        
                        */s/
                              Chen Fang**Chen
                            Fang**Director
                              and Chief Financial
                              Officer*
 Date:
                            March 30, 2007
                          
                          */s/
                              Chen Guo Wei**Chen
                            Guo Wei**Director*
 Date:
                              March 30, 2007
                            
                            */s/
                                Sun Quan Dong**Sun
                              Quan Dong**Director*
  42


**SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 **INDEX
            TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006, AND 2005**
  **Sino
            Gas International Holdings, Inc.**
  CONTENTS
                  
                  
                  PAGESREPORT
                        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  
                  
                  F-1CONSOLIDATED
                      BALANCE SHEETS
                  
                  
                  F-2
                      - F-3CONSOLIDATED
                      STATEMENTS OF INCOME
                  
                  
                  F-4CONSOLIDATED
                      STATEMENTS OF STOCKHOLDERS’ EQUITY
                  
                  
                  F-5CONSOLIDATED
                      STATEMENTS OF CASH FLOWS
                  
                  
                  F-6NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS
                  
                  
                  F-7
                      - F-26
  43
 
 **REPORT
            OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To:
                  Board
                      of Directors and Stockholders of
 Sino
            Gas International Holdings, Inc.
 
 We
            have audited the accompanying consolidated balance sheets of Sino Gas
            International Holdings, Inc. as of December 31, 2006 and 2005, and the
            related
            consolidated statements of income, stockholders' equity, and cash flows
            for the
            years then ended. These financial statements are the responsibility of
            the
            Company's management. Our responsibility is to express an opinion on
            these
            financial statements based on our audit.
 
 We
            conducted our audit in accordance with auditing standards of the Public
            Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audit to obtain reasonable assurance about whether the
            financial
            statements are free of material misstatement. An audit includes examining,
            on a
            test basis, evidence supporting the amounts and disclosures in the financial
            statements. An audit also includes assessing the accounting principles
            used and
            significant estimates made by management, as well as evaluating the overall
            financial statement presentation. We believe that our audit provides
            a
            reasonable basis for our opinion.
 
 In
            our opinion, the financial statements referred to above present fairly,
            in all
            material respects, the financial position of Sino Gas International Holdings,
            Inc. as of December 31, 2006 and 2005, and the results of its operations,
            and
            its cash flows for the years then ended in conformity with accounting
            principles
            generally accepted in the United States of America.
 
 South San Francisco,
                    California
                  Samuel
                      H. Wong & Co.,
                      LLPMarch 30, 2007
                  Certified
                      Public
                      Accountants
  F-1
 
 **SINO
                      GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                      BALANCE SHEETS****AS
                      AT DECEMBER 31, 2006 AND 2005****(STATED
                      IN US DOLLARS)**
 
 Note
                  
                  2006
                  
                  2005**Assets***Current
                      assets*Cash
                      and cash equivalents
                  
                  
                  
                  
                  $
                  3,638,673
                  
                  $
                  571,194Pledged
                      bank deposits
                  
                  
                  3
                  
                  
                  3,124,541
                  
                  
                  -Notes
                      receivable
                  
                  
                  
                  
                  
                  477,390
                  
                  
                  -Accounts
                      receivable
                  
                  
                  4
                  
                  
                  6,534,740
                  
                  
                  7,770,168Advances
                      to suppliers
                  
                  
                  
                  
                  
                  68,309
                  
                  
                  372,442Prepaid
                      expenses
                  
                  
                  
                  
                  
                  141,878
                  
                  
                  12,097Other
                      receivables
                  
                  
                  5
                  
                  
                  1,263,800
                  
                  
                  437,922Total
                      current assets
                  
                  
                  
                  
                  $
                  15,249,331
                  
                  $
                  9,163,823*Long
                      term assets*Investments
                      in equity securities
                  
                  
                  
                  
                  $
                  2,939,029
                  
                  $
                  2,443,378Plant
                      and equipment, net
                  
                  
                  6
                  
                  
                  10,608,530
                  
                  
                  3,200,682Construction
                      of pipelines in progress
                  
                  
                  
                  
                  
                  4,628,076
                  
                  
                  3,071,497Intangible
                      assets
                  
                  
                  7
                  
                  
                  457,830
                  
                  
                  437,265Total
                      long term assets
                  
                  
                  
                  
                  $
                  18,633,465
                  
                  $
                  9,152,822**Total
                      Assets**
                  
                  
                  
                  
                  $
                  33,882,796
                  
                  $
                  18,316,645**Liabilities
                      and Shareholders’ Equities***Current
                      liabilities*Short-term
                      bank loans
                  
                  
                  8
                  
                  $
                  2,430,445
                  
                  $
                  -Accounts
                      payable
                  
                  
                  
                  
                  
                  3,891,388
                  
                  
                  3,090,870Other
                      payables
                  
                  
                  9
                  
                  
                  1,790,500
                  
                  
                  2,264,965Unearned
                      revenue
                  
                  
                  
                  
                  
                  37,760
                  
                  
                  133,035Accrued
                      liabilities
                  
                  
                  
                  
                  
                  325,922
                  
                  
                  201,384Total
                      current liabilities
                  
                  
                  
                  
                  $
                  8,476,015
                  
                  $
                  5,690,254**Total
                      Liabilities**
                  
                  
                  
                  
                  $
                  8,476,015
                  
                  $
                  5,690,254
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements
  F-2
 
 **SINO
                      GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                      BALANCE SHEETS (Continued)****AS
                      AT DECEMBER 31, 2006 AND 2005****(STATED
                      IN US DOLLARS)**
 
 Note
                  
                  2006
                  
                  2005**Stockholders’
                      Equity**Preferred
                      stock A US$0.001 par value; 20,000,000 authorized; nil and
                      nil issued and
                      outstanding as of December 31, 2006 and 2005 respectively
                  
                  
                  10
                  
                  $
                  -
                  
                  $
                  -Preferred
                      stock B US$0.001 par value; 5,000,000 authorized; 4,023,268
                      and nil issued
                      and outstanding as of December 31, 2006 and 2005
                      respectively
                  
                  
                  10
                  
                  
                  4,023
                  
                  
                  -Common
                      stock US$0.001 par value; 250,000,000 authorized; 14,692,647
                      and
                      14,361,646 issued and outstanding as of December 31, 2006 and
                      2005
                      respectively
                  
                  
                  10
                  
                  
                  14,693
                  
                  
                  14,362Additional
                      paid-in-capital
                  
                  
                  
                  
                  
                  12,069,176
                  
                  
                  4,812,650Statutory
                      reserves
                  
                  
                  
                  
                  
                  2,025,022
                  
                  
                  1,219,720Retained
                      earnings
                  
                  
                  
                  
                  
                  10,469,571
                  
                  
                  6,311,794Accumulated
                      other comprehensiveIncome
                  
                  
                  
                  
                  
                  824,296
                  
                  
                  267,865$
                  25,406,781
                  
                  $
                  12,626,391**Total
                      Liabilities and Stockholders’ Equity**
                  $
                  33,882,796
                  
                  $
                  18,316,645
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements
  F-3
 
 **SINO
                      GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                      STATEMENTS OF INCOME****FOR
                      THE YEAR ENDED DECEMBER 31, 2006 AND 2005****(STATED
                      IN US DOLLARS)**
  Note
                  
                  2006
                  
                  2005Net
                      revenues
                  
                  
                  13
                  
                  $
                  10,870,718
                  
                  $
                  10,907,289Cost
                      of revenues
                  
                  
                  
                  
                  
                  (4,389,142
                  )
                  
                  (4,132,391
                  )Gross
                      profit
                  
                  
                  
                  
                  $
                  6,481,576
                  
                  $
                  6,774,898Operating
                      expensesSelling
                      and marketing expenses
                  
                  
                  
                  
                  
                  (95,779
                  )
                  
                  (99,768
                  )General
                      and administrative expenses
                  
                  
                  
                  
                  
                  (1,155,849
                  )
                  
                  (874,181
                  )Income
                      from continuing operations
                  
                  
                  
                  
                  $
                  5,229,948
                  
                  $
                  5,800,949Finance
                      costs, net
                  
                  
                  11
                  
                  
                  (78,237
                  )
                  
                  (2,486
                  )Other
                      income
                  
                  
                  
                  
                  
                  438,186
                  
                  
                  437,750Other
                      expenses
                  
                  
                  
                  
                  
                  (856
                  )
                  
                  (1,865
                  )Income
                      before taxation
                  
                  
                  
                  
                  $
                  5,589,041
                  
                  $
                  6,234,348Income
                      tax
                  
                  
                  12
                  
                  
                  (423,284
                  )
                  
                  (531,915
                  )Net
                      income
                  
                  
                  
                  
                  $
                  5,165,757
                  
                  $
                  5,702,433
 
 Net
                      income per share,Basic
                  
                  $
                  0.36
                  
                  $
                  0.40Diluted
                  
                  
                  0.32
                  
                  
                  0.40Weighted
                      average shares outstanding of common stock,Basic
                  
                  
                  14,471,980
                  
                  
                  14,361,646Diluted
                  
                  
                  16,085,778
                  
                  
                  14,361,646
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements
  F-4
 
 **SINO
                      GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                      STATEMENTS OF STOCKHOLDERS’ EQUITY****FOR
                      THE YEAR ENDED DECEMBER 31, 2006 AND 2005****(STATED
                      IN US DOLLARS)**
 
 AccumulatedAdditional
                  
                  
                  
                  
                  
                  otherPreferred
                  
                  stock
                      B
                  
                  Common
                  
                  stock
                  
                  paid-in-
                  
                  Statutory
                  
                  Retained
                  
                  comprehensiveshares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  capital
                  
                  reserves
                  
                  earnings
                  
                  income
                  
                  TotalBalance,
                      January 1, 2005
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  14,361,646
                  
                  $
                  14,362
                  
                  
                  4,812,650
                  
                  
                  333,010
                  
                  
                  1,496,071
                  
                  
                  251
                  
                  
                  6,656,344Net
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,702,433
                  
                  
                  
                  
                  
                  5,702,433Appropriations
                      to surplusreserves
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  886,710
                  
                  
                  (886,710
                  )Foreign
                      currency translationadjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  267,614Balance,
                      December 31, 2005
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  14,361,646
                  
                  $
                  14,362
                  
                  
                  4,812,650
                  
                  
                  1,219,720
                  
                  
                  6,311,794
                  
                  
                  267,865
                  
                  
                  12,626,391Balance,
                      January 1, 2006
                  
                  
                  -
                  
                  $
                  -
                  
                  
                  14,361,646
                  
                  $
                  14,362
                  
                  
                  4,812,650
                  
                  
                  1,219,720
                  
                  
                  6,311,794
                  
                  
                  267,865
                  
                  
                  12,626,391Net
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,165,757
                  
                  
                  
                  
                  
                  5,165,757Reverse
                      acquisition
                  
                  
                  
                  
                  
                  
                  
                  
                  331,001
                  
                  
                  331
                  
                  
                  
                  
                  
                  
                  
                  
                  (202,678
                  )
                  
                  
                  
                  
                  (202,347
                  )Issue
                      of stock and warrant
                  
                  
                  4,023,268
                  
                  
                  4,023
                  
                  
                  
                  
                  
                  
                  
                  
                  7,256,526
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7,260,549Appropriations
                      to surplusreserves
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  805,302
                  
                  
                  (805,302
                  )Foreign
                      currency translationadjustment
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  556,431
                  
                  
                  556,431Balance,
                      December 31, 2006
                  
                  
                  4,023,268
                  
                  $
                  4,023
                  
                  
                  14,692,647
                  
                  $
                  14,693
                  
                  
                  12,069,176
                  
                  
                  2,025,022
                  
                  
                  10,469,571
                  
                  
                  824,296
                  
                  
                  25,406,781
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements
  F-5
 
 **SINO
                      GAS INTERNATIONAL HOLDINGS, INC.****CONSOLIDATED
                      STATEMENTS OF CASH FLOWS****FOR
                      THE YEAR ENDED DECEMBER 31, 2006 AND 2005****(STATED
                      IN US DOLLARS)**
 
 2006
                  
                  2005Cash
                      flows from operating activitiesNet
                      incomes
                  
                  $
                  5,165,757
                  
                  $
                  5,702,433Depreciation
                      and amortization
                  
                  
                  155,374
                  
                  
                  131,865Equity
                      in investments
                  
                  
                  (495,651
                  )
                  
                  (404,436
                  )Decrease/(increase)
                      in accounts and other receivables
                  
                  
                  106,512
                  
                  
                  (6,139,281
                  )Increase
                      in accounts and other payables
                  
                  
                  355,316
                  
                  
                  3,564,302Net
                      cash provided by operating activities
                  
                  $
                  5,287,308
                  
                  $
                  2,854,883Cash
                      flows from investing activitiesPurchase
                      of plant and equipment
                  
                  $
                  (7,563,222
                  )
                  $
                  (1,065,108
                  )Pledge
                      deposits
                  
                  
                  (3,124,541
                  )
                  
                  -Payment
                      for the construction in progress
                  
                  
                  (1,556,579
                  )
                  
                  (1,537,774
                  )Payment
                      of cost of intangible assets
                  
                  
                  (20,565
                  )
                  
                  (365,145
                  )Net
                      cash used in investing activities
                  
                  $
                  (12,264,907
                  )
                  $
                  (2,968,027
                  )Cash
                      flows from financing activitiesIssue
                      of common stock
                  
                  
                  7,430,965
                  
                  
                  -Bank
                      borrowings, net of repayment
                  
                  
                  2,430,445
                  
                  
                  -Net
                      cash provided by financing activities
                  
                  $
                  9,861,410
                  
                  $
                  -Net
                      in cash and cash equivalents sourced/(used)
                  
                  
                  2,883,811
                  
                  
                  (113,144
                  )Effect
                      of foreign currency translation on cashand
                      cash equivalents
                  
                  
                  183,668
                  
                  
                  15,992Cash
                      and cash equivalents-beginning of year
                  
                  
                  571,194
                  
                  
                  668,346Cash
                      and cash equivalents-end of year
                  
                  $
                  3,638,673
                  
                  $
                  571,194
 Supplementary
                      cash flow information:Interest
                      received
                  
                  $
                  3,268
                  
                  $
                  3,484Interest
                      paid
                  
                  
                  9,522
                  
                  
                  -
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements
  F-6
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **1.**
                  **ORGANIZATION
                      AND PRINCIPAL ACTIVITIES**
 
 Sino
            Gas International Holdings, Inc. (“the Company”) was incorporated under the laws
            of the State of Utah on August 19, 1983 as Evica Resources, Inc. On April
            5,
            1984, the Company changed its name to American Arms, Inc. and commenced
            the
            manufacture and sale of weapons and laser sights. On April 12, 1988,
            the Company
            changed its name to American Industries, Inc., as the Company was no
            longer
            engaged in the manufacturing and sale of weapons and laser sights. American
            Industries, Inc. was in the business of providing room safes for hotel
            rooms.
 
 On
            February 19, 2002, the Company formed a subsidiary corporation named
            Pegasus
            Tel, Inc. under the laws of the State of Delaware to enter into the
            telecommunications business. On March 28, 2002, Pegasus Tel, Inc. merged
            with
            Pegasus Communications, Inc., a New York corporation, with Pegasus Tel,
            Inc. as
            the surviving entity. On January 14, 2002, the Company purchased payphone
            assets
            consisting of 29 payphones and associated equipment from the Margaretville
            Telephone Company for $11,600.00. On May 21, 2002, the Company changed
            its name
            to Dolce Ventures, Inc.
 
 On
            September 7, 2006, the Company consummated a share exchange transaction
            with the
            shareholders of Gas Investment China Co., Ltd (“Gas (BVI)”), whereby the Company
            exchanged 14,361,646 shares of its series A convertible preferred stock,
            par
            value $0.001 per share (which have been automatically converted into
            Common
            Stock on November 17, 2006) for all of the issued and outstanding stock
            of Gas
            (BVI) held by the shareholders of Gas (BVI). As a result of the share
            exchange
            transaction, Gas (BVI) became the wholly-owned subsidiary of the Company,
            and
            Beijing Zhong Ran Wei Ye Gas Co. Ltd. (“Beijing Gas”), a wholly owned subsidiary
            of Gas (BVI), became a indirectly wholly-owned subsidiary of the Company.
            In
            addition, as a result of the share exchange transaction, the Company
            ceased
            being a shell company as such term is defined in Rule 12b-2 under the
            Exchange
            Act and is now engaged in the development of natural gas distribution
            systems
            and the distribution and supply of natural gas in the PRC.
 
 On
            November 17, 2006, the Company changed its name to Sino Gas International
            Holdings, Inc., announced its new trading symbol, “SGAS,” and effected a
            304.44-for-1 reverse stock split.
 
 The
            Company consummated two private financing transactions on September 7,
            2006 and
            October 20, 2006, respectively, in which it issued an aggregate of 4,023,268
            shares of its series B convertible preferred stock, and warrants to purchase
            an
            aggregate of 13,257,293 shares of its common stock, in exchange for $9,281,600
            gross cash proceeds. The two private financing transactions were consummated
            on
            substantially the same terms and conditions. The share exchange transaction
            and
            the Company’s private financing transactions are collectively referred to
            hereafter as the “reverse merger transaction”.
 
 As
            a result of the consummation of the reverse merger transaction, the Company
            is
            now engaged in the development of natural gas distribution systems in
            small- and
            medium-sized cities in the PRC, as well as the distribution of natural
            gas to
            residential, commercial and industrial customers in the PRC, through
            its
            indirectly-owned subsidiaries in the PRC, Beijing Gas and its subsidiaries.
            The
            Company still own Pegasus Tel, but plans to spin it off in the form of
            a
            dividend to its shareholders of record as of August 30, 2006.
  F-7
 
 **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **1.**
                  **ORGANIZATION
                      AND PRINCIPAL ACTIVITIES
                      (CONT’D)**
 
 The
            Company owns and operates 23 natural gas distribution systems serving
            approximately 63,000 residential and eight commercial and industrial
            customers.
            The Company’s facilities include approximately 700 kilometers of pipeline and
            delivery networks with a designed daily capacity of approximately 70,000
            cubic
            meters of natural gas.
 
 *Basis
            of Presentation*
 
 The
            share exchange transaction on September 7, 2006 has been accounted for
            as a
            capital-raising transaction of the Company whereby the historical financial
            statements and operations of GAS(BVI) are consolidated using historical
            carrying
            amounts. The 331,001 shares of the Company outstanding prior to the stock
            exchange transaction were accounted for at the net book value at the
            time of the
            transaction. The accompanying consolidated financial statements reflect
            the
            capital-raising transaction of the Company as if the transaction occurred
            as of
            the beginning of the first period presented.
  The
            Company’s consolidated financial statements have been prepared in accordance
            with generally accepted accounting principles in the United States of
            America
            (“U.S. GAAP”).
  This
            basis of accounting differs in certain material respects from that used
            for the
            preparation of the books of account of the Company’s principal subsidiaries,
            which are prepared in accordance with the accounting principles and the
            relevant
            financial regulations applicable to enterprises
 with
            limited liabilities established in the PRC (“PRC GAAP”) or in the accounting
            standards used in the places of their domicile. The accompanying consolidated
            financial statements reflect necessary adjustments not recorded in the
            books of
            account of the Company’s subsidiaries to present them in conformity with U.S.
            GAAP.
 
 *Recent
            Acquisitions*
 
 On
            December 13, 2006, Beijing Gas entered into a stock transfer agreement
            with the
            shareholders of Zhangjiakou City Xiahuayuan Jinli Gas Ltd. Co., a limited
            liability company organized under the laws of the PRC (“Xiahuayuan Jinli”),
            under which Beijing Gas acquired all the capital stock of Xiahuayuan
            Jinli for a
            purchase price of RMB two million (or approximately $258,000) in cash.
            Xiahuayuan Jinli is now a wholly-owned subsidiary of Beijing Gas. Xiahuayuan
            Jinli is a small regional natural gas distributor in Hebei Province,
            PRC.
 
 Also
            on December 13, 2006, Beijing Gas entered into a stock transfer agreement
            with
            Yuxian Jinli Gas Ltd. Co. (“Yuxian Jinli”), a limited liability company
            organized under the laws of the PRC, under which Beijing Gas acquired
            all the
            capital stock of Yuxian Jinli for a purchase price
 
 of
            RMB9.5 million (or approximately $1,227,000) in cash. All the capital
            stock of
            Xiahuayuan Jinli and that of Yuxian Jinli were held by the same shareholders
            immediately prior to the signing of these agreements. Yuxian Jinli is
            now a
            wholly-owned subsidiary of Beijing Gas. Yuxian Jinli is a small regional
            natural
            gas distributor in Hebei Province, PRC.
  F-8
 
 **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING
                      POLICIES**
 
 *(A)*
                  *Method
                      of Accounting*
 
 The
            Company maintains its general ledger and journals with the accrual method
            accounting for financial reporting purposes. The financial statements
            and note
            are representations of management. Accounting policies adopted by the
            Company
            conform to generally accepted accounting principles in the United States
            of
            America and have been consistently applied in the presentation of financial
            statements, which are compiled on the accrual basis of accounting.
 
 *(B)*
                  *Use
                      of Estimates*
 
 In
            preparing of the consolidated financial statements in conformity with
            accounting
            principles generally accepted in the United States of America, management
            makes
            estimates and assumptions that affect the reported amounts of assets
            and
            liabilities and disclosures of contingent assets and liabilities at the
            dates of
            the consolidated financial statements, as well as the reported amounts
            of
            revenues and expenses during the reporting year. These accounts and estimates
            include, but are not limited to, the valuation of accounts receivable,
            inventories, deferred income taxes and the estimation on useful lives
            of plant
            and machinery. Actual results could differ from those estimates.
 
 *(C)*
                  *Economic
                      and Political Risks*
 
 The
            Company’s operations are conducted in the PRC. Accordingly, the Company’s
            business, financial condition and results of operations may be influenced
            by the
            political, economic and legal environment in the PRC, and by the general
            state
            of the PRC economy.
 
 The
            Company’s operations in the PRC are subject to special 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 environment and foreign currency exchange.
            The
            Company’s results may be adversely affected by changes in the political and
            social conditions in the PRC, and by changes in governmental policies
            with
            respect to laws and regulations, anti-inflationary measures, currency
            conversion, remittances abroad, and rates and methods of taxation, among
            other
            things.
  F-9
 
 **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (CONT’D)**
 
 *(D)*
                  *Principles
                      of Consolidation*
 
 The
            consolidated financial statements include the accounts of the Company
            and its
            subsidiaries (“the Group”). Significant inter-company transactions have been
            eliminated in consolidation. Investments in which the company has a 20
            percent
            to 50 percent voting interest and where the company exercises significant
            influence over the investor are accounted for using the equity
            method.
 
 As
            of December 31, 2006, the particulars of the subsidiaries are as
            follows:
  Name
                      of Company
                  
                  Place
                      of Incorporation
                  
                  Date
                      of Incorporation
                  
                  Beneficiary
                      interest %
                  
                  Equity
                    Interest
                      %
                  
                  Registered
                    CapitalGAS
                      Investment China Co., Ltd.
                  
                  The
                      BritishVirgin
                      Islands
                  
                  6/19/2003
                  
                  100
                  
                  100
                  
                  USD10,000,000Pegasus
                      Tel, Inc.
                  
                  State
                      ofDelaware,USD
                  
                  2/19/2002
                  
                  100
                  
                  100
                  
                  USD
                      1,000Beijing
                      Zhong Ran Wei Ye Gas Co., Ltd
                  
                  PRC
                  
                  8/29/2001
                  
                  100
                  
                  100
                  
                  RMB
                      94,448,517Ningjin
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  12/3/2003
                  
                  100
                  
                  95
                  
                  RMB
                      3,000,000Jinzhou
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  7/19/2004
                  
                  100
                  
                  95
                  
                  RMB
                      5,000,000Xingtang
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  2/18/2004
                  
                  100
                  
                  95
                  
                  RMB
                      3,000,000Linzhang
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  7/6/2005
                  
                  100
                  
                  85
                  
                  RMB
                      1,000,000Anping
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  8/4/2005
                  
                  100
                  
                  95
                  
                  RMB
                      5,000,000Wuqiao
                      Gas Co., Ltd
                  
                  PRC
                  
                  6/30/2004
                  
                  100
                  
                  95
                  
                  RMB
                      2,000,000Yutian
                      Zhongran Weiye Gas Co.,Ltd
                  
                  PRC
                  
                  12/19/2003
                  
                  100
                  
                  90
                  
                  RMB
                      3,000,000Sihong
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  12/3/2004
                  
                  100
                  
                  95
                  
                  RMB10,000,000Langfang
                      Development Region WeiyeDangerous
                      Goods Transportation Co., Ltd
                  
                  PRC
                  
                  3/22/2005
                  
                  100
                  
                  95
                  
                  RMB
                      1,000,000Peixian
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  8/22/2005
                  
                  100
                  
                  90
                  
                  RMB
                      5,000,000Sishui
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  12/22/2004
                  
                  100
                  
                  95
                  
                  RMB
                      3,000,000LongyaoZhongranWeiyeGasCo.,Ltd
                  
                  PRC
                  
                  10/13/2005
                  
                  100
                  
                  95
                  
                  RMB
                      3,000,000Shenzhou
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  12/23/2005
                  
                  100
                  
                  95
                  
                  RMB
                      3,000,000Hengshui
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  12/20/2005
                  
                  100
                  
                  95
                  
                  RMB
                      3,000,000Changli
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  12/8/2006
                  
                  100
                  
                  95
                  
                  RMB
                      3,000,000Yuxian
                      Jinli Gas Co., Ltd
                  
                  PRC
                  
                  11/8/2005
                  
                  100
                  
                  100
                  
                  RMB
                      9,500,000Zhangjiakou
                      City Xiahuayuan Jinli GasCo.,
                      Ltd
                  
                  PRC
                  
                  9/30/2005
                  
                  100
                  
                  100
                  
                  RMB
                      2,000,000
  F-10
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (CONT’D)**
 
 *(E)*
                  *Cash
                      and Cash Equivalents*
 
 The
            Company considers all cash and other highly liquid investments with initial
            maturities of three months or less to be cash equivalents.
 
 *(F)*
                  *Accounts
                      and Other Receivable*
 
 Accounts
            and other receivable are recorded at net realizable value consisting
            of the
            carrying amount less an allowance for uncollectible accounts, as needed.
            The
            Company extends unsecured credit to customers in the normal course of
            business
            and does not accrue interest on trade accounts receivable.
 
 *(G)*
                  *Advances
                      to Suppliers*
 
 Advances
            to suppliers represent the cash paid in advance for purchasing raw materials.
            The advances to suppliers are interest free and unsecured.
 
 *(H)*
                  *Investments
                      in Equity Securities*
 
 The
            consolidated statement of income includes the Group's share of the
            post-acquisition results of its associate for the year. In the consolidated
            balance sheet, investments in equity securities are stated at the Group's
            share
            of the net assets of the associates plus the premium paid less any discount
            on
            acquisition in so far as it has not already been amortized to the statement
            of
            income, less any identified impairment loss.
 
 *Portion
                      of**Nominal**Name
                      of*
                  
                  *Place*
                  
                  *Form
                      of*
                  
                  
                  
                  *Value
                      of**Associate*
                  
                  *of*
                  
                  *Business*
                  
                  *Registered*
                  
                  *Registered*
                  
                  *Principal**Company*
                  
                  *Registration*
                  
                  *Structure*
                  
                  *Capital*
                  
                  *Capital*
                  
                  *Activities*Beijing
                      Zhongran Xiangke Oil Gas Technology Co. Ltd
                  
                  PRC
                  
                  Sino-foreign
                      equity joint venture
                  
                  RMB
                    20,000,000
                  
                  40
                  
                  Trading
                      of natural gas and gas pipeline
                      construction
 
 Beijing
            Zhongran Xiangke Oil Gas Technology Co. Ltd is the Group's 40% owned
            joint
            Venture company and is principally engaged in sale of compressed natural
            gas to
            domestic households and industrial around sub-urban areas of Beijing
            and part of
            sub-urban areas in Hebei Province and Tianjin.
  F-11
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (CONT’D)**
 
 *(I)*
                  *Accounting
                      for the Impairment of Long-Lived
                      Assets*
 
 The
            long-lived assets held and used by the Company are reviewed for impairment
            whenever events or changes in circumstances indicate that the carrying
            amount of
            assets may not be recoverable. It is reasonably possible that these assets
            could
            become impaired as a result of technology or other industry changes.
            Determination of recoverability of assets to be held and used is by comparing
            the carrying amount of an asset to future net undiscounted cash flows
            to be
            generated by the assets.
 
 If
            such assets are considered to be impaired, the impairment to be recognized
            is
            measured by the amount by which the carrying amount of the assets exceeds
            the
            fair value of the assets. Assets to be disposed of are reported at the
            lower of
            the carrying amount or fair value less costs to sell.
 
 During
            the reporting year, there was no impairment loss.
 
 *(J)*
                  *Plant
                      and Equipment*
 
 Plant
            and equipment, other than construction in progress, are stated at cost
            less
            depreciation and amortization and accumulated impairment loss.
 
 Plant
            and equipment are carried at cost less accumulated depreciation. Depreciation
            is
            provided over their estimated useful lives, using the straight-line method.
            Estimated useful lives of the plant and equipment are as follows:
 
 Gas
                      Pipelines
                  
                  
                  25
                      yearsMotor
                      Vehicles
                  
                  
                  10
                      yearsMachinery
                      & Equipment
                  
                  
                  20
                      yearsBuildings
                  
                  
                  25
                      yearsLeasehold
                      Improvements
                  
                  
                  25
                      yearsOffice
                      Equipment
                  
                  
                  8
                      years
 
 The
            cost and related accumulated depreciation of assets sold or otherwise
            retired
            are eliminated from the accounts and any gain or loss is included in
            the
            statement of income. The cost of maintenance and repairs is charged to
            income as
            incurred, whereas significant renewals and betterments are capitalized.
 
 *(K)*
                  *Intangible
                      Assets*
 
 Intangible
            assets, are stated at cost less amortization and accumulated impairment
            loss.
            Amortization is provided over their estimated useful lives, using the
            straight-line method. Estimated useful lives of the intangibles are as
            follows:
 
 Land
                      use rights
                  
                  
                  40
                      - 50 yearsFranchises
                  
                  
                  30
                      yearsOther
                      intangibles
                  
                  
                  3
                      years
  F-12
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (CONT’D)**
 
 *(L)*
                  *Construction
                      of pipelines in progress*
 
 Construction
            of pipelines in progress represents the cost of constructing pipelines
            and is
            stated at cost. Costs comprise direct and indirect incremental costs
            of
            acquisition or construction. Completed items are transferred from construction
            in progress to gas pipelines of fixed assets when they are put in service.
            The
            major cost of construction relates to construction materials, direct
            labor wages
            and other overhead. Construction of pipeline, through which to distribute
            natural gas, is one of the Company’s principal businesses. The Company builds
            city main pipeline network and branch pipeline network to make gas connection
            to
            resident users, industrial, and commercial users, with the objective
            of
            generating revenue on gas connection and gas usage fees revenue from
            these
            customers. As at December 31, 2006, the pipelines under construction
            include
            mainly the projects in several cities of Hebei and Jiangsu province,
            and in
            Beijing. These projects, once completed, will significantly increase
            the gas
            supply capacity. Capital commitments in respect of these projects amounted
            to
            approximately $5 million at December 31, 2006 *.*
 
 *(M)*
                  *Unearned
                      Revenue*
 
 Unearned
            revenue represents prepayments by customers for gas purchases and advance
            payments on construction and installation of pipeline contracts. The
            Company
            records such prepayment as unearned revenue when the payments are
            received.
 
 *(N)*
                  *Financial
                      Instruments*
 
 The
            carrying amounts of all financial instruments are equal to the approximate
            fair
            value. The carrying amounts of cash, accounts receivable, accounts payable
            and
            accrued liabilities are approximately equivalent to the fair value of
            these
            short-term nature of tems. The carrying amounts of borrowings approximate
            the
            fair value based on the Company’s expected borrowing rate for debt with similar
            remaining maturities and comparable risk.
 
 *(O)*
                  *Foreign
                      Currency Translation*
 
 The
            accompanying consolidated financial statements are presented in United
            States
            dollars. The functional currency of the Company is the Renminbi (RMB).
            The
            consolidated financial statements are translated into United States dollars
            from
            RMB at year-end exchange rates as to assets and liabilities and average
            exchange
            rates as to revenues and expenses. Capital accounts are translated at
            their
            historical exchange rates when the capital transactions occurred.
 
 **2006**
                  
                  **2005**Year
                      end RMB : US$ exchange rate
                  
                  
                  7.8175
                  
                  
                  8.0734Average
                      yearly RMB : US$ exchange rate
                  
                  
                  7.9819
                  
                  
                  8.2033
 
 The
            RMB is not freely convertible into foreign currency and all foreign exchange
            transactions must take place through authorized institutions. No representation
            is made that the RMB amounts could have been, or could be, converted
            into US$ at
            the rates used in translation.
  F-13
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (CONT’D)**
 
 *(P)*
                  *Revenue
                      Recognition*
 
 Revenue
            is recognized when services have been rendered to the customer when a
            formal
            arrangement exists whereupon, the price is fixed or determinable, and
            delivery
            is completed, as well as collectibility is reasonably assured. Payments
            received
            before all relevant criteria are recognized, are recorded as unearned
            revenue.
 
 Net
            sales consist of gas and connection fee revenue, whereas cost of sales
            consists
            of gas and connection cost. Gas connection revenue is recognized when
            the
            outcome of a contract can be estimated reliably and the stage of completion
            can
            be measured reliably. Sales of natural gas are recognized when goods
            have been
            delivered and title has passed.
 
 *(Q)*
                  *Other
                      Income*
 
 Other
            income represents the Company’s share of post- acquisition results of its
            investment in equity securities for the year.
 
 *(R)*
                  *Income
                      Taxes*
 
 The
            Company uses the accrual method of accounting to determine and report
            its
            taxable income and uses the flow through method to account for tax credits,
            which are reflected as a reduction of income taxes for the year in which
            they
            are available. The Company has implemented *Statement
            of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
            Taxes.*
 
 Income
            tax liabilities computed according to the United States and the People’s
            Republic of China (PRC) tax laws are provided for the tax effects of
            transactions reported in the financial statements and consists of taxes
            currently due plus deferred taxes related primarily to differences between
            the
            basis of fixed assets and intangible assets for financial and tax reporting.
            The
            deferred tax assets and liabilities represent the future tax return consequences
            of those differences, which will either be taxable or deductible when
            the assets
            and liabilities are recovered or settled. Deferred taxes also are recognized
            for
            operating losses that are available to offset future income taxes. A
            valuation
            allowance is created to evaluate deferred tax assets if it is more likely
            than
            not that these items will either expire before the Company is able to
            realize
            that tax benefit, or that future realization is uncertain.
 
 In
            respect of the Company’s subsidiaries domiciled and operated in China, the
            taxation of these entities can be summarized as follows:
 
 Pursuant
            to the tax laws of PRC, general enterprises are subject to income tax
            at an
            effective rate of 33%. Beijing Gas is in the natural gas industry whose
            development is encouraged by the government. According to the income
            tax
            regulation, any company engaged in the natural gas industry enjoys a
            favorable
            tax rate. Also, Beijing Gas is exempt from corporate income tax for its
            first
            two years and is then entitled to a 50% tax reduction for the succeeding
            three
            years. The Company’s first profitable tax year was 2003. Accordingly, the
            Company’s income is subject to a reduced tax rate of 7.5%. From 2008 onwards,
            the Company’s income is subject to a reduced tax rate of 9%. Subsidiaries of
            Beijing Gas are subject to the effective rate of 33%.
  F-14
 
 **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (CONT’D)**
 
 The
            Company is subject to United States Tax according to Internal Revenue
            Code
            Sections 951 and 957. Corporate income tax is imposed on graduated rates
            in the
            range of:
 
 Taxable
                      IncomeRate
                  
                  Over
                  
                  But
                      not over
                  
                  Of
                      Amount Over15%
                  
                  
                  0
                  
                  
                  50,000
                  
                  
                  025%
                  
                  
                  50,000
                  
                  
                  75,000
                  
                  
                  50,00034%
                  
                  
                  75,000
                  
                  
                  100,000
                  
                  
                  75,00039%
                  
                  
                  100,000
                  
                  
                  335,000
                  
                  
                  100,00034%
                  
                  
                  335,000
                  
                  
                  10,000,000
                  
                  
                  335,00035%
                  
                  
                  10,000,000
                  
                  
                  15,000,000
                  
                  
                  10,000,00038%
                  
                  
                  15,000,000
                  
                  
                  18,333,333
                  
                  
                  15,000,00035%
                  
                  
                  18,333,333
                  
                  
                  -
                  
                  
                  0
 
 The
            Company, after a reverse-merger on September 7, 2006, revived to be an
            active
            business enterprise because of the operations of its subsidiaries in
            China.
            Based on the consolidated net income of 2006, the Company shall be taxed
            at the
            34% tax rate. Please refer to Note 12 for provision of United States
            and PRC
            Income Taxes.
 
 *(S)*
                  *Advertising*
 
 The
            Company expensed all advertising costs as incurred.
 
 *(T)*
                  *Concentration
                      of Credit Risk*
 
 Concentration
            of credit risk is limited to accounts receivable and is subject to the
            financial
            conditions of major customers. The Company does not require collateral
            or other
            security to support accounts receivable. The Company conducts periodic
            reviews
            of its clients’ financial condition and customers’ payment practices to minimize
            collection risk on accounts receivable.
 
 *(U)*
                  *Retirement
                      Benefits*
 
 Retirement
            benefits in the form of contributions under defined contribution retirement
            plans to the relevant authorities are charged to the statements of income
            as
            incurred.
  F-15
 
 **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (CONT’D)**
 
 *(V)*
                  *Statutory
                      Surplus Reserves*
 
 As
            stipulated by the Company Law of the People's Republic of China (PRC)
            as
            applicable to Chinese companies with foreign ownership, net income after
            taxation can only be distributed as dividends after appropriation has
            been made
            for the following:
 
 i.
                  Making
                      up cumulative prior years' losses, if
                      any;ii.
                  Allocations
                      to the "Statutory surplus reserve" of at least 10% of
                      income after tax, as determined under PRC accounting rules
                      and
                      regulations, until the fund amounts to 50% of the Company's
                      registered
                      capital;iii.
                  Allocations
                      of 5-10% of income after tax, as determined under PRC
                      accounting rules and regulations, to the Company's "Statutory
                      common
                      welfare fund", which is established for the purpose of providing
                      employee
                      facilities and other collective benefits to the Company's employees;
                      andiv.
                  Allocations
                      to the discretionary surplus reserve, if approved in
                      the shareholders' general
                      meeting.
 
 The
            Company has appropriated $805,302 as reserve for the statutory surplus
            reserve
            and welfare fund for the year ended December 31, 2006.
 
 Surplus
            reserves consist of the following as of December 31, 2006
 
 Statutory
                      surplus reserve
                  
                  $
                  1,346,053Statutory
                      common welfare fund
                  
                  
                  678,969$
                  2,025,022
 
 *(W)*
                  *Statement
                      of Cash Flows*
 
 In
            accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from
            the Company’s operations is calculated based upon the local currencies. As a
            result, amounts related to assets and liabilities reported on the statement
            of
            cash flows will not necessarily agree with changes in the corresponding
            balances
            on the balance sheet.
  *(X)*
                  *Comprehensive
                      Income*
 
 Comprehensive
            income is defined to include all changes in equity except those resulting
            from
            investments by owners and distributions to owners. Among other disclosures,
            all
            items that are required to be recognized under current accounting standards
            as
            components of comprehensive income are required to be reported in a financial
            statement that is presented with the same prominence as other consolidated
            financial statements. The Company’s current component of other comprehensive
            income is the foreign currency translation adjustment.
  F-16
 
 **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **2.**
                  **SUMMARY
                      OF SIGNIFICANT ACCOUNTING POLICIES
                      (CONT’D)**
 
 *(Y)*
                  *Recent
                      Accounting Pronouncements*
  In
            July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
            Taxes—an
            Interpretation of FASB Statement No. 109, which clarifies the accounting
            for
            uncertainty in tax positions. This Interpretation requires that the Company
            recognizes in its consolidated financial statements the impact of a tax
            position
            if that position is more likely than not of being sustained on audit,
            based on
            the technical merits of the position. The provisions of FIN 48 are effective
            for
            the Company on January 1, 2007, with the cumulative effect of the change
            in
            accounting principle, if any, recorded as an adjustment to opening retained
            earnings.
 
 In
            September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
            defines
            fair value, establishes a framework for measuring fair value in generally
            accepted accounting principles, and expands disclosures about fair value
            measurements. SFAS 157 applies under other accounting pronouncements
            that
            require or permit fair value measurements, where fair value is the relevant
            measurement attribute. The standard does not require any new fair value
            measurements. SFAS 157 is effective for financial statements issued for
            fiscal
            years beginning after November 15, 2007, and interim periods within those
            fiscal
            years.
 
 In
            September 2006, the SEC issued SAB No. 108, which provides guidance on
            the
            process of quantifying financial statement misstatements. In SAB No.
            108, the
            SEC staff establishes an approach that requires quantification of financial
            statement errors, under both the iron-curtain and the roll-over methods,
            based
            on the effects of the error on each of the Company’s financial statements and
            the related financial statement disclosures. SAB No.108 is generally
            effective
            for annual financial statements in the first fiscal year ending after
            November
            15, 2006. The transition provisions of SAB No. 108 permits existing public
            companies to record the cumulative effect in the first year ending after
            November 15, 2006 by recording correcting adjustments to the carrying
            values of
            assets and liabilities as of the beginning of that year with the offsetting
            adjustment recorded to the opening balance of retained earnings.
 
 The
            management of the Company does not anticipate that the adoption of these
            three
            standards will have a material impact on these consolidated financial
            statements.
  F-17
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **3.**
                  **PLEDGE
                      BANK DEPOSITS**
 
 Pledged
            bank deposits are restricted cash with bank for general banking
            facilities.
 
 **4.**
                  **ACCOUNTS
                      RECEIVABLE**
 
 The
            followings are the largest ten accounts receivable as at December 31
            2006
 
 Shanghai
                      Datun Energy Resources Co., Ltd
                  
                  $
                  1,509,641Jinzhou
                      City & Town Development & Construction Co.,Ltd
                  
                  
                  639,591Xuzhou
                      Ganglong Real Estate Development Co.,Ltd
                  
                  
                  559,232Kailuan(Group)
                      Weizhou Coal Mining Co.,Ltd
                  
                  
                  532,139Hebei
                      Zhong Gang Steel Co., Ltd
                  
                  
                  440,5861st
                      Machinery Works of North China Petroleum
                  
                  
                  383,754Beijing
                      Kailong Real Estate Development Co.,Ltd
                  
                  
                  299,328Beijing
                      Xincheng Real Estate Development Co.,Ltd
                  
                  
                  282,604Pei
                      Xian Zheng Yuan Construction Engineering Co
                  
                  
                  258,906Beijing
                      Hong Ji Co., Ltd
                  
                  
                  227,754$
                  5,133,535
 
 All
            of the above accounts receivable are due within one year of aging.
 
 **5.**
                  **OTHER
                      RECEIVABLES**
 
 Other
            receivables at December 31, consist of the following:
 
 2006
                  
                  2005Deposit
                      paid
                  
                  $
                  543,013
                  
                  $
                  104,483Amounts
                      due from employees
                  
                  
                  86,464
                  
                  
                  188,715Amounts
                      due from shareholders
                  
                  
                  -
                  
                  
                  22,004Sundry
                      receivables
                  
                  
                  634,323
                  
                  
                  122,720$
                  1,263,800
                  
                  $
                  437,922
 
 Amounts
            due from employees are advances for business traveling and purchases
            of
            consumables. All the amounts due from employees/shareholders are unsecured,
            interest free, and without fixed repayment terms.
  F-18
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **6.**
                  **PLANT
                      AND EQUIPMENT, NET**
 
 Plant
            and Equipment consist of the following as of December 31:
 
 2006
                  
                  2005*At
                      Cost*Gas
                      Pipelines
                  
                  $
                  8,255,231
                  
                  $
                  2,819,341Motor
                      Vehicles
                  
                  
                  2,204,621
                  
                  
                  99,376Machinery
                      & Equipment
                  
                  
                  273,943
                  
                  
                  253,536Buildings
                  
                  
                  89,799
                  
                  
                  86,952Leasehold
                      Improvements
                  
                  
                  47,543
                  
                  
                  46,036Office
                      Equipment
                  
                  
                  67,774
                  
                  
                  41,607$
                  10,938,911
                  
                  $
                  3,346,848*Less**:
                      Accumulated depreciation*Gas
                      Pipelines
                  
                  $
                  203,005
                  
                  $
                  80,557Motor
                      Vehicles
                  
                  
                  48,846
                  
                  
                  21,319Machinery
                      & Equipment
                  
                  
                  38,999
                  
                  
                  23,969Buildings
                  
                  
                  6,825
                  
                  
                  3,304Leasehold
                      Improvements
                  
                  
                  19,613
                  
                  
                  9,849Office
                      Equipment
                  
                  
                  13,093
                  
                  
                  7,168$
                  330,381
                  
                  $
                  146,166$
                  10,608,530
                  
                  $
                  3,200,682
 
 Depreciation
            and amortization expense is included in the consolidated statements of
            income
            and comprehensive income for the year December 31, 2006 is as
            follows:
 
 2006
                  
                  2005Cost
                      of revenues
                  
                  $
                  87,155
                  
                  $
                  79,118Selling
                      and marketing expenses
                  
                  
                  18,645
                  
                  
                  2,413General
                      and administrative expenses
                  
                  
                  49,574
                  
                  
                  50,334$
                  155,374
                  
                  $
                  131,865
  F-19
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **7.**
                  **INTANGIBLE
                      ASSETS**
 
 Intangible
            assets consist of the following as of December 31:
  2006
                  
                  2005Land
                      use rights
                  
                  $
                  112,565
                  
                  $
                  99,881Franchises
                  
                  
                  336,318
                  
                  
                  337,012Other
                      intangibles
                  
                  
                  8,947
                  
                  
                  372$
                  457,830
                  
                  $
                  437,265
 
 The
            Company operates as a local natural gas distributor in a city or county,
            known
            as an operation location, under an exclusive franchise agreement between
            the
            Company and the local government or entities in charge of gas utility.
            Franchises are the rights to develop sites in Anping and Jinzhou in China.
            They
            are stated at cost less accumulated depreciation.
 
 **8.**
                  **SHORT-TERM
                      BANK LOANS**
 
 Short-term
            bank loans are as follows:
  2006
                  
                  2005Loans
                      from Shen Zhen Development Bank Co., Ltd,interest
                      rate at 5.022% per annumDue
                      May 22, 2007
                  
                  $
                  2,430,445
                  
                  $
                  -
 
 Interest
            expense for the short term bank loans was $9,522 for the year ended December
            31,
            2006.
  F-20
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **9.**
                  **OTHER
                      PAYABLES**
 
 Other
            payables at December 31, 2005 and 2006 consist of the following:
 
 2006
                  
                  2005Deposit
                      received
                  
                  $
                  -
                  
                  $
                  67,934Amounts
                      due to employees
                  
                  
                  11,360
                  
                  
                  3,528Employees’
                      welfare payables
                  
                  
                  56,584
                  
                  
                  50,207Tax
                      payable
                  
                  
                  1,089,804
                  
                  
                  790,057Loan
                      from an unrelated company - Qian Shi Li
                  
                  
                  -
                  
                  
                  681,250Loan
                      from an unrelated company - Shi Yi Long Da
                  
                  
                  -
                  
                  
                  500,409Sundry
                      payables
                  
                  
                  632,752
                  
                  
                  171,580$
                  1,790,500
                  
                  $
                  2,264,965
 
 All
            the amounts due to employees are unsecured, interest free, and have no
            fixed
            repayment terms. Loan from Shenzhen Shi Yi Long Da Co., Ltd (Shi Yi Long
            Da) is
            unsecured, interest at 6% per annum and due October 2006. This money
            has been
            paid on October 2006. Loan from Beijing Qian Shi Li Technology Development
            Co.,Ltd (Qian Shi Li) is unsecured, interest free, and have no fixed
            repayment
            terms.
 
 **10.**
                  **CAPITAL
                      STOCK**
 
 The
            authorized capital stock consists of (i) 250,000,000 shares of common
            stock, par
            value $0.001 per share, of which there are 14,692,647 shares issued and
            outstanding, and (ii) 100,000,000 shares of preferred stock, par value
            $0.001
            per share. The preferred stock consists of (i) series A convertible preferred
            stock, of which 20,000,000 shares have been authorized and no shares
            are issued
            and outstanding; and (ii) series B convertible preferred stock, of which
            5,000,000 shares have been authorized and 4,023,268 shares are issued
            and
            outstanding.
 
 The
            following is a summary of the material terms of its capital stock. This
            summary
            is subject to and qualified in its entirety by its Articles of Incorporation,
            as
            amended and corrected, certificates of designations for its series A
            and series
            B convertible preferred stock, its by-laws and by the applicable provisions
            of
            Utah law.
 
 The
            Company is authorized to issue 250,000,000 shares of common stock, with
            a par
            value of $0.001. There are 14,692,647 shares of common stock issued and
            outstanding as of December 31, 2006. All shares of common stock have
            one vote
            per share on all matters including election of directors, without provision
            for
            cumulative voting. The common stock is not redeemable and has no conversion
            or
            preemptive rights. The common stock currently outstanding is validly
            issued,
            fully paid and non-assessable. In the event of liquidation of the company,
            the
            holders of common stock will share equally in any balance of the company's
            assets available for distribution to them after satisfaction of creditors
            and
            preferred shareholders, if any. The holders of common stock are entitled
            to
            equal dividends and distributions per share with respect to the common
            stock
            when, as and if, declared by the board of directors from funds legally
            available.
  F-21
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **10.**
                  **CAPITAL
                      STOCK (CONT’D)**
 
 *Preferred
            Stock*
 
 In
            addition to the 250,000,000 shares of common stock, The Company is authorized
            to
            issue 100,000,000 shares of preferred stock, with a par value of $0.001
            per
            share. Shares of the preferred stock may be issued from time to time
            in one or
            more classes or series, each of which class or series shall have such
            distinctive designation or title as shall be fixed by the board of directors
            prior to the issuance.
 
 On
            August 30, 2006, the Company’s board of directors designated 20,000,000 shares
            of its authorized $0.001 par value per share preferred stock as series
            A
            convertible preferred stock and 5,000,000 shares of its preferred stock
            as
            series B convertible preferred stock. On August 31, 2006, the Company
            filed
            certificates of designations for the series A and series B convertible
            preferred
            stock with the Office of the Secretary of State of Utah. On September
            6, 2006,
            the board of directors amended the designations of the Series B convertible
            preferred stock and the Company filed an amended certificate of designations
            for
            the Series B convertible preferred stock with the Office of the Secretary
            of
            State of Utah. The board of directors created the series A convertible
            preferred
            stock to allow the Company to consummate the share exchange transaction
            with the
            Gas (BVI) Shareholders and the series B convertible preferred stock in
            connection with its private financing transactions, although the Company
            does
            not have sufficient unissued authorized common stock to allow for a complete
            conversion. Each of the shares of series A convertible preferred stock
            was
            automatically converted into one share of its common stock upon the
            effectiveness of its reverse stock-split on November 17, 2006. Therefore,
            as of
            December 31, 2006, the Company has no shares of series A convertible
            preferred
            stock issued and outstanding.
 
 *Conversion*
 
 The
            Company issued 14,361,646 of its common shares upon the automatic conversion
            of
            its series A convertible preferred shares after the 304.44-for-1 reverse
            stock-split on November 17, 2006. The Company no longer has any series
            A
            convertible preferred shares outstanding.
 
 Each
            share of the series B convertible preferred stock will become convertible
            into
            common stock, at the option of its holder after the 304.44-for-1 reverse
            stock-split, based on the then applicable conversion rate, which is initially
            one share of series B convertible preferred stock for one share of common
            stock.
  F-22
 
 **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **11.**
                  **FINANCE
                      COSTS, NET**
 
 Details
            of finance costs are summarized as follows:
  2006
                  
                  2005Total
                      interest cost incurred
                  
                  $
                  9,522
                  
                  $
                  -Interest
                      income
                  
                  
                  (3,268
                  )
                  
                  (3,484
                  )Other
                  
                  
                  71,983
                  
                  
                  5,970$
                  78,237
                  
                  $
                  2,486
 
 **12.**
                  **INCOME
                      TAX**
 
 In
            accordance with the relevant tax laws and regulations of PRC, the corporation
            income tax rate is 33%. However, in accordance with the relevant taxation
            laws
            in the PRC, the Group is eligible for tax concessions and was exempted
            from part
            of the PRC income taxes for the year.
 
 The
            following table accounts for the differences between the actual tax provision
            and the amounts obtained by applying the applicable PRC corporation income
            tax
            rate of 33% to income before taxes for the years ended December
            31,.
  2006
                  
                  2005Income
                      before taxation
                  
                  $
                  5,122,453
                  
                  $
                  6,234,348Provision
                      for income taxes at PRC income tax rate
                  
                  
                  1,690,409
                  
                  
                  2,057,335Effect
                      of tax exemption granted to the Company
                  
                  
                  (1,267,125
                  )
                  
                  (1,525,420
                  )U.S.
                      Income Tax Provision
                  
                  
                  -
                  
                  
                  -Income
                      tax
                  
                  $
                  423,284
                  
                  $
                  531,915
  F-23
  **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **13.**
                  **BUSINESS
                      SEGMENT**
 
 The
            Company has contracted with customers usually in two business segments
            altogether, one is for the construction and installation of gas facilities
            and
            another one is the subsequent sales of gas to that customers through
            the gas
            facilities the Company constructs. However, the respective gas facilities
            contracts and gas supply contracts have separately provided for the basis
            of
            revenue recognition and distinctive from each other for the relevant
            cost-and-revenue to be incurred and hence separate calculation and subsequent
            payment of fees for respective business without any interdependence on
            each
            other in this respect.
 
 For
            management purposes, the company is currently organized into two major
            operating
            divisions - gas pipeline construction (installation of gas facilities)
            and sales
            of piped gas. These principal operating activities are the basis on which
            the
            Company reports its primary segment information.
 
 *2006*
                  
                  *Gas
                      pipeline*
                  
                  *Sales
                      of**construction*
                  
                  *piped
                      gas*
                  
                  *Others*
                  
                  *Consolidated*Turnover
                  
                  $
                  7,218,710
                  
                  
                  3,649,870
                  
                  
                  2,138
                  
                  
                  10,870,718Cost
                      of sales
                  
                  
                  (1,549,464
                  )
                  
                  (2,833,077
                  )
                  
                  (6,601
                  )
                  
                  (4,389,142
                  )Segment
                      result
                  
                  $
                  5,669,246
                  
                  
                  816,793
                  
                  
                  (4,463
                  )
                  
                  6,481,576
 
 *2005*
                  
                  *Gas
                      pipeline*
                  
                  *Sales
                      of**construction*
                  
                  *piped
                      gas*
                  
                  *Others*
                  
                  *Consolidated*Turnover
                  
                  $
                  8,204,988
                  
                  
                  2,702,301
                  
                  
                  -
                  
                  
                  10,907,289Cost
                      of sales
                  
                  
                  (1,607,987
                  )
                  
                  (2,524,404
                  )
                  
                  -
                  
                  
                  (4,132,391
                  )Segment
                      result
                  
                  $
                  6,597,001
                  
                  
                  177,897
                  
                  
                  -
                  
                  
                  6,774,898
 
 The
            Company's operations are located in the PRC. All revenue is from customers
            in
            the PRC. All of the Company’s assets are located in the PRC. Sales of piped gas
            and gas pipeline construction are carried out in the PRC. Accordingly,
            no
            analysis of the Company's sales and assets by geographical market is
            presented.
 
 **14.**
                  **COMMITMENTS
                      UNDER OPERATING LEASES**
 
 At
            December 31, 2006, the Group had commitment for future minimum lease
            payments
            under non-cancelable operating leases in respect of office rented premises
            which
            fall due as follows:
  2006
                  
                  2005*Land
                      and Buildings*Not
                      later than one year
                  
                  $
                  61,401
                  
                  $
                  59,455Later
                      than one year and not later than five years
                  
                  
                  245,603
                  
                  
                  237,818After
                      five years
                  
                  
                  521,906
                  
                  
                  505,363$
                  828,910
                  
                  $
                  802,636
  F-24
 
 **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **15.**
                  **CONTINGENT
                      LIABILITIES**
 
 The
            Company had contingent liabilities at December 31, 2006 of $268,628 (¥
2,100,000) in respect of Notes Receivable discounted.
 
 **16.**
                  **RELATED
                      PARTIES TRANSACTIONS**
 
 The
            following material transactions with related parties during the years
            were in
            the opinion of the directors, carried out in the ordinary course of business
            and
            on normal commercial terms:
 
 Sales
            to Beijing Zhongran Xiangke Oil Gas Technology Co. Ltd (Zhongran Xiangke),
            an
            investee for which the equity method is used, for the years 2006 and
            2005 were
            $334,326 and $1,088,990 respectively. These sales transactions have been
            eliminated upon consolidation. The amounts receivable from Zhongran Xiangke
            for
            the years 2006 and 2005 were nil and $177,401 respectively. Also, included
            in
            the other payables are payables to Zhongran Xiangke for the years 2006
            and 2005
            were $101,592 and $135,792 respectively.
 
 Sales
            to Beijing Zhongyou Xiangke Oil Gas Technology Co. Ltd (Zhongyou Xiangke),
            an
            investee of Zhongran Xiangke, for the years 2006 and 2005 were nil and
            $64,205
            respectively. These sales transactions have been eliminated upon consolidation.
            The amounts receivable from Zhongyou Xiangke for the years 2006 and 2005
            were
            $2,130 and $13,392 respectively.
 
 **17.**
                  **SUBSEQUENT
                      EVENTS**
 
 On
            January 15, 2007, Beijing Gas entered into a stock transfer agreement
            with the
            shareholders of Beijing Chenguang Gas Ltd., Co., a limited liability
            company
            organized under the laws of the PRC, under which Beijing Gas will acquire
            all
            the capital stock of Beijing Chenguang for a purchase price of RMB 26
            million
            (or approximately $3.35 million) in cash. Upon consummation of the transactions
            contemplated by that agreement, Beijing Chenguang will become a wholly-owned
            subsidiary of Beijing Gas. Beijing Chenguang is primarily engaged in
            the
            development, transfer and licensing of technologies used in natural gas
            purification, compression and transportation, as well as the installation
            of
            natural gas equipment and the supply of natural gas.
 
 Under
            the Beijing Chenguang agreement, the Company will pay the stock purchase
            price
            in installments. The Company paid the first installment, in the amount
            of
            10,000,000 RMB, on or about January 22, 2007. The Company will pay the
            second
            installment, also in the amount of RMB ten million, within 20 business
            days of
            completion by the selling shareholders of all government and legal procedures
            required for the sale. The Company will pay the remaining RMB six million
            on or
            prior to April 30, 2007. The agreement requires that all government and
            legal
            procedures required for the sale must be completed by the selling shareholders,
            and the title to the shares must be transferred to Beijing Gas, within
            20
            business days of the selling shareholders’ receiving the first installment of
            the purchase price.
 
 Pursuant
            to the agreement, Beijing Gas has agreed to acquire 100% of the capital
            stock of
            Beijing Chenguang on or about February 12, 2007. The PRC legal procedures
            which
            are required to complete the transaction have not been completed, and
            consequently only a portion of the purchase price has been paid.
  F-25
 
 **SINO
            GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
            IN US DOLLARS)**
 
 **17.**
                  **SUBSEQUENT
                      EVENTS (CONT’D)**
 
 One
            of the selling shareholders under the Beijing Chenguang agreement, Mr.
            Zhou Zhi
            Cheng, has been the Chief Operating Officer of the Company since October
            19,
            2006. Mr. Zhou owned 30% of the Beijing Chenguang stock immediately prior
            to the
            signing of the Beijing Chenguang agreement. Mr. Zhou is also a shareholder
            and
            legal representative of another selling shareholder, Beijing Chenguang
            Weizhong
            Management Technology Consulting Co., Ltd. which owned 10% of the Beijing
            Chenguang stock immediately prior to the signing of the agreement.
 
 On
            February 28, 2007, the Company disposed of Anping Weiye Gas Co., Ltd
            in the
            amount of RMB 33,000,000.
  F-26