UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Amendment
No. 1 to


FORM
10-K





x ANNUAL
REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
fiscal year ended December 31, 2008





o 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
              of
      incorporation or organization)
            (IRS
      Employer Identification No.)




No.18
Zhong Guan Cun Dong St.


Haidian
District


Beijing,
P. R. China 100083


(Address
of Principal Executive Offices) (Zip Code)





Issuer's
Telephone Number: 86-10-82600527





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)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes oNo x




Check
whether the issuer is not required to file reports pursuant to Sections 13 or
15(d) of the Exchange Act. Yes oNo x




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 o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K.  o


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




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




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o No x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act):


Yes oNo x





The
aggregate market value of the 9,924,431shares of voting and non-voting common
equity stock held by non-affiliates of the registrant was $13,397,981 as of June
30, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter, based on the last sale price of the registrant’s common
stock on such date of $1.35 per share, as reported by The Over-The-Counter
Bulletin Board.





As of
March 30, 2009, the Registrant had  25,269,313 shares of common stock
outstanding.



























TABLE OF
CONTENTS




PAGEPART
      IItem
      1.
            Business
            2Item
      1A.
            Risk
      FactorsItem
      1B
            Unresolved
      Staff CommentsItem
      2.
            Properties
            25Item
      3.
            Legal
      Proceedings
            26Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            26PART
      IIItem
      5.
            Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchaser of Equity Securities
            26Item
      6
            Selected
      Financial DataItem
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            27Item
      8.
            Financial
      Statements and Supplementary Data
            39Item
      9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
            39Item
      9A.
            Controls
      and Procedures
            39Item
      9B.
            Other
      Information
            40PART
      III


Item
      10.
            Directors,
      Executive Officers and Corporate Governance
            40Item
      11.
            Executive
      Compensation
            43Item
      12.
            Security
      ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            44Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            46PART
      IV47Item
      14.
            Principal
      Accounting Fees and Services
            50Item
      15.
            Exhibits,
      Financial Statement SchedulesSignatures
            51






- 2
-




PART
I




Item 1. Business





Information
regarding forward-looking statements and other information in this annual
report





This
annual report and the documents to which we refer you and incorporate into this
report by reference contain forward-looking statements. In addition, from time
to time, we or our representatives may make forward-looking statements orally or
in writing. We base these forward-looking statements on our expectations and
projections about future events, which we derive from the information currently
available to us. Such forward-looking statements relate to future events or our
future performance. You can identify forward-looking statements by those that
are not historical in nature, particularly those that use terminology such as
“may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,”
“believes,” “plans,” “projected,” “predicts,” “potential” or “continue” or the
negative of these or similar terms. In evaluating these forward-looking
statements, you should consider various factors, including those described in
elsewhere in this report. These and other factors may cause our actual results
to differ materially from any forward-looking statement. Forward-looking
statements are only predictions. The forward-looking events discussed in this
report, the documents to which we refer you and other statements made from time
to time by us or our representatives, may not occur, and actual events and
results may differ materially and are subject to risks, uncertainties and
assumptions about us.





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 27,
2009, $1.00 = 6.8302yuan.





“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, “2008”, “2007” and “2006” refer to the fiscal years ended
December 31, 2008, December 31, 2007 and December 31, 2006,
respectively.





Overview





We are
engaged in the development of natural gas distribution systems and the
distribution of natural gas to residential and industrial customers in small-
and medium-sized cities in the People’s Republic of China (“PRC”), through our
indirectly owned subsidiaries in the PRC, Beijing Zhong Ran Wei Ye Gas Co., Ltd.
(“Beijing Gas”) and its subsidiaries.




- 3
-




We
currently own and operate 37 natural gas distribution systems serving
approximately 100,900 residential and 5 industrial customers. Our facilities
include approximately 710 kilometers (“km”) of pipeline and delivery networks
with a daily distribution of approximately 89,000 cubic meters of natural gas.
We have two types of customers: (i) residential and (ii) industrial. The
following table presents, for the periods indicated, selected operating
data:




At and for the year ended
              December 312008
            
            
            2007Total
      gas distributed and supplied (US$ millions)
            
            
            12.2
            
            
            
            7.3Distribution
      network (km)
            
            
            710
            
            
            
            660Number
      of industrial customers
            
            
            5
            
            
            
            5Number
      of residential customers
            
            
            100,900
            
            
            
            87,500




We own
and operate natural gas distribution systems in small and medium sized cities in
Hebei, Jiangsu, Jilin and Anhui Provinces in addition to natural gas
distribution systems in the suburbs of Beijing. Beijing is not a province but a
municipality directly under the jurisdiction of China’s State Council and has
many urban districts in the suburbs.











- 4
-


We
generate revenues in two ways: (i) connection fees for the interconnections to
our natural gas distribution system and (ii) the sale of natural gas. 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 312008
            
            2007(in US$
              millions)
            
            (in US$
              millions)Connection
      fees (as % of total Sales)
            
            
            9.3
            (43)%
            
            
            13.0
            (64)%Gas
      sales
            
            
            12.1-
            (57-)%
            
            
            7.3
            (36)%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. The following table presents Beijing Gas’s costs of sales for the
periods indicated:




For the year ended Dec 31(US$ millions)
            2008
            
            
            2007Gas
      costs
            
            
            11.1
            
            
            
            6.4Connection
      costs
            
            
            2.9-
            
            
            
            3.1





We buy
natural gas for distribution in two forms: (i) compressed natural gas (“CNG”);
and (ii) 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 - pressure to less than 1% of its volume and transported at normal
temperature, while LNG is natural gas that has been converted temporarily to
liquid form for ease of storarge or transport, which can take up about
1/600th the
volume.. The key difference is that CNG is in compresed form, while LNG is in
liquefied form. CNG has a lower cost of production and storage compared to LNG
as it does not require an expensive cooling process and cryogenic tanks.
However, it is more cost-efficient to transport LNG over long distances because
of the reduction in volume. Generally, we transport CNG to a city if it is
located within 300 km from  the natural gas supplierand we transport
LNG to a city if it is located more than 300 km away from  the natural
gas supplier. Approximately 99% of the natural gas we purchase is CNG and
approximately 1% is LNG.





Our
business is generally affected by two seasonal factors: First, between December
and March, the cold weather in northern China makes construction very difficult.
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, our revenues from connection fees are higher in the third and fourth
quarter than that in the first and second quarters. Second, gas sales in winter
are generally higher than in summer, as our customers tend to consume more
natural gas for heating purposes.





Organization
and Structure of the Company





We
operate through our indirectly-owned subsidiaries in the PRC, Beijing Gas and
its subsidiaries.





As of
March 27, 2009, our corporate structure is set forth below:











- 5
-




(1) The
subsidiaries of Beijing Gas are set forth below:





Name of Subsidiary
            
            Beijing Gas
              Equity Interest %Peixian
      Weiye Gas Co., Ltd
            
            
            90Sihong
      Weiye Gas Co., Ltd
            
            
            95Wuhe
      Weiye Gas Co., Ltd
            
            
            100Changli
      Weiye Gas Co., Ltd
            
            
            100Yutian
      Zhongran Weiye Gas Co., Ltd
            
            
            90Weixian
      Jinli Gas Co., Ltd
            
            
            100Zhangjiakou
      City Xiahuayuan Jinli Gas Co., Ltd.
            
            
            100Wuqiao
      Gas Co., Ltd
            
            
            95Jinzhou
      Weiye Gas Co., Ltd
            
            
            95Shenzhou
      Weiye Gas Co., Ltd
            
            
            95Ningjin
      Weiye Gas Co., Ltd
            
            
            95Linzhang
      Weiye Gas Co., Ltd
            
            
            85




Hengshui
      Weiye Gas Co., Ltd
            
            
            100Longyao
      Zhongran Weiye Gas Co., Ltd
            
            
            95Xingtang
      Weiye Gas Co., Ltd
            
            
            95


Gucheng
      Weiye Gas Co., Ltd
            
            
            100Langfang
      Development Region Weiye Dangerous Goods Transportation Co.,
      Ltd
            
            
            95Beijing
      Chenguang Gas Ltd.
            
            
            100Xinji
      Zhongchen Gas Co., Ltd
            
            
            100Tianjin
      Chenguang Gas Co., Ltd
            
            
            100Luquan
      Chenguang Gas Co., Ltd
            
            
            100Cheng’an
      Chenguang Gas Co., Ltd
            
            
            100Nangong
      Weiye Gas Co., Ltd
            
            
            100Sishui
      Weiye Gas Co., Ltd
            
            
            95Guannan
      Weiye Gas Co., Ltd
            
            
            100Sixian
      Weiye Gas Co., Ltd
            
            
            100Baishan
      Wiye Gas Co., Ltd
            
            
            100






- 6
-




Organizational
History of Sino Gas





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 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.  We were an inactive
shell between May 2002 and September 7, 2006.





On
September 7, 2006, the shareholders holding 72,569,764 shares of our common
stock, which constituted 72.01% of the then outstanding shares of our capital
stock, sold all of their shares to GAS Investment China Co., Ltd. (“Gas (BVI)”),
the parent company of Beijing Gas, for a cash consideration of $675,000. On the
same date, we consummated a share exchange transaction with the shareholders of
Gas (BVI), whereby we exchanged 14,361,646 shares of our Series A Convertible
Preferred Stock, par value $0.001 per share (“Series A Preferred”), which
constituted all of the then outstanding shares of our Series A Preferred, 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.
and effected a 304.44-for-1 reverse stock split which reduced the number of the
outstanding shares of our common stock from 100,770,140 to 331,002. Upon the
effectiveness of the reverse stock split, each of the 14,361,646 shares of the
then outstanding Series A Preferred was automatically converted into one share
of our common stock, resulting in all of the shareholders of Gas (BVI)
immediately prior to the share exchange owning approximately 97.7% of the
outstanding shares of our common stock immediately after the reverse stock
split, with Mr. Yuchuan Liu, the CEO of our company, owning 36.7%, Gas (BVI)
owning 1.6% and the original shareholders of Dolce Ventures, Inc. immediately
prior to the share exchange owning 0.6%. On August
18, 2008, Sino Gas
consummated a spin-off of Pegasus Tel, Inc. (“Pegasus”), a Delaware corporation
and a wholly-owned subsidiary of Sino Gas, to Sino Gas’ stockholders of record
as of August 15, 2008 (“Spin-off”).  The Ratio of Distribution of the
Spin-off was one (1) share of common stock of Pegasus for every twelve (12)
shares of  common stock of Sino Gas (1:12).  Fractional
shares were rounded up to the nearest whole-number.  An aggregate of
2,215,136 shares of Pegasus common stock were issued pursuant to the Spin-off to
an aggregate of 167 Sino Gas stockholders.




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.





We now
have operations in Hebei Province, Jiangsu Province, Anhui Province, and Jilin
province and in the suburbs of Beijing through our four branch offices in
Beijing, We have operations in 18 cities in Hebei, 2 cities in Anhui, 3 cities
in Jiangsu and 1 city in Jilin province. Most of them have an urban population
of less than 300,000 and are experiencing quick urbanization. Hebei Province is
the closest province to the Chinese Capital city Beijing, where our headquarters
is located. Jiangsu Province and Anhui Province are two adjourning provinces in
eastern China, which are close to Shanghai City. Jilin Province is located in
North-Eastern China.





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.




- 7
-





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 chemical
preparation for use in the exploration process of oil field. We did not derive
any material amount of revenues from this joint venture.





In 2007,
we made the following acquisitions:





On
January 15, 2007, Beijing Gas acquired 100% equity interest of Beijing Chenguang
Gas Ltd., Co. for a purchase price of 26,000,000 RMB (or approximately USD3.35
million) in cash. Beijing Chenguang became a wholly-owned subsidiary of Beijing
Gas. Beijing Chenguang is primarily engaged in the business of developing,
transfer and licensing of technologies regarding natural gas purification,
compression and transportation., as well as installation of natural gas
equipment and supply of natural gas. Mr. Zhicheng Zhou, our Chief Operating
Officer, owned 30% of Beijng Chenguang immediately prior to the acquisition. We
made full disclosure under the heading “Certain relationships and related
transactions” in this report.





On June
20, 2007, Beijing Gas acquired 100% equity interest of Guannan Zhongyuan Natural
Gas Co., Ltd. for a purchase price of 7,500,000 RMB (approximately $987,000) in
cash. Guannan is a regional natural gas distributor and developer of natural gas
distribution networks in China's Jiangsu Province. The acquisition of Guannan
includes all of the assets and customer relationships of Guannan, including
concession rights to be the exclusive natural gas distributor in Guannan County,
Jiangsu Province, for a period of 30 years beginning June 29, 2007. This
acquisition is not with related parties.




On July
9, 2007, We purchased the assets of Baishan Gas Co., Ltd., a regional
distributor and developer of distribution networks for natural gas in Jilin
Province for a price of $921,000 (RMB7,000,000). Under the asset purchase
agreement, we are responsible for paying outstanding debts of Baishan Gas Co.,
Ltd. in the amount of $4,000,000, which are due in periodic installments through
the year 2030. This acquisition is not with related parties.





On April
22, 2008, we entered into an agreement with the Qujing Development Investment
Co., Ltd. a PRC state-owned company and Yunnan Investment Group Co., Ltd, also a
PRC state-owned company, to set up Qujing Gas Co. Ltd to operate in the City of
Qujing, Yunnan Province (the “Qujing Gas”). The Company will hold a 39% equity
interest in Qujing Gas. The initial registered capital of the Qujing Gas is RMB
30 million (U.S.$4.29 million). This acquisitions is not with related
parties.





On April
23, 2008, the Company entered into an agreement to acquire 100% equity interest
in Tongshan Hengxin Jiaye Natural Gas Co., Ltd. (“Tongshan”), for a purchase
price of RMB 32.6 million (U.S.$4.66 million). Tongshan is a regional natural
gas distributor and developer of natural gas distribution networks in China’s
Jiangsu Province. This acquisition is not with related parties.




Our
Industry




China’s
Macro-Economic Environment for the Natural Gas Market





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 68.0%, 22.3%, 7.1% and 2.6%,
respectively, of the PRC's total energy consumption. In 2005, the ratios were
68.9%, 21.0%, 7.2% and 2.9% respectively. In 2006, the ratios were 69.4%, 20.4%,
7.2%, and 3% respectively. Based on the PRC government’s Eleventh Five Year Plan
(2006-2010), the ratios of coal, crude oil, hydro-electricity would change to
66.1%, 20.5%, and 6.8% respectively, while that of natural gas would
increase to 5.1%. 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, while the non-production sector
accounts for low percentage of final consumption. In 2005, non-production
consumption of natural gas was around 7.9 billion cubic meters, which was only a
little over 15% of total natural gas consumption that reached to 47.9 billion
cubic meters (Source: National Bureau of Statistics of China).




- 8
-





The PRC's
heavy reliance on coal is out of line with world consumption rates for the same
time period, which was 26.5% in 2005 (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. The latest air pollution study conducted by the Blacksmith Institute
shows that in 2007 two of the 10 most polluted cities in the world are located
in the PRC (Source: http://www.blacksmithinstitute.org). As such, there have
been serious environmental concerns in many countries around the world and
resulted in a global trend to reduce coal usage.





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. 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 the PRC. The natural gas industry has
been deemed by the PRC government as a suitable industry for public and private
investments.





Demand
for Natural Gas in China




Currently,
natural gas consumption in the PRC accounts for  about 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. According to the statistics of
the China National Development and Reform Commission (“NDRC”), the consumption
of natural gas as increased from 24.5 billion cubic meters in 2000 to 47.9
billion cubic meters in 2005, which represented an average growth of 14.35% per
year. According to a research report by Merrill Lynch, demand for natural gas
will increase from 16 billion cubic meters in 2005 to 70 billion cubic meters in
2020, representing a compounded annual growth rate of 10.3%.





China’s
Natural Gas Reserves and Gas Pipeline Infrastructure





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 statistics of the Energy Information Administration, proved
natural gas reserves in China are estimated to be 53,325 billion cubic feet in
2006, and 80,000 billion cubic feet in 2007.




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.




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.




Under
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 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.




- 9
-




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.





Natural
Gas Suppliers





The
natural gas supply in China is dominated by the three large state-owned oil and
gas holding companies, namely China National Petroleum Corporation Group
(“PetroChina”), China Petroleum and Chemical Corporation Group (“Sinopec”), and
China National Offshore Oil Corporation Group (“CNOOC”). In 2006, production by
CNPC, Sinopec and CNOOC accounted for 73.7%, 14.1% and 12.2%,
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 (Source: The Institute of Energy Economics of
Japan).





Natural
Gas Distributors





Before
2000, natural gas distribution had been principally served by local municipal
governments. Since then, the 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. In large cities where the
population exceeds 100,000, the natural gas distribution business is dominated
by state owned companies, while in cities where the population is less than
100,000, natural gas distribution is carried out by many privately owned
companies, most of which operate in just a few locations.





The
Gas Delivery Process





The
natural gas delivery process is categorized by three segments: production,
transmission and distribution, as shown in the chart below:









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 such as Sinopec
and PetroChina.





Distribution
companies (such as our company) distribute natural gas to end users and often
own the gas pipeline infrastructure rights of an operational location (including
the local pipelines, the processing stations, 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 stations along the major pipeline and
delivery points and the expected demand for gas from the relevant gas supply
locations.





The
transportation of CNG and LNG involves the delivery of natural gas by trucks
from gas wells or stations located along the relevant long distance pipeline to
a processing station. Such processing stations may contain CNG or LNG pressure
regulating facilities which will depressurize the CNG or LNG to reduce the
pressure of natural gas from high pressure to medium pressure, before
transferring the natural gas to a local pipeline.





The
processing station is usually located on the outskirts of an operational
location for safety reasons and it provides certain ancillary facilities,
including  the addition of bromine to the gas to enable the detection
of leakages when the gas is transmitted through the pipelines, and storing the
gas under high, medium or low pressure to be used as reserves for future
unexpected fluctuation in demand.




- 10
-


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’ inlets.




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 local 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’ inlets. Customers’ inlets transmit the natural gas
through the pressure regulating box to the end users.




Our
Strategy





Our
strategy involves: (i) expanding our presence in smaller cities; (ii) acquiring
existing gas distribution systems and/or franchises; and (iii) expanding our
business upstream by developing and maintaining pipelines that connect China’s
East-West Gas Pipeline with the cities where we have our gas stations or where
other distributors own distribution networks.





(i) Expand Our
Presence in Smaller Cities by Obtaining Additional Exclusive Franchises.
We have focused on small (with urban population in the city proper of less than
100,000) and medium sized (with urban population in the city proper of less than
300,000) cities, generally near a larger metropolitan area where there is little
competition to obtain a franchise, and where our franchise grants us
exclusivity. 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.  These smaller cities
urgently need to provide their citizens with energy and usually do not 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 to 30 years. Since our founding, we have successfully
obtained 27 franchises in small and medium sized cities, of which 25 have
already developed and 2 are still under development. In 2008, we were able to
secure one development project.




(ii) Acquire
Existing Franchises and Gas Distribution Networks to Facilitate Growth.
Our expanded presence in small and medium sized cities was accomplished not only
by securing franchises and developing gas distribution networks ourselves but
also by acquiring existing franchises and networks from other operators. We
believe acquisitions will provide us opportunities for growthas
well as enable us to explore opportunities in bigger cities (with urban
population in the city proper of more than 300,000). Normally we target
companies that have valuable assets and market prospects with strategic
locations.




(iii) Expand into
Upstream Business. We currently develop gas distribution networks which
deliver gas from our storage station in a particular city to residential or
industrial customers in that city. We do not have pipelines that connect the
national main pipeline that runs across China from the West to the East with the
cities where we our customers are located. We have to deliver the gas we
purchase from the main pipeline operator to our gas storage facilities in
different cities by trucks. We intend to expand into the upstream business by
developing regional distribution networks to connect the West-East main pipeline
with cities that are not located near the passageway of the national main
pipeline. By developing and maintaining regional pipelines, we believe we can
deliver natural gas to our customers more efficiently and with potentially
higher margins. In addition, such regional distribution networks can be used by
other gas distributors along the pipelines, which will add potential revenue
sources for us. As the development of such regional networks require a
significant capital outlay, we intend to start exploring such projects after we
are able to raise a significant amount of funds in the future.




(iv) Raise
Additional Capital . We are in a capital-intensive business due to the
fact that a major part of our activities is to build local natural gas
distribution networks which requires larger capital outlay.


- 11
-


Although
the connection fees we charge our customers provide us with the needed capital
for building local natural gas distribution networks to a large degree, they may
not provide sufficient capital if we carry out the acquisitions and upstream
expansion as we have planned. Our growth will, therefore, depend on our ability
to raise additional funds. We anticipate using our financing strategy as a
competitive tool. Our goal is to duplicate the type of financing 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 would not only give us a
favorable cost of capital, but enhance investor returns and keep investor
dilution at a minimum.





Competitive
Advantages





We
believe we have the following competitive advantages:




(i) Better
Relationships with Natural Gas Suppliers. We have been able to develop
good relationships and therefore secure contracts with t large state-owned
natural gas producers such as SinoPec and PetroChina. These contracts have
ensured a stable supply of natural gas for us.




(ii) Experienced
Management and Technical Personnel.We have a team of senior
executives who are industry experts in managing larger Chinese petroleum and/or
gas companies with scores of years of combined experience in running our company
or managing businesses in our industry. Our founder and Chief Executive Officer,
Mr. Yuchuan Liu, is a natural gas industry expert with over 20 years experience
in senior management positions at PetroChina and China Gas Holdings Limited, a
Hong Kong Stock Exchange-listed PRC company. Our Chief Operating Officer, Mr.
Zhicheng Zhou, served as the director and General Manager of Beijing Chenguang
Gas Co., Ltd. from late 2002 to 2006. Our Chief Engineer, Mr. Shukui 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. Our company was one of the earliest to engage in the
natural gas distribution business in small and medium sized cities, and thus
having gained significant experience in this market segment.




(iii) Experienced Sales
and Marketing Team. Our sales and marketing team has gained significant
experience in working with local governments and identifying potential markets
in small and medium sized cities. Due to their effort, we have won franchises
for 27 locations.




(iv) US Capital
Markets Access. By becoming a US public company, we have gained access to
size and efficiency of the US capital market. We will be able to raise funds, as
we have done, for our expansion and growth, albeit our ability to raise funds in
the US is a limited one because we have not been listed on any major US national
stock exchanges. Very few Chinese companies that are in the natural gas
distribution business have become US public companies.





Products
and Services





Currently,
we generate revenues primarily from the connection fees we charge our customers
for connecting to the pipelines in our natural gas distribution systems which we
have constructed, and fees for natural gas we charge our customers based on
usage.





We
recorded connection fees in the amounts of $9.29 million and $12.97 million for
the fiscal years ended December 31, 2008 and 2007, respectively, constituting
43% and 64% of total revenues for those years. Sales of natural gas were $12.16
million and $7.29- million for the fiscal years ended December 31, 2008 and
2007, respectively, constituting 57% and 36% of the total revenues for those
years.




Connection
Fees





We charge
our real estate developer customers a flat connection fee for the installation
of gas lines to each of their apartments or housing units. The level of
connection fees varies among operational locations and is determined based on a
detailed analysis of factors such as estimated capital expenditure, fees charged
in surrounding cities, number of users, expected penetration rates, income
levels and affordability to local


- 12
-


residents
and is approved by the relevant local state price bureau. The average of these
connection fees for the company in 2008 was approximately $346.90 per household.
For industrial customers, the connection fee is determined based on the facility
capacity (on a cubic meter per day basis 300 RMB per cubic meter). Should
additional capacity be needed, these customers are required to pay additional
connection fees for the additional capacity installed. Connection fees are
usually paid in installments, with 30% within certain days set out in the
contracts after the start of each project, 30% at milestones set out in the
contracts, 30% upon completion and 10% guarantee which is paid after one year.
Connection fees generally provide a 60-80% profit margin. The rates of
connections fee are set by the local state price bureau based on the connection
fees charged by other gas distributors in surrounding areas and can vary in
different cities. In most cases, we accept the price set by the local state
price bureau. But if we find the price does not offer a profit margin equal or
greater than 20%, we will negotiate with local governments for an increase and
local governments usually agree to increase our connection fees under such
circumstances. Our average connection fee per household is about $345 and the
connection fees in most cities are very close to that average. Gas usage fees
are also 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.





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.




Gas Usage
Charges





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. 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 85% 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 our staff 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.





Our
Business Activities





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




- 13
-





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 our 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.




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.
            Likelihood
      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. CNG
      trucks are deployed if the gas source, or long distance pipeline, is
      located within 300 km. 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 37
completed or partially completed operational locations.





(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


- 14
-


increase
public awareness of piped natural gas in the operational location. Concurrently,
we begin actively seeking 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.




(iii)Construction.





(a) 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 master
design is subject to approval by the local city construction department. The
design stage normally takes two to three months.




(b) 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 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’ inlets pursuant to gas supply contracts with customers. The designs
of branch pipelines and customers’ inlets 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 inlets 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. The natural gas to be supplied
to the residential or industrial customers is carried by trucks with canisters
that contain CNG or LNG, to our storage facilities in various operational
locations for storage, decompression and gasification. From those storage
facilities, the gas is transported through our pipeline system to our end
users.




Intellectual
Property





We do not
hold any registered trademarks or patents. We have developed a proprietary
natural gas compression process that allows us to effectively and economically
compress natural gas and distribute it. .





We own
and operate a website under the internet domain name
www.sino-gas.com.




- 15
-





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,
2008 and 2007, we spent approximately $1,067,000 and $1,013,400, 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, especially the reduction of the
      size of the storage facilities.




Sales
and Marketing





Our main
sales office, which is located in Beijing, has three staff led by the Vice
President of Marketing and is responsible for managing our overall sales
policies and devising our marketing strategy. They are responsible for
developing and maintaining accounts with major industrial customers and large
real estate developers. They regularly visit potential customers and conduct
meetings with them to determine if demand exists and to introduce the advantages
of using natural gas.




We have
approximately 25 sales and marketing staff at our operational locations who
target residential customers by working with local neighborhood committees and
government agencies. In addition, they coordinate with our national office in
targeting industrial customers and local developers. 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. Our marketing team plays an active role in lobbying the
relevant government authorities during the negotiation stage.





The sales
and marketing team is responsible for our 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.




Our
Customers





We have
two principal types of customers: (i) residential customers and (ii) industrial
customers.





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. For new residential developments, connection
fees are usually paid in installments, with 30% paid within certain days set out
in the contracts after the start of each project , 30% paid at milestones set
out in the contracts, 30% paid upon completion, and the final 10% guarantee
generally used for retention  for quality warranty to the developer,
which is normally received after one year.




- 16
-


We also
perform gas connection services to existing buildings formerly 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 build pipelines to connect these customers to our gas
storage facilities and supply gas at market price after receiving payment. The
inlets that are located inside the home 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 405 master supply agreements for the supply of
gas to 100,900 end users in Beijing Hebei, Jiangsu, Jilin and Anhui. Our top
five residential customers, who are developers or owners of residential areas,
are shown below:




Percentage of
              Connections
              Fees for the year ended
              December 31,Customers
            
            2008
            
            
            2007Baishan
      Zhongfang Real Estate Development Co. Ltd.
            
            
            3.2
            %
            
            
            -
            %Tonghua
      Tongsheng Real Estate Development Co. Ltd.
            
            
            3.2
            %
            
            
            -
            %Beijing
      Zhenshi Real Estate Co.
            
            
            2.9
            %
            
            
            -
            %Oriental
      Sun-Town Real Estate Co.
            
            
            5.3
            %
            
            
            -
            %Tongshan
      Shunda Real Estate Development Co.
            
            
            3.1
            %
            
            
            -
            %Total
            
            
            17.7
            %
            
            
            -
            %





Industrial and Commercial
Customers





Our
industrial customers use natural gas primarily for heating, air conditioning,
water heating and cooking purposes. These customers we target 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 distribution 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 customers for the periods
indicated:




Percentage of Sales
              Fiscal year ended
              December 31,Customers
            
            2008
            
            
            2007Hebei
      Zhong Gang Steel
            
            
            25.23
            %
            
            
            30.4Huabei
      Machine Factory
            
            
            3.97
            %
            
            
            2.88
            %Hebei
      Ji Heng Yuan
            
            
            3.48
            %
            
            
            0.76
            %Tang
      Shan Chang Sheng
            
            
            2.01
            %
            
            
            4.00
            %Elite
      (Lang Fang) Textile
            
            
            0.88
            %
            
            
            0.90
            %Total
            
            
            35.57
            %
            
            
            38.94
            %





During
the fiscal year ended December 31, 2008, our largest two customers were Heibei
Zhong Gang Steel and Huabei Machine Factory.






- 17
-




Materials
and Supplies





Natural
Gas




The
principal supplies purchased for our business are natural gas. Purchase of
natural gas represented 79.3-% and 67.1% of our total costfor the fiscal years
ended December 31, 2008 and 2007, 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 PetroChina. Our LNG
supplier has been Henan Zhong Yuan Lu Ye Advanced Technology Ltd. Co. (“Henan
Zhong Yuan”), a subsidiary of SinoPec. Historically, we have purchased majority
of our CNG from North China Oilfield and 100% of our total purchases of LNG from
Henan Zhong Yuan.




We have
supply contracts (with terms from 1 to 3 years renewable but no fixed price,
which price is set indirectly by the PRC National Development and Reform
Commission (“NDRC”) irregularly and can be passed along to the end customers)
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 which is determined by NDRC with approval from
the PRC State Council, distance of transportation, purification fees and the
supplier’s operating costs. The wellhead price of natural gas is 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.




Piping,
Machinery and Equipment





Piping,
machinery and equipment constitute 60-70% of our construction expenditure. We
purchase such supplies through a bidding process which is administered by the
procurement committee. Potential suppliers are evaluated on their proposed terms
including technical specifications, price, payment terms and post-sale services
and the procurement committee keeps a scoring system based on these parameters.
After validation of the various suppliers’ service and capabilities for stable
supply, we acquire the needed materials and parts from the supplier offering the
best terms.




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. Payments for
equipment, pipes and machinery are purchased with credit terms ranging from 30
to 90 days. We generally do not purchase gas appliances except gas meters which
we purchase 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.





In 2008,
we purchased approximately $4,625,000 of pipes, machinery and
equipment.




Competition





Since our
inception, we have focused on supplying natural gas to small and medium sized
cities in the PRC where the average urban residents in the city proper is
300,000 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 and medium sized 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. Due to our smaller 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 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 37 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 smaller cities in the
PRC with urban dwellers in the city proper between 100,000 to 300,000. Among
them, approximately 800 smaller cities have the potential to be supplied with
natural gas and over 100 smaller cities have already been supplied with natural
gas. Among the over 100 smaller cities where natural gas is already available,
Beijing Gas is the distributor to 27 of them, and, therefore, we believe we have
the largest market share among our peer businesses that target the natural gas
market among smaller cities.




We
believe we compete with the following companies directly:




Ticker
            
            07 Revenue
              (in$millions)
            
            07 Net
              Income
              (in$millions)Towngas
      China Co., Ltd (Panva Gas)(1)
            
            
            1083.HK
            
            565
            
            
            26Xinao
      Gas Holdings Ltd(2)
            
            
            2688.HK
            
            738
            
            
            65China
      Gas Holdings Limited(3)
            
            
            0384.HK
            
            327
            
            
            15Zhengzhou
      Gas Co. Ltd(4)
            
            
            3928.HK
            
            132
            
            
            19





(1)
Towngas China Company Ltd., formerly Panva Gas Holding Limited, is supplier of
gas, including liquefied petroleum gas (LPG) and natural gas in eight Chinese
provinces, where over 40 companies of the Group are providing gas fuel
services.





(2) Xinao
Gas Holdings Limited is principally engaged in the investment in, and the
operation and management of, gas pipeline infrastructure and the sale and
distribution of piped and bottled gas in China with operations in four
divisions: gas connection, sales of piped gas, distributions of bottled LPG and
sales of gas appliances.




(3) China
Gas Holdings Limited (China Gas) is an investment holding company. The Company
is an operator of natural gas services principally engaged in the investment,
operation and management of city gas pipeline infrastructure, long-distance,
high-pressure pipelines, distribution of natural gas to residential, commercial,
industrial and vehicle users, construction and operation of oil stations, and
gas stations, as well as liquefied natural Gas (LNG) liquefaction plants, and
development and application of oil and natural gas related technologies. The
Company has four operating divisions: property investment, financial and
securities investment, gas connection and sales of piped gas.





(4)
Zhengzhou Gas Company Limited is an investment holding company. The Company is
principally engaged in the sales of natural gas, pressure control equipment and
gas appliances to customers, and the construction of gas pipelines and the
provision of repairs and maintenance of gas pipelines services. The gas
appliances available for sales include gas stoves, water heaters and
wall-attached stove.




- 19
-





Safety
and Quality Control




Safety
Control





We are
focused on safety, have implemented a safety system and have set up a safety
department to oversee safety issues for all of our operations. We carry out
routine inspection of the branch pipelines, customers’ inlets, 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.





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 local
pipelines. The information is collected 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.





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 expect compulsory insurance and fixed-sum insurance for cars
and other vehicles. We plan to purchase property insurance to cover our
manufacturing plants, equipment and office buildings in the near future when
such insurance policies are available.




We
maintain social insurance for our staff and employees in accordance with
relevant requirements under PRC law.




- 20
-




Government
Regulations




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 NDRC, and is currently set at $0.12 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 NDRC.




Pricing
of Natural Gas - US$ per cubic meter




2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007Wellhead
            
            $
            0.09
            
            
            $
            0.09
            
            
            $
            0.08
            
            
            $
            0.11
            
            
            $
            0.11Pipeline
            
            $
            0.09
            
            
            $
            0.09
            
            
            $
            0.09
            
            
            $
            0.09
            
            
            $
            0.09Purification
            
            $
            0.01
            
            
            $
            0.01
            
            
            $
            0.01
            
            
            $
            0.01
            
            
            $
            0.01Total
            
            $
            0.19
            
            
            $
            0.19
            
            
            $
            0.18
            
            
            $
            0.21
            
            
            $
            0.21




The price
we charge our residential customers for natural gas is based on the wholesale
price plus cost and a profit margin of 10-15% and must be approved by the local
price bureau.





Operational
and Construction Permits





In the
PRC, companies in the gas distribution business must also obtain an operational
permit from the local municipal government to begin operation. In addition, a
construction permit must be obtained if such gas distribution company also
engages in construction. In both cases, the local municipal government 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
March 27, 2009, Beijing Gas and most of our project companies and branch offices
have the necessary operational permits. We are still in the process of getting
natural gas distribution permits for three of our projects. We believe failure
to obtain such permits in time for those projects will not have a materially
adverse effect on our operations.




Safety
Regulations





As a
natural gas distributor, Beijing Gas is regulated by the Administrative Rules on
the City Gas Safety jointly promulgated by the PRC Ministry of Construction,
standards set by Standard Bureau and Fire Safety Bureau of 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.
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. As of December 31, 2008, most of our project companies have
received such certificates. There are six project companies that are still in
the process of obtaining such certificates. We believe failure to obtain such
certificates in time for those projects will not have a materially adverse
effect on our operations.




- 21
-




Environmental
Assessment




Under
China’s Environmental Regulations, each of our project location should obtain an
environmental assessment report which asses the environmental impact of the
operations of the project. The report must be approved by the relevant
authorities. As of March 27, 2009, most of our project companies have obtained
such reports. We are still in process of obtaining such reports for five project
companies. We believe failure to obtain such reports in time for those projects
will not have a materially adverse effect on our operations.




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. Effective January 1, 2008, the PRC government implemented a new 25% tax
rate for all enterprises regardless of whether the enterprise is domestic or
foreign.  However, the PRC government has established a set of
transition rules to allow enterprises that had already began to enjoy tax
exemptions prior to January 1, 2008 to continue enjoying the tax exemptions
until fully utilized. The subsidiaries of Beijing Gas are subject to the
effective rate of 15% - 25%. A majority of income is earned by Beijing
Gas.




Foreign
Currency Control




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.





Employees




As of
March 31, 2009, we had approximately 534 full-time employees, including
approximately 65 management personnel, 59 technicians, 42 engineers and 19
research and development personnel. One employee holds a doctorate degree, 3
employees hold a master’s degree, and 125 employees hold a bachelor’s
degree.





As
required by applicable Chinese law, we have entered into employment
contracts with all of our employees. We have also entered into a confidentiality
agreement with all of our employees under which such employees are prohibited
from disclosing confidential information of the Company or using it for other
purposes than the benefit of the Company. Directors, officers, mid-level
managers and some key employees in sales and R&D are required to sign a
non-compete agreement which prohibits them from competing with the Company while
they are employees of the Company and not working for a competitor within one
year of termination and working in the industry for two years after their
employment with the Company is terminated.




Our
employees in China participate in a state
pension arrangement organized by Chinese municipal and provincial
governments. We are required to contribute to the arrangement at the
rate of 20% of the average monthly salary. In addition, we are required by
Chinese law to cover employees in China with other types of social insurances.
Our total contribution may amount to 30% of the average monthly salary.
We have purchased social insurances for all of our employees. The social
insurance we paid in 2008 and 2007 is shown below:




At and for the year ended
              December 31,2008
              (in USD)
            
            2007
              (in USD)Amount of social insurance
            
            
            212,327
            
            233,113






- 22
-




Item
1A. Risk Factors




An
investment in our common stock is speculative and involves a high degree of
risk. You should carefully consider the risks described below and the other
information in this prospectus before purchasing any shares of our common stock.
The risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties may also adversely impair our business
operations. If any of the events described in the risk factors below actually
occur, our business, financial condition or results of operations could suffer
significantly. In such case, the value of your investment could decline and you
may lose all or part of the money you paid to buy the shares of common
stock.




Risks Related to Our
Business





Disruptions
in the capital and credit markets related to the current national and worldwide
financial crisis, which may continue indefinitely or intensify, could adversely
affect our results of operations, cash flows and financial condition, or those
of our customers and suppliers.




The
current disruptions in the capital and credit markets may continue indefinitely
or intensify, and adversely impact our results of operations, cash flows and
financial condition, or those of our customers and suppliers. Disruptions in the
capital and credit markets as a result of uncertainty, changing or increased
regulation, reduced alternatives or failures of significant financial
institutions could adversely affect our access to liquidity needed to conduct or
expand our businesses or conduct acquisitions or make other discretionary
investments, as well as our ability to effectively hedge our currency or
interest rate. Such disruptions may also adversely impact the capital needs of
our customers and suppliers, which, in turn, could adversely affect our results
of operations, cash flows and financial condition.




We
are dependent on supplies of natural gas to deliver to our
customers.




The basic
business model of our business is to purchase natural gas from our suppliers,
and sell such natural gas to our industrial and residential customers for a
profit.





As we do
not own natural gas reserves, we depend on natural gas supply from a small
number of suppliers. While we typically enter into multiple-year gas supply
contracts with our suppliers, the supply contracts are subject to review every
twelve months. If key terms of these supply contracts are changed after the
annual review, or if our suppliers breach any of the key terms of the supply
contracts, we will not be able to deliver the natural gas to our customers.
While we have not experienced any shortage of supply in the past, we cannot
assure you that natural gas will continue to be available to us. In the event
that our current suppliers are unable to provide us with the natural gas we
require, we may be unable to find alternative sources, or find alternative
sources at reasonable prices. In such an event, our business and financial
results would be materially and adversely affected.





The
price of natural gas is subject to uncertain government regulations and market
conditions.





The price
of natural gas is subject to uncertain government regulations and market
conditions in the PRC which are subject to change or fluctuations. While our
costs for natural gas are subject to control by the PRC government
and we have not experienced any significant price fluctuations over the past few
years, we can not assure you that the price of natural gas will not vary
significantly in the future. Numerous factors, most of which are beyond our
control, drive the price and supply of natural gas. Some of these factors are:
general international and domestic political and economic conditions, wars, OPEC
actions, industry capacity utilization and government regulations. The war in
Iraq and uncertain international political conditions could drive the price of
natural gas upwards, thus reducing our profit margins in selling the natural gas
to our customers. Any production restrictions imposed by OPEC on crude oil and
natural gas could also reduce the inventory of the natural gas and drive the
price upwards, reducing our profits. The price at which we sell to customers
will be subject to approval by the Chinese government and is thus heavily
regulated. Although in the past three years there were no significant changes in
regulations, we cannot assure you this will be the case in the future. Any
change in PRC governmental regulations such as labor law regarding the minimum
wage could materially and adversely affect our profits.




- 23
-





Our
success depends on our ability to identify and develop operational locations and
negotiate and enter into favorable franchise agreements with local
governments at the operation locations.





Our
success depends on our ability to identify new operational locations in
small-and -medium-sized cities in China and negotiate and enter into favorable
franchise agreements with local governments that grant us long-term exclusive
right to develop the natural gas distribution network and supply natural gas in
the operational location. Our failure to identify and develop new operational
locations and obtain the exclusive rights to be the developer of natural gas
distribution networks and distribute natural gas in such operational locations
would curb our revenue growth and may adversely impact our financial condition
and operating results.





Our
success depends on our ability to obtain large industrial supply contracts and
master residential supply contracts with large quantity of end
users.





Our
success depends on our ability to obtain large industrial supply contracts and
master residential supply contracts with a large quantity of end users. Our
failure to obtain large industrial supply contracts and master residential
supply contracts with a large quantity of end users will adversely affect our
ability to generate revenue and our growth potential and may adversely impact
our financial condition and operating results.





Our
inability to fund our capital expenditure requirements may adversely affect our
growth and profitability.





Our
business is capital intensive. Our continued growth is dependent upon our
ability to generate more revenue from our existing distribution systems and
raise capital from outside sources. We believe that in order to continue to
capture additional market share, we will have to raise more capital to fund the
construction and installation of the natural gas distribution network for our
customers under existing contracts and for new customers. In order to expand our
operation, we expect that we will need additional financing for acquisition and
expansion in terms of debt financing or equity financing. Our ability to obtain
needed financing at any time may depend on a number of factors, including our
financial condition and results of operations, the condition of the PRC economy
and the natural gas industry in the PRC, and conditions in relevant financial
markets in the United States, the PRC and elsewhere in the world. In the future
we may be unable to obtain the necessary financing on a timely basis and on
acceptable terms, and our failure to do so may adversely affect our financial
position, competitive position, growth and profitability.





We
may not be able to effectively control and manage our growth.





From
August 2003 to December 2008, we have entered into 27 franchise agreements with
27 local government to provide natural gas to certain newly developed
residential communities, and we expect that we will secure more of such
franchise agreements in the years to come.






- 24
-




If our
business and markets grow and develop, it will be necessary for us to finance
and manage expansion in an orderly fashion. In addition, we may face challenges
in managing expanding natural gas distribution network and service offerings and
in integrating acquired businesses with our own. Our business expansion has
resulted, and will continue to result, in substantial demands on our management,
operational, technological and other resources. To manage and support our
growth, we must improve our existing operational, administrative and
technological systems and our financial and management controls, and recruit,
train and retain additional qualified technical and management personnel as well
as other administrative and sales and marketing personnel, particularly as we
expand into new markets. We cannot assure you that we will be able to
effectively and efficiently manage the growth of our operations, recruit and
retain qualified technical and management personnel and integrate new
communities into our operations. Any failure to effectively and efficiently
manage our expansion may materially and adversely affect our ability to
capitalize on new business opportunities, which in turn may have a material
adverse impact on our financial condition and results of
operations.




The
nature of our natural gas operations is highly risky and we may be subject to
civil liabilities as a result of our business of gas operations.





Our
natural gas operations are subject to potential hazardous accidents to the
gathering, processing, separation, storage and delivery of natural gas, such as
pipeline ruptures, explosions, product spills, leaks, emissions and fires. These
potential hazardous accidents can cause personal injury and loss of life, severe
damage to and destruction of property and equipment, and pollution or other
environmental damage, and may result in suspension or shutting down of
operations at the affected facilities of residential areas. Consequently, we may
face civil liabilities in the ordinary course of our business. These liabilities
may result in us being required to make indemnification payments in accordance
with the applicable contracts and regulations. At present, we do not carry any
insurance to cover such liabilities in the ordinary course of our business.
Although we have not faced any civil liabilities in the past since we started
the current line of business in the ordinary course of our natural gas
operations, there is no assurance that we will not face such liabilities in the
future. If such liabilities occur in the future, they may adversely and
materially affect our operations and financial condition.





Changes
in the regulatory environment could adversely affect our business.





The
distribution of natural gas to industrial and residential customers and
operation of filling stations are highly regulated in the PRC requiring
registrations with the government for the issuance of licenses required by
various governing authorities in the PRC. For example, to operate in our line of
business, we are required to obtain and maintain licenses such as the Natural
Gas Business License and the franchise Business License. In addition, there are
various standards that must be met for filling stations including handling and
storage of natural gas, tanker handling, and compressor operation which are
regulated by the government. The costs of complying with regulations may
increase which may in turn harm our business. Furthermore, future changes in
environmental laws and regulations in the PRC could occur that could result in
stricter standards and enforcement, larger fines and liability, and increased
capital expenditure requirement and operating costs, any of which could have a
material adverse effect on our financial condition or results of
operations.





We
may not be able to effectively protect our proprietary technology, which could
harm our business and competitive position.




Our
success depends, in part, on our ability to protect our proprietary
technologies. At present, we use an unpatented proprietary natural gas
compression process that allows us to effectively and economically compress
natural gas and distribute it. This process was developed by us based on a
patented technology co-owned by our Chairman and Chief Executive Officer, Mr.
Yu-Chuan Liu, and another individual who is not associated with our company. We
cannot assure you that we are, and will be able to effectively protect our
technology, and our current or potential competitors do not have, and will not
obtain or develop similar compression process, the occurrence of either of which
could harm our business and competitive position.




- 25
-





Implementation
of PRC intellectual property-related laws has historically been lacking,
primarily because of ambiguities in the PRC laws and difficulties in
enforcement. Accordingly, intellectual property rights and confidentiality
protections in the PRC may not be as effective as in the United States
or other developed countries. Policing unauthorized use of proprietary
technology is difficult and expensive, and we might need to resort to litigation
to enforce our rights or defend us, or to determine the enforceability, scope
and validity of our proprietary rights or those of others. Such litigation may
require significant expenditure of cash and management efforts and could harm
our business, financial condition and results of operations. An adverse
determination in any such litigation will impair our intellectual property
rights and may harm our business, competitive position, and business
prospects.





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.




At
present, we use an unpatented, proprietary natural gas compression process that
allows us to effectively and economically compress natural gas and distribute
it. This process was developed by us based on a patented technology co-owned by
our Chairman and Chief Executive Officer, Mr. Yu-Chuan Liu, and another
individual who is not associated with our company. In developing the process, we
did not obtain and have not obtained authorization from such individual to use
the patented technology. We believe that the technology we use is significantly
improved and distinguished from the original patented technology, and any
infringement claim related to the original patented technology would be unlikely
to succeed. However, we cannot assure you that our assessment is and will be
correct. In addition, as litigation becomes more common
in the PRC in resolving commercial disputes, we face a higher
risk of being the subject of intellectual property infringement claims. The
validity and scope of claims relating to natural gas compression technology and
related devices and machines patents involve complex technical, legal and
factual questions and analysis and, therefore, may be highly uncertain. The
defense and prosecution of intellectual property suits, patent opposition
proceedings and related legal and administrative proceedings can be both costly
and time consuming and may significantly divert the efforts and resources of our
technical and management personnel. An adverse determination in any such
litigation or proceedings to which we may become a party could subject us to
significant liability, including damage awards to third parties, court orders
requiring us to seek licenses from third parties, to pay ongoing royalties, or
to redesign our products or subject us to injunctions preventing us from
providing gas services to our customers as required by various contracts we
entered. Protracted litigation could also result in our customers or potential
customers deferring or limiting their purchase or use of our products until
resolution of such litigation.





Our limited operating history may
not serve as an adequate basis to judge our future prospects and results of
operations.





We have a
limited operating history. We commenced our current line of business of offering
natural gas to customers in certain cities in China in 2003. Our limited
operating history may not provide a meaningful basis on which to evaluate our
business. Although our revenues and profits have grown since we started our
current business, we cannot assure you that we will maintain our profitability
or that we will not incur net losses in the future. We will continue to
encounter risks and difficulties frequently experienced by companies at a
similar stage of development, including our potential failure to:




·
            
            raise
      adequate capital for expansion and operations;·
            
            implement
      our business model and strategy and adapt and modify them as
      needed;·
            
            increase
      awareness of our brands, protect our reputation and develop customer
      loyalty;


- 26
-





·
            
            manage
      our expanding operations and service offerings, including the integration
      of any future acquisitions;·
            
            maintain
      adequate control of our expenses;·
            
            anticipate
      and adapt to changing conditions in the natural gas utility market in
      which we operate as well as the impact of any changes in government
      regulations, mergers and acquisitions involving our competitors,
      technological developments and other significant competitive and market
      dynamics.




If we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.





We
do not have key man insurance on our Chairman and CEO, Mr. Liu, on whom we rely
for the management of our business.





We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Yu Chuan Liu. The loss
of the services of Mr. Liu, for any reason, may have a material adverse
effect on our business and prospects. We cannot assure you that the services of
Mr. Liu will continue to be available to us, or that we will be able to find a
suitable replacement for Mr. Liu. We do not carry key man life insurance for any
key personnel.





In
addition, our future success also depends upon the continuing services of the
other members of our senior management team, including our Marketing Director,
Zhi Min Zhong; our Vice President and Chief Engineer, Shu Kui Bian; and our
Chief Financial Officer, Yugang Zhang. If one or more of our senior executives
or other key personnel are unable or unwilling to continue in their present
positions, we may not be able to replace them easily or at all, and our business
may be disrupted and our financial condition and results of operations may be
materially and adversely affected. Competition for senior management and senior
technology personnel in our line of business is intense in China, the pool of
qualified candidates is very limited, and we may not be able to retain the
services of our senior executives or senior technology personnel, or attract and
retain high-quality senior executives or senior technology personnel in the
future. Such failure could materially and adversely affect our future growth and
financial condition.





We
do not presently maintain product liability insurance, and our property
equipment insurance does not cover their full value, which leaves us with
exposure in the event of loss or damage to our properties or claims filed
against us.





We
currently do not carry any product liability or other similar insurance. While
product liability lawsuits in the PRC are not common and we have never
experienced significant failures of our products, we cannot assure you that we
would not face such liability in the event of the failure of any of our
products. We do not carry any property insurance to cover our real property,
natural gas pipelines, storage facilities and equipment, nor do we have other
insurance such as business liability or disruption insurance coverage for our
operations in the PRC.





We
do not maintain a reserve fund for warranty or defective equipment claims. Our
costs could substantially increase if we experience a significant number of
warranty claims.




Currently,
we provide one year service warranty for the end user equipment, such as gas
indoor pipes and gas meters to our customers after we have installed the gas
distribution systems and commenced gas supply for them. The warranties require
us to repair and replace defective components. Since we started our current line
of business, we have received a very limited number of warranty claims for our
productsthat only
involved minor repairs and whose costs were negligible(around $250 in total) .
Consequently, the costs associated with our warranty claims have historically
been very low. Therefore, we have not established any reserve funds for
potential warranty claims. However, if we experience any increase in warranty
claims or if our repair and replacement costs associated with warranty claims
increase significantly, it would have a material adverse effect on our financial
condition and results of operations.




- 27
-




Risks Related to Doing
Business in the PRC.





We
face the risk that changes in the policies of the PRC government could have a
significant impact upon the business we may be able to conduct in the PRC and
the profitability of such business.





All of
our business operations are conducted in China. Accordingly, our business,
financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The
Chinese economy differs from the economies of most developed countries in many
respects, including level of government involvement in economic activities,
stage of national development, and control of foreign exchange.





While the
Chinese economy has grown significantly in the past 20 years, the growth
has been uneven, both geographically and among various sectors of the
economy.





The PRC’s
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy. Under this direction, we believe that the PRC will continue to
strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While we believe that
this trend will continue, we cannot assure you that this will be the case. A
change in policies by the PRC government could adversely affect our interests
by, among other factors: changes in laws, regulations or the interpretation of
laws and regulations, confiscatory taxation, restrictions on currency
conversion, imports or sources of supplies, or the expropriation or
nationalization of private enterprises. Although the PRC government has been
pursuing economic reform policies for more than two decades, we cannot assure
you that the government will continue to pursue such policies or that such
policies may not be significantly changed, especially in the event of a change
in leadership, social or political disruption, or other circumstances affecting
the PRC's political, economic and social life.





The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC laws and regulations may have a
material and adverse effect on our business.





We
conduct substantially all of our business through our subsidiary, Beijing Gas,
established in China. Beijing Gas is generally subject to laws and regulations
applicable to foreign investment in China and, in particular, laws applicable to
wholly foreign-owned enterprises. The PRC legal system is based on written
statutes. Prior court decisions may be cited for reference but have limited
precedential value. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of new laws or regulations, or new interpretation of existing laws
and regulations. Beijing Gas and any future PRC subsidiaries are considered
foreign invested enterprises under PRC laws, and as a result, we are required to
comply with PRC laws and regulations governing foreign invested enterprises.
These laws and regulations are sometimes vague and may be subject to future
changes, and their official interpretation and enforcement may involve
substantial uncertainty. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively. We cannot predict
what effect the interpretation of existing or new PRC laws or regulations may
have on our businesses.


- 28
-


A
slowdown or other adverse developments in the PRC economy may materially and
adversely affect our customers, demand for our services and our
business.




We are a
holding company. All of our operations are conducted in the PRC and all of our
revenues are generated from sales in the PRC. Although the PRC economy has grown
significantly in recent years, we cannot assure you that such growth will
continue. The use of natural gas for commercial and residential consumption in
the PRC is relatively new and growing, but we do not know how sensitive we are
to a slowdown in economic growth or other adverse changes in the PRC economy
which may affect demand for natural gas. A slowdown in overall economic growth,
an economic downturn or recession or other adverse economic developments in the
PRC may materially reduce the demand for natural gas and materially and
adversely affect our business.





Inflation
in the PRC could negatively affect our profitability and growth.





While the
PRC economy has experienced rapid growth in recent years, such growth has been
uneven among various sectors of the economy and in different geographical areas
of the country. Rapid economic growth can lead to growth in the money supply and
rising inflation. If prices for our products and services rise at a rate that is
insufficient to compensate for the rise in the costs of supplies, it may have an
adverse effect on profitability. In order to control inflation in the past, the
PRC government has imposed controls on bank credits, limits on loans for fixed
assets and restrictions on state bank lending. Such an austerity policy can lead
to a slowing of economic growth. In October 2004, the People’s Bank of China,
the PRC’s central bank, raised interest rates for the first time in nearly a
decade and indicated in a statement that the measure was prompted by
inflationary concerns in the Chinese economy. In 2007, the People’s Bank of
China raised the interest rates again. Repeated rises in interest rates by the
central bank would likely slow economic activity in China which could, in turn,
materially increase our costs and also reduce demand for our products and
services.





Beijing
Gas is subject to restrictions on paying dividends and making other payments to
us.




We are a
holding company incorporated in the State of Utah and do not have any assets or
conduct any business operations other than our investments in our subsidiaries.
As a result of our holding company structure, we rely primarily on dividends
payments from our subsidiary in China. However, PRC regulations currently permit
payment of dividends only out of retained earnings, as determined in accordance
with PRC accounting standards and regulations. The “retained earning” has the
same meaning under both US GAAP and PRC accounting standards in general, except
that under PRC regulations, minimum 10% of net profit after tax has to be set
aside as the reserve fund. The upper limit of the reserve fund is 50% of the
total registered capital of the Company. Only after such set-aside reserve fund
is satisfied, can dividends be paid out of retained earnings. Thus, the impact
of such set-aside reserve fund on the Company is the restriction upon the
Company’s ability to pay dividends to shareholders. For the most recently
completed fiscal year, we have satisfied the set-aside reserve fund requirement
and dividends could have been paid out of retained earnings. However, this year,
we do not have plans to distribute dividends. Our subsidiary and affiliated
entity in China are also required to set aside a 10% of their after-tax profits
according to PRC accounting standards and regulations to fund certain reserve
funds. The PRC government also imposes controls on the conversion of RMB
(Chinese currency Renminbi) into foreign currencies and the remittance of
currencies out of China. We may experience difficulties in completing the
administrative procedures necessary to obtain and remit foreign currency. See
“Government control of
currency conversion may affect the value of your investment.”
Furthermore, if our subsidiary or affiliated entity in China incurs debt on
their own in the future, the instruments governing the debt may restrict their
ability to pay dividends or make other payments. If we or our subsidiary is
unable to receive the revenues due from our operations, we may be unable to pay
dividends on our common stock. As of now, we have not attempted to distribute
and remit any dividends from our subsidiaries in China and therefore, we have
not experienced restrictions.




- 29
-




Governmental
control of currency conversion may affect the value of your
investment.




The PRC
government imposes controls on the convertibility of Renminbi, the Chinese
currency, into foreign currencies and, in certain cases, the remittance of
currency out of the PRC. We receive substantially all of our revenues in
Renminbi, which is currently not a freely convertible currency. Shortages in the
availability of foreign currency may restrict our ability to remit sufficient
foreign currency to pay dividends, or otherwise satisfy foreign currency
dominated obligations. Under existing PRC foreign exchange regulations, payments
of current account items, including profit distributions, and interest payments,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of the PRC to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.




The PRC
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain of our expenses as they come
due.




The
fluctuation of the Renminbi may materially and adversely affect your
investment.




The value
of the Renminbi (“RMB”) against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in the PRC's political
and economic conditions. As we rely entirely on revenues earned in the PRC, any
significant revaluation of the RMB may materially and adversely affect our cash
flows, revenues and financial condition. For example, to the extent that we need
to convert U.S. dollars we receive from an offering of our securities into RMB
for our operations, appreciation of the RMB against the U.S. dollar could have a
material adverse effect on our business, financial condition and results of
operations. Conversely, if we decide to convert our RMB into U.S. dollars for
the purpose of making payments for dividends on our common stock or for other
business purposes and the U.S. dollar appreciates against the RMB, the U.S.
dollar equivalent of the RMB we convert would be reduced. In addition, the
depreciation of significant U.S. dollar denominated assets could result in a
charge to our income statement and a reduction in the value of these
assets.





On July
21, 2005, the PRC government changed its decade-old policy of pegging the value
of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in an approximately 17.1%
appreciation of the RMB against the U.S. dollar between July 21, 2005
and Aug 29, 2008. While the international reaction to the RMB revaluation
has generally been positive, there remains significant international pressure on
the PRC government to adopt an even more flexible currency policy, which could
result in a further and more significant appreciation of the RMB against the
U.S. dollar.





The
discontinuation of any preferential tax treatment currently available to us and
the increase in the enterprise income tax in the PRC could in each case result
in a decrease of our net income and materially and adversely affect our results
of operations.





The PRC
government has provided various incentives to foreign-invested enterprises and
domestic companies operating in a national level economic and technological
development zone, including reduced tax rates and other measures. For example,
Beijing Gas, which is registered and operating in a high-tech zone in Beijing,
has been qualified as a “high or new technology enterprise.” As a result, it is
entitled to a preferential enterprise income tax rate of 15.0% so long as it
continues to operate in the high-tech zone and maintains its “high or new
technology enterprise” status. Beijing Gas is entitled to a two-year exemption
from the enterprise income tax for its first two profitable years of operation,
which were 2003 and 2004. Beijing Gas is thereafter entitled to a preferential
enterprise income tax rate of 7.5% for the succeeding three years (with an
exceptional tax rate of 9.0% for 2005), which will expire on December 31,
2007. However, we cannot assure you that the current preferential tax treatments
and the current level of the enterprise income tax enjoyed by our PRC operating
subsidiary will continue, and any legislative changes to the
tax regime could discontinue any preferential tax treatment and increase the
enterprise income tax rate applicable to our principal subsidiaries in the
PRC.




- 30
-





Specifically,
the PRC Enterprise Income Tax Law, or the EIT Law, was enacted on March 16,
2007. Under the EIT Law, effective on January 1, 2008, China will adopt a
uniform tax rate of 25.0% for all enterprises (including foreign-invested
enterprises) and revoke the current tax exemption, reduction and preferential
treatments applicable to foreign-invested enterprises. However, the current
preferential tax rate of 15.0% applicable to high and new technology enterprises
and the current preferential tax treatments for all enterprises (including
foreign-invested enterprises) will be grandfathered for a period of five years
following the effective date of the EIT Law. The EIT Law applies to all of our
PRC operating subsidiaries, including Beijing Gas, which is currently both a
high and new technology enterprise and a foreign-invested enterprise. Any future
increase in the enterprise income tax rate applicable to our PRC operating
subsidiaries or other adverse tax treatments, such as the discontinuation of
preferential tax treatments, would have a material adverse effect on our results
of operations and financial condition.





Dividends
payable by us to our foreign investors may become subject to withholding taxes
under PRC tax laws.





Under the
EIT Law, dividends payable to foreign investors which are “derived from sources
within the PRC” may be subject to income tax at the rate of 20% by way of
withholding. Since we are a holding company and substantially all of our income
will come from dividends that we receive from our PRC subsidiaries, dividends
that we declare from such income may be deemed “derived from sources within the
PRC” for purposes of the EIT Law and therefore subject to a 20% withholding tax.
While the EIT Law stipulates that such taxes may be exempted or reduced, since
no rules or guidance concerning the new tax law have been issued yet, it is
unclear under what circumstances, and to what extent, such tax would be exempted
or reduced. One example of a limitation on the 20% withholding tax is the way in
which, pursuant to a treaty for the avoidance of double taxation, income tax
levied by the PRC authorities on U.S. investors may not exceed 10% of the gross
amount of the dividends, provided that we are deemed to be a PRC resident
enterprise under the new tax law. If we are required under the EIT Law to
withhold PRC income tax on our dividends payable to our foreign shareholders,
the value of your investment in our common stock may be materially and adversely
affected.





Gains
on the sales of our shares may become subject to PRC income taxes.





Under the
EIT Law, our foreign corporate shareholders may be subject to a 20% income tax
upon any gains they realize from the transfer of their shares, if such income is
regarded as income from “sources within the PRC.” What will constitute “sources
within the PRC” and whether or not there will be any exemption or reduction in
taxation for our foreign corporate investors, however, are unclear since no
rules or guidance concerning the new tax law has been issued yet. If our foreign
shareholders are required to pay PRC income tax on the transfers of their
shares, the value of your investment in our common stock may be materially and
adversely affected.





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.





Recent
regulations promulgated by the PRC State Administration of Foreign Exchange, or
SAFE, regarding offshore financing activities by PRC residents have undergone a
number of changes which may increase the administrative burden we
face.




- 31
-




In
October 2005, SAFE promulgated regulations in the form of public notices, which
require registrations with, and approval from, SAFE on direct or indirect
offshore investment activities by PRC resident individuals. The SAFE regulations
require that if an offshore company directly or indirectly formed by or
controlled by PRC resident individuals, known as “SPC”, intends to acquire a PRC
company, such acquisition will be subject to strict examination by the SAFE.
Without registration, the PRC entity cannot remit any of its profits out of the
PRC as dividends or otherwise. Gas (BVI) is deemed a SPC under these SAFE
regulations. As such, our shareholders who are PRC residents, must comply with
the registration and disclosure requirements provided under the SAFE
regulations. Mr. Yu Chuan Liu, our Chairman and Chief Executive Officer, has
completed the registration with the SAFE and has been issued a SAFE certificate
was issued by SAFE to Beijing Gas in August 2006. We have determined that there
are about a dozen of 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. In
addition, we have agreed with the Investors of this round of financing that
within ninety (90) days of the closing such additional shareholders will file
registration with SAFE, and obtain SAFE certificates.The 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.




Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our operations.





In 2002,
a breakout of SARS in China and other parts of Asia resulted in major
disruptions to the economy of China and Asia. A renewed outbreak of SARS or
another widespread public health problem in the PRC, where all of the Company’s
revenue is derived, could have an adverse effect on our operations. Our
operations may be impacted by a number of health-related factors, including
quarantines or closures of some of our offices that would adversely disrupt our
operations.





Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.





Because
our principal assets are located outside of the United States and nearly all of
our directors and all our officers reside outside of the United States, it may
be difficult for you to enforce your rights based on U.S. Federal Securities
Laws against us and our officers and some directors in the U.S. or to enforce
U.S. Court Judgment against us or the directors or officers in the
PRC.





All  of
our five directorsand all of our officers
reside outside of the United States. In addition, our operating subsidiaries are
located in the PRC and substantially all of our assets are located outside of
the United States. It may therefore be difficult for investors in the United
States to enforce their legal rights based on the civil liability provisions of
the U.S. Federal securities laws against us in the courts of either the U.S. or
the PRC and, even if civil judgments are obtained in U.S. courts, to enforce
such judgments in PRC courts. Further, it is unclear if extradition treaties now
in effect between the United States and the PRC would permit effective
enforcement against us or our officers and directors of criminal penalties,
under the U.S. Federal securities laws or otherwise.





We
may face obstacles from the communist system in the PRC.





Foreign
companies conducting operations in PRC face significant political, economic and
legal risks. The Communist regime in the PRC, including a cumbersome
bureaucracy, may hinder Western investment.





We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.





The PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors,
we may experience difficulty in establishing management, legal and financial
controls, collecting financial data and preparing financial statements, books of
account and corporate records and instituting business practices that meet
Western standards.




- 32
-




Risks Related to Our Common
Stock.





Our
officers, directors and affiliates control us through their positions and stock
ownership and their interests may differ from other stockholders.





Our
officers, directors and affiliates beneficially own approximately 60.7.% of our
Common Stock. Yu chuan Liu, our Chairman, and Chief Executive Officer,
beneficially owns approximately 25.8% and Mr. Quandong Sun, a director,
beneficially owns 21.3%of our Common Stock. As
a result, Mr. Liu and Mr. Sun are able to influence the outcome of stockholder
votes on various matters, including the election of directors and extraordinary
corporation transactions including business combinations. Yet Mr. Liu and Mr.
Sun’s interests may differ from other stockholders. Furthermore, the current
ratios of ownership of our common stock reduce the public float and liquidity of
our common stock which can in turn affect the market price of our common stock.
Please refer to “Security Ownership of Certain Beneficial Owners and Management”
of this Registration Statement for more information regarding beneficial
ownership of securities of our management.





We
are not likely to pay cash dividends in the foreseeable future.





We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiary in the PRC. In addition, our
operating subsidiary, from time to time, may be subject to restrictions on its
ability to make distributions to us, including as a result of restrictions on
the conversion of local currency into U.S. dollars or other hard currency and
other regulatory restrictions.




There
is currently a limited trading market for our common stock.





Our
common stock is quoted on the over-the-counter Bulletin Board. However, our bid
and asked quotations have not regularly appeared on the OTC Bulletin Board for
any consistent period of time. There is no established trading market for our
common stock and our common stock may never be included for trading on any stock
exchange or through any other quotation system (including, without limitation,
the NASDAQ Stock Market). You may not be able to sell your shares due to the
absence of a trading market.





Our
Common Stock may be considered to be a “penny stock” and, as such, the market
for our Common Stock may be further limited by certain SEC rules applicable to
penny stocks.





To the
extent the price of our common stock remains below $5.00 per share, we have net
tangible assets of $2,000,000 or less, or if we fall below certain other
thresholds, our common shares will be subject to certain “penny stock” rules
promulgated by the SEC. Those rules impose certain sales practice requirements
on brokers who sell penny stock to persons other than established customers and
accredited investors (generally institutions with assets in excess of $5,000,000
or individuals with net worth in excess of $1,000,000). For transactions covered
by the penny stock rules, the broker must make a special suitability
determination for the purchaser and receive the purchaser’s written consent to
the transaction prior to the sale. Furthermore, the penny stock rules generally
require, among other things, that brokers engaged in secondary trading of penny
stocks provide customers with written disclosure documents, monthly statements
of the market value of penny stocks, disclosure of the bid and asked prices and
disclosure of the compensation to the brokerage firm and disclosure of the sales
person working for the brokerage firm. These rules and regulations adversely
affect the ability of brokers to sell our common shares and limit the liquidity
of our securities.


- 33
-




Our
common stock is illiquid and subject to price volatility unrelated to our
operations.





The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.





You
may face difficulties in protecting your interests, and your ability to protect
your rights through the U.S. federal courts may be limited, we are incorporated
in non-U.S. jurisdictions, we conduct substantially all of our operations in
China, and all of our officers reside outside the United States.





We
conduct substantially all of our operations in China through our wholly owned
subsidiaries in China. All of our officers reside outside the United States and
some or all of the assets of those persons are located outside of the United
States. As a result, it may be difficult or impossible for you to bring an
action against us or against these individuals in China in the event that you
believe that your rights have been infringed under the securities laws or
otherwise. Even if you are successful in bringing an action of this kind, the
laws of the PRC may render you unable to enforce a judgment against our assets
or the assets of our directors and officers. As a result of all of the above,
our public stockholders may have more difficulty in protecting their interests
through actions against our management, directors or major stockholders than
would stockholders of a corporation doing business entirely within the United
States.




A large number of
shares will be eligible for future sale and may depress our stock
price.




We are
required under the Registration Rights Agreement to register for sale by the
investors and certain other parties a total number of 12,681,255 shares of
Common Stock, including 1,771,074 shares of common stock which are issuable upon
(i) exercise of warrants issued to the Placement Agent in the Private Financing,
and (ii) shares of Common Stock issuable based on the “Make Good” provisions of
the Stock Purchase Agreement. As these shares are placed on the market for sale,
it will increase the supply of stocks for sale, and therefore depress the
selling price of our stock.




Sales of
substantial amounts of common stock, or a perception that such sales could
occur, and the existence of options or warrants to purchase shares of common
stock at prices that may be below the then current market price of the common
stock, could adversely affect the market price of our common stock and could
impair our ability to raise capital through the sale of our equity
securities.





The
exercise of certain warrants will dilute the investment by current
investors.





Currently
our outstanding warrants include: (i) series A warrants to purchase an aggregate
of 241,708 shares of common stock at $3.84 per share, (ii) series C warrants to
purchase an aggregate of 3,083,588 shares of common stock at $3.375 per share,
(iii) series G warrants to purchase an aggregate of 109,489 shares of common
stock at $3.84 per share, (iv) series F warrants to purchase an aggregate of
271,074 shares of common stock at $4.84 per share and (v) placement agent series
R warrant to purchase an aggregate of 271,074 shares of common stock at $4.84
per share. Under the existing warrants, a total of 3,976,933 common shares will
need to be issued by us if the warrant holders decide to exercise the warrants.
If this happens, the investment of our current shareholders would be
significantly diluted.




- 34
-




Item 2. Properties





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.





All land
in China is owned by the State. Individuals and companies are permitted to
acquire rights to use land or land use rights for specific purposes. 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. In the case of land used for industrial purposes, the
land use rights are generally granted for a period of 50 years. This period may
be renewed at the expiration of the initial and any subsequent terms. Granted
land use rights are transferable and may be used as security for borrowings and
other obligations. We 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, we
lease office buildings and warehouse facilities for our business
operations.





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
            
            November25,
              2003
            
            November
              25, 2043Yu 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


Xiahuayuan
              Jinli Gas Ltd.
            
            East
              side of Xinchen
              Road in
      Xiahuayuan District of Zhangjiakou City
            
            Commercialuse
            
            3,320
            
            
            
            ,
              2047






- 35
-




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. The documentation of some of
these land use rights have not yet been completed. We expect to complete the
documentation for these land use rights in the near future.




As of
December 31, 2008, we own 710 km of high-pressure underground pipeline. We also
own and operate 37 natural gas stations with accompanying buildings, gas
compression facilities and other equipment, including 29 cars, 17 trucks, 47
containers (3000 m3 ), 5
containers (4500 m3 ), and
76 containers (300 m3 ). We
also lease two trucks and containers.





We
believe that all our properties and equipment have been adequately maintained,
are generally in good condition, and are suitable and adequate for our
business.





Item 3. Legal Proceedings





To our
knowledge, there is no material litigation pending or threatened against
us.




Item 4. Submission of Matters to a Vote of
Security Holders




None.




PART
II




Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities





Our
common stock is quoted on the OTC Bulletin Board under the symbol SGAS.OB.
There was no public trading activity in our shares during the past two fiscal
years through September 7, 2006. Since our September 7, 2006 reverse merger with
GAS Investment China Co., Ltd. (“Gas (BVI)”), there has been some minimal
trading activity in our shares. The following table provides the high and low
sales prices for our common stock as reported for the periods
indicated.




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)September 30, 2006(1)
            
            $
            0.04
            
            
            $
            0.014December
      31, 2006
            
            $
            5.00
            
            
            $
            3.60March
      31, 2007
            
            $
            11.12
            
            
            $
            6.1June
      30, 2007
            
            $
            8.0
            
            
            $
            4.0September
      30, 2007
            
            $
            6.0
            
            
            $
            3.7December
      31, 2007
            
            $
            4.5
            
            
            
            2.75March
      31, 2008
            
            $
            4.0
            
            
            $
            2.10June
      30, 2008
            
            $
            2.45
            
            
            $
            1.35


September
      30, 2008
            
            $
            1.45
            
            
            $
            0.77December
      31, 2008
            
            $
            0.80
            
            
            
            0.30First
      quarter of 2009 (as of March 27, 2009)
            
            $
            0.40
            
            
            
            0.06




(1) We
completed our reverse merger with GAS Investment China Co., Ltd. (“Gas (BVI)”)
on September 7, 2006.




- 36
-




As of
March 30, 2009, there were 682 holders of record of our common
stock.




To date,
we have neither declared nor paid any cash dividends on shares of our common
stock. We presently intend to retain earnings to finance the operation and
expansion of our business and do not anticipate declaring cash dividends in the
foreseeable future.




Item
6. Selected Financial Data





Not
required.




Item 7. Management’s Discussion and
Analysis of Financial Condition and Results 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 January
11, 2008.





Overview





We are
engaged in the development of natural gas distribution systems and the
distribution of natural gas to residential, and industrial customers in small-
and medium-sized cities in China, through our indirectly-owned subsidiaries in
the PRC, Beijing Gas and its subsidiaries.–





Beijing
Gas is organized as a holding company with 27 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. These exclusive franchise agreements last between
20-30 years.





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.




Through
its subsidiaries, Beijing Gas is a natural gas distributor, principally engaging
in the investment, operation and management of city gas pipeline infrastructure,
in the distribution of natural gas to residential and industrial users, in the
construction and operation of natural gas distribution networks, and in the
development and application of natural gas related technologies. Beijing Gas and
it subsidiaries own and operate 37 natural gas distribution systems serving
approximately 100,900 residential and five industrial customers. Our
facilities include approximately 710 km of pipeline and delivery networks with a
daily capacity of approximately89,000 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, Jilin, Anhui and Beijing.




- 37
-




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.





Executive
Summary





Economic
& Industrial Trend





We
generate revenue from two sources: connection fees for constructing connections
to our natural gas distribution network and sales of natural gas. Our connection
activities are closely related to the development of the real estate industry in
our targeted cities in China, given the fact that almost all of our connection
fees are from new residential apartments. Natural gas facilities in new
apartments are often required by local governments, who aim to promote the use
of natural gas to improve local residents’ quality of life.





We have
experienced high growth of our connection activities since inception of our
business due to the Chinese real estate boom in the
past years. However, in 2007, the Chinese government implemented a
series of policies and regulations to curb inflation and the property market.
These policies, together with the worldwide financial crisis in 2008, has
resulted a slowdown of the real estate market in China and our business, in
turn, has been affected in 2008. Recently, the Chinese government has
changed its policy and prioritized boosting of the economy . The Chinese
government has adopted new policies to address the slowdown of the real estate
market, such as reducing stamp duties and transactions fees, lowering interest
rates, and loosening bank lending policies. The Chinese government has also
decided to inject a stimulus package to boost the overall economy, including
allocation of funds for mass housing projects. We have seen signs of recovery of
the real estate market in China in recent months.





Even with
the current slowdown of the Chinese real estate market, we believe that
the future growth trend of the real estate market will not
change  because of the continuous urbanization in
China.  Therefore, in the next several months, we expect to see
the return of growth of household connections, especially in small-to-medium
sized cities where the real estate market is at an early developing
stage.




Our gas
users are composed of industrial and residential users. Gas sales from
residential users are much less affected by economic and industrial factors and
would maintain stable growth in the future, due to the increasing pool of our
residential customers. Gas sales from industrial users is subject to the
operating performance of the end industrial user. Gas sales to our industrial
users have increased 41.6% during 2008 as existing users have expanded their
production capacity. For our biggest industrial user, Hebei Zhong Gang Co. Ltd,
our average daily gas sales were 24,000 cubic meters in 2008. As we develop into
more cities, we expect to add one to two industrial users in the coming year if
capital requirements are available.




- 38
-




Material
Opportunities





The gas
distribution market is quite fragmented in the small (population less than
100,000)-to-medium (population between 100,000 to 300,000) sized cities. We have
been in active talks with potential project targets. The size of the projects
varies from small cities, like the ones we have, to medium-sized cities. For
small city markets, many of them are still untapped or undeveloped. The
development of these markets is generally considered major growth
components of the company. The current world wide financial crisis has created
pricing opportunities for us to acquire projects at attractive
prices.





Regarding
medium-sized or large cities, most of them have already been developed by large
distributors or are still operated by state-owned companies. Acquisition
opportunities exist for those still run by state-owned companies, as the central
government encourages suppliers to turn them into privately-owned companies. The
acquisition of these markets would have material impact on the company,
increasing the company’s assets and revenues significantly. The company needs to
raise money to fund these acquisitions.




Material
Challenges





There are
vast number of small-to-medium sized cities left undeveloped, but the
competition is intense, as there are many small new players in the market
attracted by the profitability and growth potential of the business. Meanwhile,
from time to time, we are also facing competitions from stronger competitors, as
large city markets are getting saturated and our competitors are beginning to
expand into smaller cities.





We are
facing limited opportunities in developing into first-tier cities in China, as
most of them have already been taken by other large gas distributors, such as
Xin’ao Gas Co. Ltd (largest in China) in the past decade.





Still,
potential users in small and medium-sized cities need to be educated by the
benefits of natural gas. It takes some time for them to get to know how natural
gas can improve the quality of life. This is especially true for new markets,
where there is no use of natural gas. Small cities tend to be more reluctant for
use of new energies than large cities where residents depend more on coal,
rather than natural gas.





China’s
energy market is highly regulated by the government, with regard to purchase
price and sale price of natural gas. Whenever there is an adjustment to purchase
price by the government, gas distributors would increase the sale price
correspondingly, subject to a public hearing and government approval. The
increase of natural gas prices in China is lagging behind that in the
international markets, which has soared in the past year. The Chinese government
has seldom adjusted natural gas and we cannot rule out the possibilities of an
increase of natural gas prices by the government in the future. Even though we
can adjust the sale price accordingly after the increase of purchase
price,  passing the increase to end users. However, it would make
natural gas more expensive, as compared to other alternative energies. Thus this
increase of price will deter our business development.





Risks
in Short-Term and Long-Term





In each
of the cities we are developing and aiming to develop, the real estate market is
the major factor that impacts us. Most of our residential customers are the new
home buyers. If the real estate market turns downward,
the demands for new homes would decrease, resulting in fewer natural gas
connections, and thus negatively impacting our business.





To reduce
the company dependence on connection fees, the company is looking at
opportunities to diversify its business by expanding into related areas, such as
pipeline and gas station business. However, we do not expect to develop into
those areas in large scale any time soon and it may take some time for those
businesses to become our major business.




- 39
-




RESULTS
OF OPERATIONS





Year
Ended Dec 31, 2008 Compared to Year Ended Dec 31, 2007





In the
year ended December 31, 2008, net revenues were  $21,448,488, representing
an increase of 5.83% from that of the previous year ,and gross
profit was $7,469,980, representing a decrease of 30.63% from that of the
previous year.  Operating income in 2008 was $2,689,582, representing
a decrease of 66.60% from 2007.




For the 12 months ended
              December 31,2008
            
            
            2007
            
            
            ChangeUS$
            
            
            US$
            
            
            %Net
      Revenues
            
            
            21,448,488
            
            
            
            20,267,756
            
            
            
            5.83
            %Gross
      Profit
            
            
            7,469,980
            
            
            
            10,768,004
            
            
            
            -30.63
            %Operating
      Income
            
            
            2,689,582
            
            
            
            8,052,785
            
            
            
            -66.60
            %Net
      Income
            
            
            1,600,493
            
            
            
            7,707,370
            
            
            
            -79.23
            %Gross
      Margin
            
            
            34.83
            %
            
            
            53.13
            %Net
      Margin
            
            
            7.46
            %
            
            
            38.03
            %




Net
Revenues





We
generate revenues from two sources: connection fees for constructing connections
to our natural gas distribution network, and sales of natural gas.





Total net
revenues for the year ended December 31, 2008 were $21,448,488, compared to
$20,267,756 for the same period in 2007, representing a slight increase of
5.83%. The slight increase was mainly due to  the significant increase
of gas sales, which was able to offset the substantial decrease in connection
fees. In 2008, we connected 26,770 new residential households to our gas
distribution network, resulting in total connection fees of $9,287,529. Gas
sales during the same period amounted to 34.71 million cubic meters,
or $12,160,959. In comparison, we connected 39,306 new residential
households to our gas distribution network throughout 2007, resulting in total
connection fees of $12,973,148. Gas sales during the period amounted to
25.89 million cubic meters, or $7,294,608.


For
      the 12 months ended December 31,2008
            
            
            2007
            
            
            Change(In
      $ million)
            
            US$
            
            
            %
            
            
            US$
            
            
            %
            
            
            %Net
      Revenues
            
            
            21.45
            
            
            
            100
            %
            
            
            20.27
            
            
            
            100
            %
            
            
            5.83
            %Connection
      Fees
            
            
            9.29
            
            
            
            43.31
            %
            
            
            12.97
            
            
            
            64.01
            %
            
            
            -28.37
            %Gas
      Sales
            
            
            12.16
            
            
            
            56.69
            %
            
            
            7.29
            
            
            
            35.99
            %
            
            
            66.80
            %






- 40
-




Our net
revenues for the year ended December 31, 2008 largely resulted from the
following factors:




1)
            Signficant
      increase of gas sales. When more customers added into our existing gas
      network system, the gas sales increased significantly compared to the
      previous year.





2)
            Substantial decrease of
      connection fees from residential customers. (Connection fees offer a
      higher gross margin than gas sales.) The slowdown of the real estate
      market and unfavorable capital markets have affected our operation,
      especially our connection fees.  The slowdown of the real estate
      market has caused real estate developers, our customers, to grant fewer
      new contracts to us to perform new gas connection services.  In
      addition, real estate developers also postponed the execution of certain
      existing contracts for connection services.  The unfavorable
      capital markets have forced us to scale back our operations.  In
      2007, with funds raised, we were able to acquire additional new
      projects, which contributed to the bulk of the increase of connection fees
      in 2007.  However, in 2008, the unavailability of capital has
      greatly reduced the amount of connection fees  to be generated from
      new projects.





3)
            Decrease
      of connection fees from industrial users in
  2008.




We expect
the percentage of gas sales relative to total revenue will continue
to increase and the percentage of connection fees relative to the total
revenues to decrease, since more customers will be added into our gas
distribution network.





The
company is also considering opportunities to diversify its business by expanding
into related areas, such as pipeline and gas fueling stations. However, we do
not expect to develop into these areas on a large
scale  immediately..





Connection
Fees





Connection
fees in 2008 were $9.29 million, representing a decrease of 28.37% over the
year 2007. Connection fees in 2008 accounted for approximately 43.31% of total
net revenue compared to approximately 64.01% for the same period in 2007. With
regard to the source of connection fees, $9.29 million, or 100% of total
connection fees, came from the development of new residential users. We
connected 26,770 residential users in 2008, a decrease of approximately 31.89%
from 2007. There were no connection fees attributable to industrial
users in 2008.




For
      the 12 months ended December 31,(in
      US$ millions)
            
            2008
            
            
            2007
            
            
            ChangeUS$
            
            
            %
            
            
            US$
            
            
            %
            
            
            %Connection
      Fees
            
            
            9.29
            
            
            
            100
            %
            
            
            12.97
            
            
            
            100
            %
            
            
            -28.37
            %Residential
      Users
            
            
            9.29
            
            
            
            100
            %
            
            
            11.25
            
            
            
            86.74
            %
            
            
            -17.49
            %Industrial
      Users
            
            
            0
            
            
            
            0
            %
            
            
            1.72
            
            
            
            13.26
            %




- 41
-




The table
below is a breakdown of our top five customers by connection fees:




Customers
            
            Connected
              Household Users
            
            
            Connection Fees:
              ($ million)
            
            
            Percentage of
              Connection Fees
              (%)Baishan
      Zhongfang Real Estate Development Co., Ltd.
            
            
            915
            
            
            
            0.3
            
            
            
            3.2
            %Tonghua
      Tongsheng Real Estate Development Co., Ltd.
            
            
            1,052
            
            
            
            0.3
            
            
            
            3.2
            %Beijing
      Zhenshi Real Estate Co.
            
            
            990
            
            
            
            0.27
            
            
            
            2.9
            %Oriental
      Sun-Town Real Estate Co.
            
            
            1300
            
            
            
            0.49
            
            
            
            5.3
            %Tangshan
      Shunda Real Estate Development Co., Ltd.
            
            
            996
            
            
            
            0.29
            
            
            
            3.1
            %





At
present, we are searching for new projects with great growth potential, and we
entered into a purchase agreement for one new project at the end of 2008. It is
anticipated that the project will bring the us approximately 9,000 new
residential customers in the next three years.




Gas
Sales




In terms
of volume, we sold 34.71 million cubic meters of natural gas in 2008, compared
to 25.89 million cubic meters in 2007. In terms of value, gas sales were $12.16
million in 2008, accounting for 56.69% of total net revenue in 2008,
representing an increase of 66.80% over the year 2007. Gas sales to residential
users increased 141.97%, from $1.73 million in 2007 to $4.18 million in 2008.
Gas sales to industrial users increased 67.15%, from $2.84 million in 2007 to
$4.74 million in 2008. Gas sales to commercial users increased 18.6%, from $2.73
million in 2007 to $3.24 million in 2008.




For
      the 12 months ended December 31,2008
            
            
            2007
            
            
            Change($
      million)
            
            US$
            
            
            %
            
            
            US$
            
            
            %
            
            
            %Gas
      Sales
            
            
            12.16
            
            
            
            100
            %
            
            
            7.29
            
            
            
            100
            %
            
            
            66.80
            %Residential
      Users
            
            
            4.18
            
            
            
            34.4
            %
            
            
            1.73
            
            
            
            23.7
            %
            
            
            141.97
            %Industrial
      Users
            
            
            4.74
            
            
            
            39
            %
            
            
            2.84
            
            
            
            39
            %
            
            
            67.15
            %Commercial
      Users
            
            
            3.24
            
            
            
            26.6
            %
            
            
            2.73
            
            
            
            37.3
            %
            
            
            18.6
            %




Such
substantial increases were primarily attributable to the fact that our invested
projects maintained steady development, and more users were added to our gas
distribution network.




The table
below is a breakdown of our major industrial customers for gas consumption in
2008.




Industrial
      Customers
            
            Gas Usage
              (million
              cubic
              meters)
            
            
            Gas Usage
              ($ million)
            
            
            Percentage
              of Gas Sales
              (%)Hebei
       Zhonggang Steel Co., Ltd.
            
            
            8.74
            
            
            
            3.07
            
            
            
            25.2
            %The
      First Machine Factory of Huabei Petrol Bureau
            
            
            1.41
            
            
            
            0.48
            
            
            
            4.1
            %Hebei
      Jihengyuan Group Ltd.
            
            
            0.93
            
            
            
            0.42
            
            
            
            2.7
            %Tangshan
      Changsheng Ceramic Factory
            
            
            0.72
            
            
            
            0.25
            
            
            
            2.1
            %Elite
      (Langfang) Textile Corporation
            
            
            0.33
            
            
            
            0.11
            
            
            
            1
            %





Gas sales
of $3.07 million were contributed by Hebei Zhonggang Steel Co., Ltd.
(“Hebei Zhonggang”), which started to use gas at the beginning of 2006. The gas
consumption of Hebei Zhonggang has increased to 8.74
million cubic meters in 2008 from 7.35 million cubic meters in 2007.
In 2008, daily gas consumption by Hebei Zhonggang has increased to roughly
24,000 cubic meters.




- 42
-




Cost
of Revenues





Cost of
revenues in 2008, which includes cost of connection and cost of gas sales, was
$13.98 million, an increase of $4.48 million, or 47.15%, from $9.50 million in
2007.




For
      the 12 months ended December 31,2008
            
            
            2007
            
            
            Change($
      million)
            
            US$
            
            
            %
            
            
            US$
            
            
            %
            
            
            %Cost
      of Revenues
            
            
            13.98
            
            
            
            100
            %
            
            
            9.50
            
            
            
            100
            %
            
            
            47.15
            %Connection
      Cost
            
            
            2.89
            
            
            
            20.7
            %
            
            
            3.13
            
            
            
            32.9
            %
            
            
            -7.38
            %Gas
      Cost
            
            
            11.08
            
            
            
            79.3
            %
            
            
            6.37
            
            
            
            67.1
            %
            
            
            73.88
            %




Cost of
Connection




Our cost
of connection during the year ended December 31, 2008 was $2.89 million, or
20.7% of total cost of revenues.  By comparison, the cost of
connection during the same period of 2007 was $3.13 million, or 32.9% of total
cost of revenue.





Cost of
connection decreased approximately 7.38% from the same period in 2007,
mainly due to the decrease of connection service activities in 2008 compared to
2007. .





Cost of
connection includes depreciation of major pipelines, the cost of courtyard
pipelines, valves, gas meters, and installation and maintenance
fees.




Considering
the city's overall planning and the long-term interests of our company, the
capacity of the gas pipeline network we designed to distribute gas for a city
usually greatly exceeded the number of households we served at the very
beginning, which makes the cost of connection, specifically the depreciation of
fixed assets and maintenance cost relatively high if the number of residential
users connected is low. However, with connection of more households to the gas
pipeline, the average cost to each household will be gradually
reduced.





Cost of Gas
Sales




The cost
of natural gas sales includes the purchase and transportation of natural gas and
depreciation of delivery equipment. The cost of gas sales increased 73.88% to
$11.08 million during the year ended December 31, 2008 from $6.37 million during
the same period in 2007. This increase, which outpaced the 66.71% increase in
sales of natural gas during the same interval, is largely due to the increase of
rental expenses on gas delivery trucks and higher fuel cost in
2008.





Connection
fees have a much higher gross margin than gas sales.




For the
year ended December 31, 2008, we purchased a total of 34.7 million cubic meters
of natural gas.





Langfang
Development Zone Wei Ye Hazardous Goods Transportation Co. Ltd, one of our
subsidiaries, is responsible for our gas transportation, and transportation cost
per cubic meter is relatively stable at RMB 0.55 ($0.075) per cubic
meter.




Gross
Profit





For
      the 12 months ended December 31,2008
            
            
            2007
            
            
            Change($
      million)
            
            US$
            
            
            %
            
            
            US$
            
            
            %
            
            
            %Gross
      Profit
            
            
            7.47
            
            
            
            100
            %
            
            
            10.77
            
            
            
            100
            %
            
            
            -30.63
            %Connection
            
            
            6.39
            
            
            
            85.58
            %
            
            
            9.85
            
            
            
            91.45
            %
            
            
            -35.08
            %Gas
            
            
            1.08
            
            
            
            14.42
            %
            
            
            0.92
            
            
            
            8.55
            %
            
            
            17.05
            %






- 43
-


During
the year ended December 31, 2008, gross profit was $7.47 million, representing a
decrease of approximately 30.63% from the same period of 2007. Gross profit from
connection fees is $6.39 million for 2008, accounting for 85.58% of total gross
profit. In comparison, gross profit from connection fees was $9.85 million for
2007, accounting for 91.45% of total gross profit. Gross profit from gas sales
was $1.08 million, accounting for 14.42% of total gross profit, compared to
$0.92 million, 8.55% of total gross profit in the same period in
2007.




Gross
margin during the year ended December 31, 2008 is 34.83%, compared to 53.13%
during the same period in 2007.





Gross
margin for connection fees for the year 2008 was 68.83%, compared to 75.91%
in 2007. The decrease of connection gross margin is mainly because we built gas
distribution infrastructures which can be used for 25-30 years by the total
potential residential households in our operating cities and, now, only a small
proportion of residential households have been connected. As a result, the
depreciation under the cost of connection is relatively higher if the number of
residential users connected is low. As we develop more households in the cities,
the margin will improve.





Gross
margin for sales of natural gas was 8.86% in 2008, compared to 12.62% during the
same period of 2007The decrease was due to an increase of rental expenses on gas
delivery trucks and higher cost of fuel.





Selling
and Marketing Expenses





Our
selling and marketing expenses in the year ended December 31, 2008 were $1.14
million and approximately 5% of our net revenues, compared with $0.61million, or
3% of net revenues in the same period of 2007.  We entered into a term
sheet agreement with one debt financing investor to raise approximately $20
million for the acquisition of potential target projects.  The
definitive agreements were expected to be signed in the second quarter of 2008.
In 2008, based on the assumption that $20 million would be available, we
significantly increased our sales and marketing efforts for new projects. The
debt financing, however, did not occur due to the effects on the capital markets
of the financial crisis in 2008.




General
and Administrative Expenses





General
and administrative expenses were $3.64 million for the year ended December
31, 2008, which was 72.51% higher than $2.11 million for the same
period in 2007.  The increase was largely due to the contingent
expenses of 1.2 million, substantial
of which is non-recurrentincluding the penalties of late registration
and late registration statement effectiveness of $481,800, the fees of legal
counsel  for registration and fees of financial consultant of
$344,565, the escrow account expenses of $246,186, and costs of approximately
$140,000 for Sarbanes-Oxley compliance consultation, which was disclosed in the
second quarter and most of which are non-recurrent expenses. Such increase in
general and administrative expenses were also caused by the increase in the
number of our operating subsidiaries from 26 to 27, which led to increases in
salary, social insurance, traveling expenses and other expenses.




Operating
Income


The
operating income in 2008 was $2.69 million, representing a decrease of 66.58%
compared to the operating income of $8.05 million in 2007.




- 44
-




Income
tax




Income
tax was $0.90 million in 2008, compared to $0.53 million in 2007. The increase
is caused by the higher income tax rate in 2008.





For 2007,
the income tax rate applicable to Beijing Gas, the main subsidiary of Sino Gas
in China, is 7.5%. Beijing Gas is classified as a foreign high-tech enterprise
by the tax regulatory authority, and therefore has enjoyed a favorable tax rate
for the past five years, with an income tax rate of zero in 2004 and 7.5% from
2005 to 2007. Starting in 2008, Beijing Gas was subjected to the new tax rate of
25%.The income tax rate of our subsidiaries is 25%, except for Beijing
Chenguang. Beijing Chenguang has been classified as a foreign high-tech
enterprise and is subject to the favorable income tax rate of 7.5% from 2006 to
2008.





Net
Income





Net
income for the year ended December 31, 2008 was $1.60 million,
representing a decrease of 79.24% from $7.71 million in the same
period in 2007. This decrease was due to the significant decrease of connection
fee in 2008 as compared to the same period of 2007 , the increase of SG&A
expense , and the increase of income tax expense. During this period, we
connected 26,770 new residential households to our gas distribution network. In
comparison, during 2007, we connected 39,306 new residential households to our
gas distribution network.




Net
income margin is 7.46%, compared with 38.03% for the same period last year.
The decrease was mainly due to our substantial increase of cost and expenses as
explained above.





Liquidity
and Capital Resources




Cash and
cash equivalents were $3.03 million as of December 31, 2008, a decrease of
$7.89 million as compared to  $10.92 million of cash and cash
equivalents as of December 31, 2007. In 2008, the major source of cash was from
the Company’s operating activities.





We have
the following major financing activities during the period of 2008: Beijing Gas,
the main subsidiary of Sino Gas in China, took out a one year loan in the amount
of RMB 15 million (approximately $2.2 million), accruing interest at a fixed
rate of 6.69% per year. from Bank of Dalian; in the fourth quarter. We repaid
the RMB 20 million (approximately $2.7 million) one year loan from Chinese
Renmin Bank.





Cash
Flows





Cash
flows from operating activities during the year ended December 31, 2008
were $4.21 million, a decrease of $8.86 million from $13.07 million in 2007,
Such decrease was mainly due to the decrease of net income, adjusted for
non-cash expense items and changes in working capital.





Cash
flows from investing activities during the year ended December 31, 2008 were
$16.96 million, a decrease of $7.19 million from $24.15 million in
2007. The decrease was mainly due to acquisitions in 2007.




Cash
flows from financing activities during the year ended December 31, 2008
were $0.55 million, a decrease of $15.88 million from $16.43 million in 2007.
There were basically no financing activities in 2008 due to the unfavorable
capital markets.




Natural
gas distribution is a typical capital-intensive industry, which requires a large
amount of capital for the construction of pipelines and gas stations, and other
costs such as the purchase of transportation vehicles, while the investment
would generally see returns in the following year with increased new household
connections. Under the organic growth model (growth by the Company without
outside funding), the Company can develop new city projects by using the revenue
generated from existing cities. The Company would be constrained by inadequate
capital when developing large scale projects or conducting merger or acquisition
activities, under which situations the company would require financing for
its business expansion.




- 45
-




Accounts
Receivable





Accounts
receivable as of December 31, 2008 were $6.01 million, representing a decrease
of $1.31 million from $7.32 million as of December 31, 2007. Accounts receivable
accounted for 28.04% of net revenues, compared to 36.11% in 2007. The
considerable decrease was due to the fact that we  significantly
improved the management and control of accounts receivable.




Our
accounts receivable is expected to gradually decrease during the first six
months of 2009 due to our seasonal business cycle, in which connection fees are
generally higher in the third and fourth quarters of every year than the first
two quarters. Accounts receivable are collected in the beginning of the
following year.




The table
below is a breakdown of our 10 largest accounts receivable as of December 31,
2008.




Hebei
      Zhonggang Steel, Ltd.
            
            $
            430,262ShuqiaXuzhou
      Shenyuan Real Estate Co.,Ltd.
            
            
            324,167Peixuan
      Jiannan Development Company
            
            
            278,947Beijing
      Yincheng Construction Co.,Ltd.
            
            
            283,271Tonghua
      Tongsheng Real Estate Co., Ltd.
            
            
            370,225Sihong
      Jinwan Development Co., Ltd.
            
            
            334,661Guannan
      Fangwu Construction Co.,Ltd.
            
            
            341,268Lianyun
      Port Development
            
            
            368,157Shanghai
      Datun Energy Co., Ltd.
            
            
            238,705Beijing
      Zheng Real Estate Co.,Ltd.
            
            
            229.811$
            3,199,474




Notes
Receivable




Notes
receivable of $0.11 million as of December 31, 2008 is the Note issued by Hebei
Zhonggang for its use of gas.




Inventory




Inventory
of $0.35 million as of December 31, 2008 comprised spare parts and natural
gas.




Fixed
Assets




Fixed
Assets as of December 31, 2008 was $36.18 million, an increase of $9.95 million
from $26.23 million in 2007. The table below is a breakdown of our fixed assets
at cost:





2008
            
            
            2007At
      CostGas
      Pipelines
            
            $
            27,859,313
            
            
            $
            18,885,734Motor
      Vehicles
            
            
            5,600,508
            
            
            
            4,874,685Machinery
      & Equipment
            
            
            857,834
            
            
            
            885,997Buildings
            
            
            1,568,380
            
            
            
            1,405,638Leasehold
      Improvements
            
            
            80,101
            
            
            
            68,942Office
      Equipment
            
            
            216,435
            
            
            
            105,336Less
      Accumulated depreciation
            
            
            (3,149,453
            )
            
            
            (1,653,771
            )


$
            33,033,118
            
            
            $
            24,572,565






- 46
-




Other
Payables





Other
payables as of December 31, 2008 were $6.17 million, a decrease of $4.21 million
from the end of 2007.




Off-balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.




Item 8. Financial Statements and
Supplementary Data




Our
financial statements begins on page F-1of this annual report.




Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial Disclosure





None.




Item 9A. Controls and
Procedures





Management’s
Report of Disclosure Controls and Procedures





Our
management is responsible for establishing and maintaining adequate disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act and have designed disclosure controls and procedures or caused
disclosure controls and procedures to be designed under its supervision in order
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles, as applicable. Due to its
inherent limitations, disclosure controls and procedures may not prevent or
detect material misstatements. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Under the
supervision of and with the participation of our Chief Executive Officer and our
Chief Financial Officer, our management conducted its evaluation of the
effectiveness of our Company’s disclosure controls and procedures as of December
31, 2008.  Based on that evaluation, our management concluded that, as
of December 31, 2008, our Company’s disclosure controls and procedures was not
effective due to the material weaknesses described below.




Management’s
Report of Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act and have designed internal control over financial reporting or
caused internal control over financial reporting to be designed under its
supervision in order to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, as
applicable. Due to its inherent limitations, internal control over financial
reporting may not prevent or detect material misstatements. In addition,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.




Under the
supervision of and with the participation of our Chief Executive Officer and our
Chief Financial Officer, our management conducted its evaluation of the
effectiveness of our Company’s internal control over financial reporting as of
December 31, 2008 using the criteria in theInternal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on that evaluation, our management concluded
that, as of December 31, 2008, our Company’s internal control over financial
reporting was not effective due to the material weaknesses described
below.




- 47
-





(1) The
Company has not yet established a comprehensive Code of Conduct and Ethics (the
“Code”) which is applicable to all Company directors, officers and
employees.





(2) Our
Internal Audit Department has not taken an active role in the conduct of its
activities due to insufficient resources. The annual plan, budget, and specific
procedures to perform the internal audit function have not been fully developed,
and the anti-fraud audit plan has not been developed either.





(3) Our
Audit Committee was not comprised of sufficient independent directors who are
"independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act. Our Audit Committee did not appoint a member who qualifies as an
"audit committee financial expert" as defined in Item 401(e) of Regulation S-B.
Our written Audit Committee Charter was not submitted to the Boards for
approval.





(4) Our
Company did not formulate a comprehensive Related Party Transactions Policy and
develop a master list of all Related Parties.





This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.





Management’s
Plan for Remediation of Material Weaknesses




In light
of the conclusion that our Company’s internal control over financial reporting
was not effective, our management has worked, and will continue to work, to
address these weaknesses in our internal control over financial reporting.
Implementations of certain remedial measures include the following:




(1) We
are going to continue modify the Code, and arrange respective on-going training
to all the employees in the near future. Training which includes the content of
the Code will be provided to new employees at the time of hiring. All the
employees will be required to sign an affidavit acknowledging that the employee
has read and will intend to comply with the Code;





(2) The
management is committed to develop a comprehensive and risk-based internal audit
function within the Company. With the limited human capital supplies in the
market, we have engaged a third party professional to assist the management in
establishing the internal control system. At the same time, we have enhanced our
efforts of recruitment and interviews are undergoing. We expect that an internal
audit department will be set up in the near future. With the assistance from the
third party professional, the roles and responsibilities of the internal audit
department will be formulated and a comprehensive risk-based internal audit plan
will be developed and approved by the Audit Committee within a month after the
set up.





(3) The
Board of Directors has appointed Mr. Zhang Xin Min on March 10, 2008, Mr. Zhang
serves as a financial expert of Audit Committee and will provide
oversight/monitoring over our financial reporting mechanism.





(4) We
will continue to modify Related Party Transaction Policy and our goal is to
formulate a comprehensive policy in the near future.




Changes
in Internal Control over Financial Reporting




During
the year ended December 31, 2008, there was no major change in our internal
controls over financial reporting that has materially affected, or that is
reasonably likely to materially affect, our internal control over financial
reporting.




Item 9B. Other Information





None.




- 48
-




PART
III




Item 10. Directors, Executive
Officers and Corporate Governance




Directors
and Executive Officers




Directors
      and ExecutiveOfficers
            
            Position/Title
            
            AgeYuchuan
      LIU
            
            President
      & Chief Executive Officer, director and Chairman of the
      Board
            
            44Zhicheng
      ZHOU
            
            Chief
      Operating Officer/Director (since Mar. 14, 08)
            
            44Zhimin
      ZHONG
            
            Marketing
      Director
            
            53Shukui
      BIAN
            
            Vice
      President & Chief Engineer
            
            44Yong
      ZHANG
            
            Chief
      Financial Officer (resigned August 25, 2008)
            
            34Yugang
      ZHANG
            
            Chief
      Financial Officer (effective August 25, 2008)
            
            37Guowei
      CHEN
            
            Director
            
            52Quandong
      SUN
            
            Director
            
            42Xinmin
      ZHANG
            
            Director
            
            53John
      D. KUHNS
            
            Director
      (resigned effective Mar. 8, 08)
            
            57Fang
      CHEN
            
            Director
      (resigned effective Mar. 6, 08)
            
            35




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:




Mr. Yuchuan
Liu 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 Zhong Ran Wei
Ye Gas Co., Ltd. between 2003-2006 and he was the Chairman of the Board 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.
Zhicheng Zhou Mr. Zhou 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 2007.
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. between 2001 and 2002.





Mr. Zhimin
ZhongMr.
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 the Marketing
Director for Beijing Zhong Ran Wei Ye Gas Co., Ltd., between 2004-2006. 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. Shukui
BianMr.
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 2007. 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.




Mr. Yugang ZhangOn August 25, 2008, Mr. Yugang Zhang was appointed Chief Financial
Officer. Mr. Zhang was the Area Financial Controller for Asian Operation of
Smufit-Stone Container Enterprises Inc., a U.S. company, from June 2003 to July
2008. Prior to that, from March 2001 to May 2003, he worked as the Plant
Controller of the same company in Mansfield, MA. From September 2000 to March
2001, he was the Assistant Controller and Accounting Manager for FAE Worldwide,
Inc. in Boston, MA. From February 1999 to September 2000, he was the Staff
Accountant for Braver CPAs & Co., P.C. of Chestnut Hill, MA. Mr. Zhang
obtained an MBA from the Clark University of Massachusetts with a full-tuition
scholarship in 1997 and graduated from the Mechanical Engineering School of
Harbin Institute of Technology in Harbin with a Bachelor’s degree in
1993.




- 49
-


Mr.
GuoweiChenMr. 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.
QuandongSunMr. 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.





Mr. Xinmin
Zhang Mr. Zhang was appointed our director on March 10, 2008. From
December 1999 to present, Mr. Zhang is the Dean of International Business
School, University of International Business and Economics (“UIBE”) in Beijing,
China. From September 1994 to December 1999, he was the Vice Dean of
International Business School, UIBE. He is a Certified Public Accountant and
also a professor of Accounting of UIBE. Mr. Zhang now serves as the independent
director of three listed companies in China which are Minmetals Development Co.,
Ltd, Gree Corporation, Guangcai Construction Co., Ltd. Mr. Zhang obtained his
Bachelor of Engineering from Northern Industrial University in 1983, his Master
of Economics from Renmin University in 1989 and his Ph.D. in Management Science
from Northeastern University of Economics and Trade in 2001.





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.





In 2008,
the Board of Directors had held four meetings, all the directors were
present.




Board
Composition and Committees





Our board
of directors currently consists of five members: Yuchuan Liu, Xinmin Zhang,
Guowei Chen, Quandong Sun and Zhicheng Zhou. Xinmin Zhang and Guowei Chen are
“independent” as that term is defined by SEC rules.




Compensation
Committee





Our
Compensation Committee comprises three members and is responsible for the
administration of all salary, bonus and incentive compensation plans for our
officers and key employees. The members of our Compensation Committee are Xinmin
Zhang, Guowei Chen and Quandong Sun. Xinmin Zhang and Guowei Chen are
“independent” as that term is defined by SEC rules.




Audit
Committee Financial Expert





Because
we only recently  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 current audit
committee members are Sun Quan Dong, Chen Guo Wei and Xinmin Zhang. Xinmin Zhang
and Guowei Chen are “independent” as that term is defined by SEC rules. 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.




- 50
-





Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Exchange Act requires our executive officers, directors and
beneficial owners of more than ten percent (10%) to report their beneficial
ownership of equity interests in the company to the SEC. Their initial reports
are required to be filed using the SEC's Form 3, and they are required to report
subsequent purchases, sales, and other changes using the SEC's Form 4, which
must be filed within two business days of most transactions. Officers,
directors, and persons owning more than 10% of our capital shares are required
by SEC regulations to furnish us with copies of all of reports they file
pursuant to Section 16(a).




According
to our records, Mr. Xinmin Zhang did not file his form 3 in a timely
manner.





Code
of Ethics





We have
adopted Code of Conductand and Ethics in 2008, however it isn’t
comprehensive..





Item 11. Executive
Compensation





Mr.
Yuchuan Liu was appointed chairman of the board, president and chief executive
officer on September 7, 2006. The compensation amounts paid to Mr. Liu reflect
compensation paid to him by the operating subsidiaries of Sino Gas and its
subsidiaries during the reported periods.




Summary
Compensation Table




Name
      and Principal
              Underlying
              Positions
            
            Year
            
            Salary
            
            
            Bonus
            
            
            Option
              Awards
            
            
            Stock
              Awards
            
            
            All Other
              Compensation
            
            
            TotalYuchuan
      Liu- President & CEO
            
            2008
            
            $
            110,000
            
            
            
            **65,000
            
            
            
            
            
            
            
            
            
            
            
            $
            175,0002007
            
            $
            100,000
            
            
            $
            50,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            150,000Yugang
      Zhang (effective August2008)
            
            2008
            
            
            47,500
            
            
            
            15,500
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            63,000Yong
      Zhang CFO (resigned August 2008)
            
            2008
            
            $
            10,000
            
            
            $
            —
            
            
            
            
            
            
            
            
            
            
            
            —
            
            
            $
            10,000Zhicheng
      Zhou-Chief Operating Officer
            
            2008
            
            
            116,000
            
            
            
            59,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            175,0002007
            
            $
            60,000
            
            
            
            **30,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            90,000




** The
bonuses have not been paid and are estimates only.




Our
Compensation Committee comprises three members and is responsible for the
administration of all salary, bonus and incentive compensation plans for our
officers and key employees. The members of our Compensation Committee are Xinmin
Zhang, Chen Guo Wei and Quandong Sun.





Outstanding
Equity Awards





None.




Equity
Compensation Plan





The board
of directors of the Company adopted a stock option plan on November 19, 2007 and
reserved 1,460,000 shares of our common stock as options to be issued under the
plan. No options have been issued under the plan for 2008. The company has
revoked the stock option plan in December, 2008.


- 51
-




Retirement,
Post-Termination and Change in Control Description





The
Company currently does not have retirement, post-termination and change in
control arrangements for its officers.




Compensation
of Directors




Directors
and employees are not currently additionally compensated for their services as a
director.  Our director compensation consists of cash only. Each director
is paid an annual retainer of $10,000. 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.




Name
            
            Fees Earned
              or Paid in
              Cash
              ($)
            
            Stock Awards
              ($)
            
            Option
              Awards ($)
            
            Non-Equity
              Incentive
              Plan
              Compensation
              ($)
            
            Non-Qualified
              Deferred
              Compensation
              Earnings
              ($)
            
            All
              Other
              Compensation
              ($)
            
            Total ($)Yuchuan Liu
            
            
            0
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0Zhicheng
      Zhou
            
            
            0
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0Guowei
      Chen
            
            
            10,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,000Quandong
      Sun
            
            
            10,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,000Xinmin
      Zhang
            
            
            10,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,000




Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters





The
following table sets forth, as of March 30, 2009, 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 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 report, we have outstanding (i) 25,269,313 shares of common stock,
(ii) no shares of series A convertible preferred stock, (iii) 4,579,839
shares of series B convertible preferred stock and 95,418 shares of series B-1
preferred stock, (iv) series A warrants to purchase an aggregate of 241,708
shares of common stock at $3.84 per share, (v) series C warrants to purchase an
aggregate of 3,083,588 shares of common stock at $3.375 per share, (vi) series G
warrants to purchase an aggregate of 109,489 shares of common stock at $3.84 per
share, (vii) series F warrants to purchase an aggregate of 271,074 shares of
common stock and (viii) placement agent warrant to purchase an aggregate of
271,074 shares of common stock. The warrants are exercisable until September
2012. The placement agent warrant is exercisable until September 2010. The
warrants have cashless exercise provision entitling the holders to obtain shares
equal to the product of (1) the nominator is the difference between the market
value of all the exercised shares on the date of exercise and the exercise price
of all the exercised shares and (2) the denominator is the market price per
share on the date of exercise.




Shares of
Series B convertible preferred stock vote together with shares of common stock
on all matters upon which stockholders are entitled to vote. On those matters
upon which the series B convertible preferred stock votes together with the
common stock as a single class, each share of series B 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 B convertible
preferred stock shall be entitled to notice of any stockholders’ meeting in
accordance with our bylaws. Series B-1 preferred stock have the same rights and
privileges as series B preferred stock.




- 52
-




In
determining beneficial ownership of the common stock, 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 30, 2009, (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 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 30, 2009, 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
District


Beijing,
China 10083




Amount and Nature of
              Beneficial
              Ownership
            
            
            Percent of ClassShareholder
            
            Series
              B Preferred
              Stock(1)
            
            
            Common
              Stock(2)
            
            
            Series
              B Preferred Stock
            
            
            Common StockOwner of More than 5% of
      ClassEloten
      Group Ltd.
            
            
            
            
            
            6,524,174
            (4)(5)
            
            
            
            
            
            25.8
            %Leading
      King Investment Limited
            
            
            
            
            
            5,384,923
            (6)(7)
            
            
            
            
            
            21.3
            %Vision
      Opportunity Master Fund, Ltd.
            
            
            4,380,413
            
            
            
            2,756,824
            
            
            
            93.7
            %
            
            
            10.9
            %T.
      Rowe Price Small-Cap Value Fund, Inc.
            
            
            
            
            
            
            2,376,944
            
            
            
            
            
            
            
            9.4
            %Directors and Executive
      OfficersLiu
      Yuchuan
            
            
            
            
            
            
            6,524,174
            (4)(5)
            
            
            
            
            
            
            25.8
            %


Sun
      Quandong
            
            
            
            
            
            
            5,384,923
            (6)(7)
            
            
            
            
            
            
            21.3
            %Zhong
      Zhimin
            
            
            
            
            
            
            393,581
            (3)
            
            
            
            
            
            
            1.6
            %Zhou
      Zhicheng
            
            
            
            
            
            
            -Bian
      Shukui
            
            
            
            
            
            
            173,962
            (3)
            
            
            
            
            
            
            0.7
            %Xinmin
      Zhang
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -Chen
      Guowei
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -All Directors and Executive
      Officers
            
            
            
            
            
            
            12,588,058
            
            
            
            
            
            
            
            49.4
            %




(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.
There are conversion restrictions placed on series B preferred stock and
warrants to avoid the series B preferred stock holders and warrant holders
owning more than 9.9% of total common stock for each individual series B
preferred stock holder or warrant holder. Series B preferred stock holder can
waive the restriction upon 61 days notice to the Company. Warrant holders cannot
waive such restriction.





(2) Only
shares of common stock are listed because of restrictions imposed on series B
and B-1 preferred shares and warrants as stated in (1) above.





(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 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.





(5)
Includes 108,286 shares of common stock beneficially attributed to Eloten Group
Ltd. based on Eloten Group Ltd.'s ownership interest in Gas (BVI).





(6)
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.





(7)
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.




- 53
-




Item 13. Certain Relationships and Related
Transactions, and Director Independence




On
January 15, 2007, Beijing Gas acquired 100% equity interest of Beijing Chenguang
Gas Ltd., Co. for a purchase price of 26,000,000 RMB (or approximately USD3.35
million) in cash. Beijing Chenguang became a wholly-owned subsidiary of Beijing
Gas. Beijing Chenguang is primarily engaged in the business of developing,
transfer and licensing of technologies regarding natural gas purification,
compression and transportation., as well as installation of natural gas
equipment and supply of natural gas. Mr. Zhicheng Zhou, our Chief Operating
Officer, owned 30% of Beijng Chenguang immediately prior to the
acquisition.




Item 14. Principal Accounting 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 2008
            
            
            FISCAL 2007Audit
      Fees (1)
            
            $
            105,000
            
            
            
            100,000Audit-Related
      Fees
            
            
            —
            
            
            
            —Tax
      Fees (2)
            
            
            —
            
            
            
            —All
      Other Fees
            
            
            —
            
            
            
            —Total
            
            $
            105,000
            
            
            
            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.







ITEM 15. EXHIBITS




Exhibit
              Number3.1
            
            Articles
      of Incorporation, as amended on November 14, 2006 incorporated by
      reference from 10-Q filed on August 20, 2007.3.2*
            
            Bylaws.3.3*
            
            Certificate
      of Designations authorizing the Series A Convertible Preferred
      Stock.3.4*
            
            Amended
      and Restated Certificate of Designations authorizing the Series B
      Convertible Preferred Stock.4.1**
            
            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**
            
            Registration
      Rights Agreement, dated as of September 7, 2006, by and between, Dolce
      Ventures, Inc., Vision Opportunity Master Fund, Ltd.4.3**
            
            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.






- 54
-






4.9**
            
            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.4.10**
            
            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.4.11**
            
            Consulting
      Agreement dated August 8, 2006, by and between Kuhns Brothers, Inc. and
      Dolce Ventures, Inc.4.12**
            
            Engagement
      Letter dated Feb 15, 2006, by and between, Beijing Zhong Ran Wei Ye Gas
      Co., Ltd. and Kuhns Brothers, Inc.4.13**
            
            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.




4.14****
            
            Securities
      Purchase Agreement dated as of September 7, 2007 by and among the Company
      and the investors named therein.4.15****
            
            Registration
      Rights Agreement dated as of September 7, 2007 by and among the Company
      and the investors named therein.4.16****
            
            Make
      Good Escrow Agreement dated as of September 7, 2007 by and between the
      Company, the investors and Manufacturers and Traders Trust Company, as
      escrow agent.4.17***
            
            Series
      B Stock Purchase Agreement, dated as of October 20, 2006, by and among,
      Dolce Ventures, Inc., and each of the other investors named
      therein.4.18***
            
            Registration
      Rights Agreement, dated as of October 20, 2006, by and between, Dolce
      Ventures, Inc., and each of the other investors named
    therein.4.19***
            
            Form
      of Lock-Up Agreement, by and among, Docle Ventures, Inc., and certain
      other parties named therein.10.1
            
            Urban
      Gas Development Agreement with Jinzhou Town incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.2
            
            Municipal
      Public Utilities Franchise Agreement with Yutian County incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-14799810.3
            
            Urban
      Gas Development Agreement with Yutian County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-147998


10.4
            
            Urban
      Gas Development Agreement with Wuqiao County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.5
            
            The
      Agreement on Developing the Pipeline Gas Project with Xintang County
      incorporated by reference from SB-2 filed on January 11, 2008, file number
      333-14799810.6
            
            Urban
      Gas Development Agreement with Linzhang County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.7
            
            Urban
      Gas Development Agreement with Ningjin County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.8
            
            Urban
      Gas Development Agreement with Luquan County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.9
            
            Gas
      Supply Contract- Henan Zhongyuan Lvneng High-Tech Co., Ltd incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-14799810.10
            
            Gas
      Supply Contract-PetroChina Huabei Oilfield Company incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-147998






- 55
-






10.11
            
            Gas
      Supply Contract-Tianjin Dagang Oilfield Transportation Co., Ltd
      incorporated by reference from SB-2 filed on January 11, 2008, file number
      333-14799810.12
            
            Gas
      Supply Contract-Hebei Natural Gas Co., Ltd incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.13
            
            Gas
      Supply Contract-Xinjiang Guanghui LNG Development Co., Ltd incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-14799810.14
            
            Pipe
      Gas Franchise Agreement for Baishan City incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.15
            
            Pipe
      Gas Franchise Agreement for Si County incorporated by reference from SB-2
      filed on January 11, 2008, file number 333-14799810.16
            
            Pipe
      Gas Franchise Agreement for Xiahuayuan District incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.17
            
            Pipe
      Gas Franchise Agreement for Yu County incorporated by reference from SB-2
      filed on January 11, 2008, file number 333-14799810.18
            
            Pipe
      Gas Franchise Agreement for Wuhe County incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.19
            
            Pipe
      Gas Franchise Agreement for Zaoqiang County incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.20
            
            The
      Cooperation Agreement on Gas Project in Xinji Town incorporated by
      reference from SB-2 filed on January 11, 2008, file number
      333-147998


10.21
            
            The
      Cooperation Agreement with Chengan County incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.22
            
            Urban
      Gas Development Agreement with Nangong Town incorporated by reference from
      SB-2 filed on January 11, 2008, file number 333-14799810.23
            
            Pipe
      Gas Franchise Agreement for Pei County incorporated by reference from SB-2
      filed on January 11, 2008, file number 333-14799810.24
            
            Urban
      Gas Development Agreement with Gucheng County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.25
            
            Urban
      Pipe Natural Gas Project Development Agreement with Sihong County
      incorporated by reference from SB-2 filed on January 11, 2008, file number
      333-14799810.26
            
            Urban
      Gas Development Agreement with Changli County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.27
            
            Urban
      Gas Development Agreement with Shenzhou Town incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.28
            
            Urban
      Gas Development Agreement with Longyao County incorporated by reference
      from SB-2 filed on January 11, 2008, file number
  333-14799810.29
            
            Shareholders’
      Agreement among  Yunnan Investment Group, Sino Gas International
      Holdings, Inc. and Qujing Development Investment Co. Ltd. dated April 22,
      200810.30
            
            Equity
      Interest Transfer Agreement dated among Beijing Zhong Ran Wei Ye Gas Co.
      Ltd. Wuhan ShiCheng Estate Development Co. Ltd. and Song Tiegang etc.
      dated April 23, 2008






- 56
-






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 Subsidiaries incorporated by reference from SB-2 filed on January 11,
      2008, file number 333-14799831.1
            
            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.*
            
            Incorporated
      by reference from Form 8-K filed September 7,
2006.**
            
            Incorporated
      by reference from Form 8-K/A filed on November 28,
2007.***
            
            Incorporated
      by reference from Form 8-K/A filed on November 27,
  2007.


****
            
            Incorporated
      by reference from Form 8-K filed September 13,
  2007.







- 57
-




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 31, 2009
            By:
            /s/
      Liu Yu ChuanLiu
      Yu ChuanChairman 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.




Signatures
            
            Title
            
            Date/s/
      Yuchuan Liu
            
            Chief
      Executive Officer and Director
            
            March
      31, 2009Yuchuan
      Liu
            
            (Principal
      Executive Officer)/s/
      Yugang Zhang
            
            Chief
      Financial Officer
            
            March
      31, 2009Yugang
      Zhang/s/
      Guowei Chen
            
            Director
            
            March
      31, 2009Guowei
      Chen/s/
      Quandong Sun
            
            Director
            
            March
      31, 2009Quandong
      Sun/s/
      Xinmin Zhang
            
            Director
            
            March
      31, 2009Xinmin
      Zhang/s/
      Zhicheng Zhou
            
            Director
      and Chief Operating Officer
            
            March
      31, 2009Zhicheng
      Zhou






- 58
-








SINO
GAS INTERNATIONAL HOLDINGS, INC





CONSOLIDATED
AUDITED FINANCIAL STATEMENTS





DECEMBER
31, 2008 AND 2007





(Stated
in US dollars)



























SINO
GAS INTERNATIONAL HOLDINGS, INC.
 INDEX
TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007


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-5
      – F-7CONSOLIDATED
      STATEMENTS OF CASH FLOWS
            F-8NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
            F-9
      – F-42














To:
            The
      Board of Directors and Stockholders
of


Sino Gas
International Holdings, Inc.






Report of Independent
Registered Public Accounting Firm











We have
audited the accompanying consolidated balance sheets of Sino Gas International
Holdings, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of operations, 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 audits.





We
conducted our audits in accordance with the 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 audits provide 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, 2008 and 2007, and the results of its operations and its
cash flows for each of 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., LLPFebruary
      20, 2009
            Certified
      Public Accountants






F-1




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
BALANCE SHEETS
 AS
OF DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


ASSETS2008
            
            
            2007Current
      Assets
            NotesCash
      & cash equivalents
            2(e)
            
            $
            3,027,543
            
            
            $
            10,915,590Restricted
      cash
            3
            
            
            234,279
            
            
            
            478,920Notes
      receivable
            
            
            
            109,422
            
            
            
            825,119Accounts
      receivable
            2(f),4
            
            
            6,013,621
            
            
            
            7,315,253Advance
      to suppliers
            2(g)
            
            
            3,024,518
            
            
            
            27,372Other
      receivables
            2(f)
            
            
            3,028,368
            
            
            
            3,100,695Inventory
            
            
            
            347,341
            
            
            
            207,976Prepayment
      and others
            
            
            
            370,593
            
            
            
            320,380Total
      Current Assets
            
            
            
            16,155,686
            
            
            
            23,191,305Non-Current
      AssetsInvestment
            2(h),5
            
            
            5,159,009
            
            
            
            4,007,310Property,
      plant & equipment, net
            2(j),6
            
            
            33,033,118
            
            
            
            24,572,565Construction
      in progress
            2(l)
            
            
            17,155,473
            
            
            
            11,556,820Intangible
      assets, net
            2(k),7
            
            
            2,193,252
            
            
            
            2,028,250Total
      Non-current Assets
            
            
            
            57,540,852
            
            
            
            42,164,945Total
      Assets
            
            
            $
            73,696,538
            
            
            $
            65,356,250LIABILITIES
      & STOCKHOLDERS' EQUITYLIABILITIESCurrent
      LiabilitiesBank
      loans
            8
            
            $
            2,188,439
            
            
            $
            2,734,444Accounts
      payable
            
            
            
            6,350,092
            
            
            
            716,707Other
      payables
            9
            
            
            6,174,871
            
            
            
            10,383,657Accrued
      liabilities
            
            
            
            189,090
            
            
            
            362,262Unearned
      revenue
            2(m)
            
            
            938,696
            
            
            
            312,573Total
      Current Liabilities
            
            
            
            15,841,188
            
            
            
            14,509,644Total
      Liabilities
            
            
            $
            15,841,188
            
            
            $
            14,509,644






See Accompanying Notes to Financial
Statements and
Accountant’s Report




F-2




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
BALANCE SHEETS
 AS
OF DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


STOCKHOLDERS'
      EQUITY
            Notes
            
            2008
            
            
            2007Preferred
      Stock B US$0.001 par value; 5,000,000 shares authorized; 4,579,839 and
      4,971,859 shares issued and outstanding as of December 31, 2008 and 2007
      respectively
            10
            
            $
            4,580
            
            
            $
            4,972Additional
      paid in capital - Preferred Stock B
            
            
            
            5,323,972
            
            
            
            5,323,972Additional
      paid in capital - Warrants Series: A, B, J, C, D
            
            
            
            311,110
            
            
            
            311,110Preferred
      Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 and
      95,418 shares issued and outstanding as of December 31, 2008 and 2007
      respectively
            10
            
            
            95
            
            
            
            95Additional
      paid in capital - Preferred Stock B-1
            
            
            
            132,662
            
            
            
            132,662Additional
      paid in capital - Beneficial Conversion Feature
            
            
            
            7,002,292
            
            
            
            7,002,292Common
      Stock US$0.001 par value; 250,000,000 shares authorized; 25,269,313 and
      24,877,271 shares issued and outstanding as of December 31, 2008 and 2007
      respectively.
            10
            
            
            25,269
            
            
            
            24,877Additional
      paid in capital - Common Stock
            
            
            
            23,196,304
            
            
            
            23,196,304Additional
      paid in capital - Warrants Series: E, G
            
            
            
            47,946
            
            
            
            47,946Additional
      paid in capital - Warrants Series: F, R
            
            
            
            107,652
            
            
            
            107,652Statutory
      reserve
            2(v)
            
            
            3,956,728
            
            
            
            3,258,201Retained
      earnings
            
            
            
            10,069,896
            
            
            
            9,167,930Accumulated
      other comprehensive income
            2(x)
            
            
            7,676,844
            
            
            
            2,268,593Total
      Stockholders' Equity
            
            
            
            57,855,350
            
            
            
            50,846,606Total
      Liabilities & Stockholders' Equity
            
            
            $
            73,696,538
            
            
            $
            65,356,250


See Accompanying Notes to Financial
Statements and
Accountant’s Report




F-3




SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF INCOME
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Notes
            
            2008
            
            
            2007Sales
      revenues
            
            
            $
            21,448,488
            
            
            $
            20,267,756Cost
      of revenues
            
            
            
            (13,978,508
            )
            
            
            (9,499,752
            )Gross
      Profit
            
            
            
            7,469,980
            
            
            
            10,768,004Operating
      ExpenseSelling
      and marketing expenses
            
            
            
            (1,136,867
            )
            
            
            (608,830
            )General
      and administrative expenses
            
            
            
            (3,643,531
            )
            
            
            (2,106,389
            )Total
      operating expense
            
            
            
            (4,780,398
            )
            
            
            (2,715,219
            )Operating
      Income
            
            
            
            2,689,582
            
            
            
            8,052,785Other
      Income/(Expense)Investment
      income
            2(q)
            
            
            417,265
            
            
            
            213,772Other
      income
            
            
            
            17,179
            
            
            
            29,942Other
      expense
            17
            
            
            (545,612
            )
            
            
            (18,890
            )Interest
      income
            
            
            
            113,884
            
            
            
            149,270Interest
      expense
            
            
            
            (187,999
            )
            
            
            (197,959
            )Total
      other income/(expense)
            
            
            
            (185,283
            )
            
            
            176,136Earnings
      from continued operation
            
            
            
            2,504,299
            
            
            
            8,228,921Income
      tax
            2(r),11
            
            
            (903,806
            )
            
            
            (532,500
            )Gain/(Loss)
      from discontinued operation, net of
    tax
            15
            
            
            -
            
            
            
            10,950Net
      income
            
            
            $
            1,600,493
            
            
            $
            7,707,370Constructive
      Preferred Dividend - Amortization of Beneficial Conversion
            
            
            -
            
            
            
            (1,264,500
            )Income
      Available to Common Stockholders
            
            
            $
            1,600,493
            
            
            $
            6,442,870Earnings
      per share
            2(z),16Basic
            
            
            $
            0.064
            
            
            $
            0.36Diluted
            
            
            $
            0.053
            
            
            $
            0.29Weighted
      Average Shares Outstanding
            16Basic
            
            
            
            25,115,675
            
            
            
            17,876,078Diluted
            
            
            
            29,944,548
            
            
            
            22,541,911


See Accompanying Notes to Financial
Statements and
Accountant’s Report






F-4




SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 AS
OF DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Preferred
      Stock B
            
            
            Preferred
      Stock B-1Shares
      Outstanding
            
            
            Amount
            
            
            Additional
      Paid In Capital-Preferred Stock B
            
            
            Additional
      Paid in Capital- Warrants Series: A, B, J, C, D
            
            
            Additional
      Paid in Capital-Beneficial Conversion Feature
            
            
            Shares
      Outstanding
            
            
            Amount
            
            
            Additional
      Paid In Capital- Preferred Stock B-1
            
            
            Additional
      Paid in Capital-Beneficial Conversion FeatureBalance,
      January 1, 2007
            
            
            4,023,268
            
            
            
            4,023
            
            
            
            3,817,049
            
            
            
            3,439,764
            
            
            
            6,418,864
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of Common Stock from conversion of Warrants J in connection with May
      financing transaction
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (171,284
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of Common Stock and Preferred Stock in connection with September financing
      transaction
            
            
            1,375,479
            
            
            
            1,375
            
            
            
            1,912,357
            
            
            
            (2,957,370
            )
            
            
            1,182,471
            
            
            
            95,418
            
            
            
            95
            
            
            
            132,662
            
            
            
            82,029Conversion
      of Preferred Stock B to Common Stock
            
            
            (426,888
            )
            
            
            (427
            )
            
            
            (405,434
            )
            
            
            -
            
            
            
            (681,072
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of Common Stock to Minority Shareholders in connection with Pegasus
      Telecom
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Shares
      Cancelled
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of 2006 Make Good Common Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Appropriations
      of Retained Earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
      Currency Translation Adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31, 2007
            
            
            4,971,859
            
            
            
            4,972
            
            
            
            5,323,972
            
            
            
            311,110
            
            
            
            6,920,263
            
            
            
            95,418
            
            
            
            95
            
            
            
            132,662
            
            
            
            82,029Balance,
      January 1, 2008
            
            
            4,971,859
            
            
            
            4,972
            
            
            
            5,323,972
            
            
            
            311,110
            
            
            
            6,920,263
            
            
            
            95,418
            
            
            
            95
            
            
            
            132,662
            
            
            
            82,029Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Conversion
      of Preferred Stock B to Common Stock
            
            
            (392,020
            )
            
            
            (392
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of Common Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Appropriation
      of Retained Earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
      Currency Translation Adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      December 31, 2008
            
            
            4,579,839
            
            
            
            4,580
            
            
            
            5,323,972
            
            
            
            311,110
            
            
            
            6,920,263
            
            
            
            95,418
            
            
            
            95
            
            
            
            132,662
            
            
            
            82,029






See Accompanying Notes to Financial
Statements and
Accountant’s Report









SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 AS
OF DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Common
      StockShares
      Outstanding
            
            
            Amount
            
            
            Additional
      Paid In Capital
            
            
            Additional
      Paid in Capital-Warrants Series: E,G
            
            
            Additional
      Paid in Capital-Warrants Series: F,R
            
            
            Statutory
      Reserve
            
            
            Retained
      Earnings
            
            
            Accumulated
      Other Comprehensive Income
            
            
            TotalBalance,
      January 1, 2007
            
            
            14,693,186
            
            
            
            14,693
            
            
            
            4,812,363
            
            
            
            -
            
            
            
            -
            
            
            
            2,025,022
            
            
            
            3,958,239
            
            
            
            824,296
            
            
            
            25,314,313Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,707,370
            
            
            
            -
            
            
            
            7,707,370Issuance  of
      Common Stock from conversion of Series J Warrants in connection with May
      financing transaction
            
            
            1,094,891
            
            
            
            1,095
            
            
            
            1,600,778
            
            
            
            1,157,170
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,587,759Issuance
      of Common Stock and Preferred Stock B &B-1 in connection with
      September financing transaction
            
            
            8,340,762
            
            
            
            8,341
            
            
            
            15,696,978
            
            
            
            (1,109,224
            )
            
            
            107,652
            
            
            
            -
            
            
            
            (1,264,500
            )
            
            
            -
            
            
            
            13,792,867Conversion
      of Preferred Stock B to Common Stock
            
            
            426,888
            
            
            
            427
            
            
            
            1,086,506
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of Common Stock to Minority Shareholders in connection with Pegasus
      Telecom
            
            
            3,650
            
            
            
            4
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4Shares
      Cancelled
            
            
            (3,274
            )
            
            
            (3
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3
            )Issuance
      of 2006 Make Good Common Stock
            
            
            321,168
            
            
            
            321
            
            
            
            (321
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Appropriations
      of Retained Earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,233,179
            
            
            
            (1,233,179
            )
            
            
            -
            
            
            
            -Foreign
      Currency Translation Adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,444,297
            
            
            
            1,444,297Balance,
      December 31, 2007
            
            
            24,877,271
            
            
            
            24,877
            
            
            
            23,196,304
            
            
            
            47,946
            
            
            
            107,652
            
            
            
            3,258,201
            
            
            
            9,167,930
            
            
            
            2,268,593
            
            
            
            50,846,606Balance,
      January 1, 2008
            
            
            24,877,271
            
            
            
            24,877
            
            
            
            23,196,304
            
            
            
            47,946
            
            
            
            107,652
            
            
            
            3,258,201
            
            
            
            9,167,930
            
            
            
            2,268,593
            
            
            
            50,846,606Net
      Income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,600,493
            
            
            
            -
            
            
            
            1,600,493Conversion
      of Preferred Stock B to Common Stock
            
            
            392,020
            
            
            
            392
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of Common Stock
            
            
            22
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Appropriation
      of Retained Earnings
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            698,527
            
            
            
            (698,527
            )
            
            
            -
            
            
            
            -Foreign
      Currency Translation Adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,408,250
            
            
            
            5,408,250Balance,
      December 31, 2008
            
            
            25,269,313
            
            
            
            25,269
            
            
            
            23,196,304
            
            
            
            47,946
            
            
            
            107,652
            
            
            
            3,956,728
            
            
            
            10,069,896
            
            
            
            7,676,844
            
            
            
            57,855,350




and Accountant’s
Report









SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 AS
OF DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Comprehensive Income
            
            2007
            
            
            2008
            
            
            TotalNet
      Income
            
            $
            7,707,370
            
            
            $
            1,600,493
            
            
            $
            9,307,863Other Comprehensive IncomeForeign
      Currency Translation Adjustment
            
            
            1,444,297
            
            
            
            5,408,250
            
            
            
            6,852,547Total
            
            $
            9,151,667
            
            
            $
            7,008,743
            
            
            $
            16,160,410


See Accompanying Notes to Financial
Statements and
Accountant’s Report
  F-7
 
  SINO
GAS INTERNATIONAL HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOW
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Cash
      Flows from Operating Activities
            
            2008
            
            
            2007Net
      Income
            
            $
            1,600,493
            
            
            $
            7,707,370Depreciation
      expense
            
            
            1,495,682
            
            
            
            1,301,480Amortization
      expense
            
            
            88,341
            
            
            
            323,815Loss/(gain)
      on disposal of discontinued operation
            
            
            -
            
            
            
            (10,950
            )Withdraw
      in restricted time deposits
            
            
            244,641
            
            
            
            2,645,621Decrease/(increase)
      in accounts and other receivables
            
            
            2,089,656
            
            
            
            (2,390,699
            )Increase
      in inventory
            
            
            (139,365
            )
            
            
            (56,183
            )Increase
      in prepaid expenses
            
            
            (3,047,229
            )
            
            
            (178,501
            )Increase
      in accounts and other payables
            
            
            1,877,419
            
            
            
            3,724,740Cash
      Sourced/(Used) in Operating Activities
            
            
            4,209,638
            
            
            
            13,066,694Cash
      Flows from Investing ActivitiesCash
      paid for acquisitions
            
            
            -
            
            
            
            (4,337,000
            )Proceeds
      from the sale of Anping Weiye
            
            
            -
            
            
            
            422,280Investment
      in equity
            
            
            (1,151,699
            )
            
            
            (1,479,611
            )Purchase
      of property, plant, and equipment
            
            
            (9,956,236
            )
            
            
            (10,644,532
            )Increase
      of goodwill
            
            
            (115,774
            )
            
            
            (1,513,348
            )Purchase
      of other intangible asset
            
            
            (137,570
            )
            
            
            (380,886
            )Increase
      in construction in progress
            
            
            (5,598,651
            )
            
            
            (6,215,626
            )Cash
      Sourced/(Used) in Investing Activities
            
            
            (16,959,930
            )
            
            
            (24,148,723
            )Cash
      Flows from Financing ActivitiesProceeds/(settlement)
      of bank loans
            
            
            (546,005
            )
            
            
            48,163Proceeds
      from conversion of warrants J
            
            
            -
            
            
            
            2,587,759Proceeds
      from issuance of common stock
            
            
            -
            
            
            
            13,792,867Cash
      Sourced/(Used) in Financing Activities
            
            
            (546,005
            )
            
            
            16,428,789Net
      increase in cash & cash equivalents for the year
            
            
            (13,296,297
            )
            
            
            5,346,760Cash
      received from acquisitions of Chenguang & Guannan
            
            
            -
            
            
            
            485,860Effect
      of currency translation on cash and cash equivalents
            
            
            5,408,250
            
            
            
            1,444,297Cash
      & cash equivalents at the beginning of year
            
            
            10,915,590
            
            
            
            3,638,673Cash
      & cash equivalents at the end of year
            
            $
            3,027,543
            
            
            $
            10,915,590Supplementary
      cash flow informationInterest
      received
            
            $
            113,884
            
            
            $
            149,270Interest
      paid
            
            $
            187,999
            
            
            $
            197,959Income
      tax paid
            
            $
            1,317,079
            
            
            $
            774,555






See Accompanying Notes to Financial
Statements and
Accountant’s Report




F-8




SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. 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.  The
Company changed its name to American Arms, Inc. on April 5, 1984, and then
changed its name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed
its name to Sino Gas International Holdings, Inc. on November 17,
2006.




On
September 7, 2006, the Company underwent a reverse-merger with Gas Investment
China Ltd. (“GIC”), an International Business Company incorporated in the
British Virgin Islands, and its wholly-owned subsidiaries, involving an exchange
of shares whereby the Company issued an aggregate of 14,361,646 shares to the
shareholders of GIC in exchange for all of the issued and outstanding shares of
GIC.  For financial reporting purposes, this transaction is classified
as a recapitalization of Sino Gas International Holdings, Inc. (Legal acquirer,
accounting acquiree) and the historical financial statements of Gas Investment
China Co. Ltd. (Legal acquiree, accounting acquirer)




The
Company 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 and industrial users, in the
construction and operation gas stations, and in the development and application
of natural gas related technologies.  The Company owns and operates 37
natural gas distribution systems serving approximately 100,900 residential and
five commercial and industrial customers.  The Company’s facilities
include approximately 710 kilometers of pipeline and delivery networks
(including delivery trucks) with a daily capacity of approximately 89,000 cubic
meters of natural gas.




The
common stock of the Company is currently quoted on the National Association of
Securities Dealers' Over-the-Counter Bulletin Board under the symbol
“SGAS”.




Basis of Presentation and
Organization




The
Company’s consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“US 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 US GAAP.






F-9




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





(a)
                        Method of
      AccountingThe
      Company maintains its general ledger and journals with the accrual method
      accounting for financial reporting purposes.  The financial
      statements and notes 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





The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods.  Management makes these estimates using
the best information available at the time the estimates are made; however,
actual results could differ materially 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 law and regulations, anti-inflationary
measures, currency conversion, remittances abroad, and rates and methods of
taxation, among other things.






F-10




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


(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.




The
Company owned its subsidiaries soon after its inception and continued to acquire
and own the equity interests throughout the reporting periods.  The
following table depicts the identities of the consolidating subsidiaries as of
December 31, 2008 and 2007.





Name
      of Company
            
            Place
      of
              Incorporation
            
            Date
      of
              Incorporation
            
            Beneficiary
              Interest
      %
            
            Equity
              Interest
      %
            
            Registered
              CapitalGAS
      Investment China Co., Ltd.
            
            The
      British Virgin Islands
            
            6/19/2003
            
            100
            
            100
            
            USD
      10,000,000Sino
      Gas Construction, Ltd.
            
            The
      British Virgin Islands
            
            1/9/2007
            
            100
            
            100
            
            USD50,000Sino
      Gas Investment Development, Ltd.
            
            The
      British Virgin Islands
            
            1/9/2007
            
            100
            
            100
            
            USD50,000Beijing
      Zhong Ran Wei Ye Gas Co., Ltd.
            
            PRC
            
            8/29/2001
            
            100
            
            100
            
            RMB
      184,916,420Beijing
      Chenguang Gas, Ltd.
            
            PRC
            
            10/30/2002
            
            100
            
            100
            
            RMB
      20,000,000Guannan
      Weiye Gas Co., Ltd.
            
            PRC
            
            6/19/2003
            
            100
            
            100
            
            RMB
      9,510,000






F-11




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Ningjin
      Weiye Gas Co., Ltd
            
            PRC
            
            12/3/2003
            
            100
            
            95
            
            RMB
      3,000,000Yutian
      Zhongran Weiye Gas Co., Ltd.
            
            PRC
            
            12/19/2003
            
            100
            
            90
            
            RMB
      3,000,000Xingtang
      Weiye Gas Co., Ltd.
            
            PRC
            
            2/18/2004
            
            100
            
            95
            
            RMB
      3,000,000Wuqiao
      Gas Co., Ltd.
            
            PRC
            
            6/30/2004
            
            100
            
            95
            
            RMB
      2,000,000Jinzhou
      Weiye Gas Co., Ltd.
            
            PRC
            
            7/19/2004
            
            100
            
            95
            
            RMB
      5,000,000Sihong
      Weiye Gas Co., Ltd.
            
            PRC
            
            12/3/2004
            
            100
            
            95
            
            RMB
      10,000,000Sishui
      Weiye Gas Co., Ltd.
            
            PRC
            
            12/22/2004
            
            100
            
            95
            
            RMB
      3,000,000Langfang
      Weiye Dangerous Goods Transportation Co., Ltd.
            PRC
            
            3/22/2005
            
            100
            
            95
            
            RMB
      1,000,000Linzhang
      Weiye Gas Co., Ltd.
            
            PRC
            
            7/6/2005
            
            100
            
            85
            
            RMB
      1,000,000Peixian
      Weiye Gas Co., Ltd.
            
            PRC
            
            8/22/2005
            
            100
            
            90
            
            RMB
      5,000,000Zhangjiakou
      City Xiahuayuan Jinli Gas Co., Ltd.
            PRC
            
            9/30/2005
            
            100
            
            100
            
            RMB
      2,000,000Longyao
      Zhongran Weiye Gas Co., Ltd.
            
            PRC
            
            10/13/2005
            
            100
            
            95
            
            RMB
      3,000,000






F-12




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Yuxian
      Jinli Gas Co., Ltd.
            
            PRC
            
            11/8/2005
            
            100
            
            100
            
            RMB
      9,500,000Hengshui
      Weiye Gas Co., Ltd.
            
            PRC
            
            12/20/2005
            
            100
            
            100
            
            RMB
      3,000,000Shenzhou
      Weiye Gas Co., Ltd.
            
            PRC
            
            12/23/2005
            
            100
            
            95
            
            RMB
      3,000,000Changli
      Weiye Gas Co., Ltd.
            
            PRC
            
            12/8/2006
            
            100
            
            100
            
            RMB
      3,000,000Chenan
      Chenguang Gas Co., Ltd
            
            PRC
            
            1/23/2007
            
            100
            
            100
            
            RMB
      1,500,000Wuhe
      Weiye Gas Co., Ltd.
            
            PRC
            
            1/30/2007
            
            100
            
            100
            
            RMB
      3,000,000Xinji
      Zhongchen Gas Co., Ltd
            
            PRC
            
            2/7/2007
            
            100
            
            100
            
            RMB
      3,000,000Gucheng
      Weiye Gas Co., Ltd.
            
            PRC
            
            3/21/2007
            
            100
            
            100
            
            RMB
      3,000,000Luquan
      Chenguang Gas Co., Ltd.
            
            PRC
            
            4/27/2007
            
            100
            
            100
            
            RMB
      2,000,000Shijiazhuang
      Chenguang Gas Co., Ltd.
            
            PRC
            
            6/14/2007
            
            100
            
            100
            
            RMB
      2,000,000Nangong
      Weiye Gas Co., Ltd.
            
            PRC
            
            6/25/2007
            
            100
            
            100
            
            RMB
      3,000,000Sixian
      Weiye Gas Co., Ltd.
            
            PRC
            
            9/3/2007
            
            100
            
            100
            
            RMB
      3,000,000






F-13




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Baishan
      Weiye Gas Co., Ltd.
            
            PRC
            
            7/13/2007
            
            100
            
            100
            
            RMB
      15,000,000





(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
equity method of accounting was used to account for the Company’s investment in
equity securities for which the Company did not have controlling equity
interest.  Non controlling equity interest for the Company is
typically a position of less than 50% beneficial ownership.




The
consolidated statement of income includes the Company's share of the
post-acquisition results of the investment’s performance for the year. In the
consolidated balance sheet, investments in equity securities are stated at the
Company's share of the net assets of the investments plus any potential premium,
or less discounts paid at the time of acquisition, and less any identified
impairment loss.




Beijing
Zhongran Xiangke Oil Gas Technology Co. Ltd is the Company’s 40% owned
investment and is principally engaged in sale of compressed natural gas to
domestic households and industrial firms around the suburbs of Beijing as well
as the suburban areas of the Hebei Province and Tianjin.






F-14




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Qujing
Gas Co., Ltd. is the Company’s 39% owned investment and is principally engaged
in the business of gas pipeline construction in Yunnan Province.





Place
      of Registration
            
            Form
      of Business Structure
            
            Registered
      Capital
            
            Nominal
      Value of Registered Capital
            
            Principle
      ActivitiesPRC
            
            Sino-foreign
      equity joint venture
            
            RMB
      20,000,000
            
            40%
            
            Trading
      of natural gas and gas pipeline constructionPRC
            
            Equity
      joint venture
            
            RMB30,000,000
            
            39%
            
            Gas
      pipeline construction





The
Company did not record any goodwill when it acquired its equity position in
Xiangke and Qujing. Accordingly, in accordance with SFAS 142, the Company has
not taken an amortization expense of goodwill during the time it has carried a
40% and 39% stakes in Xiangke and Qujing respectively.





(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 periods, there was no impairment loss.






F-15




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


(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:





Asset Class
            Estimated Use LifeGas
      Pipelines (Up to December 31, 2007)
            25
      yearsGas
      Pipelines (Starting from January 1, 2008)
            50
      yearsBuildings
            25
      yearsLeasehold
      Improvements
            25
      yearsMachinery
      & Equipment
            20
      yearsMotor
      Vehicles
            10
      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:





Asset Class
            Estimated Useful LifeLand
      use rights
            40
      - 50 yearsFranchises
            30
      yearsOther
      intangibles
            3
      years





(l)
            Construction in
      Progress





Construction
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 the gas pipelines of fixed assets when they are
ready for their intended use.  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 Group’s principal businesses.  The Group
builds city main pipeline network and branch pipeline network to make gas
connection to resident users, industrial, and






F-16




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


commercial
users, with the objective of generating revenue on gas connection and gas usage
fees collected from these customers. These projects, once completed, will
significantly increase the gas supply capacity.





(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 approximate fair
value.  The carrying amounts of cash, accounts receivable, accounts
payable and accrued liabilities approximate fair value due to the short-term
nature of these items.  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.




12/31/2008
            
            
            12/31/2007Years
      end RMB : US$ exchange rate
            
            
            6.8542
            
            
            
            7.3141Average
      yearly RMB : US$ exchange rate
            
            
            6.9623
            
            
            
            7.6172





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-17




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


(p)
            Revenue
      Recognition




Revenue
is recognized when services are rendered to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured.  Payments received before all of the relevant criteria for
revenue recognition are satisfied are recorded as unearned revenue.




Net sales
consist of gas and connection fee revenue.  Cost of sales include gas
and connection cost.  Gas connection revenue is recognized when the
outcome of a contract can be estimated reliably and the stage of completion at
the balance sheet date can be measured reliably.  Sales of natural gas
are recognized when goods are delivered and title has passed.





(q)
            Investment
      Income





Investment
income represents the Group’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 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 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 be either
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, whether it is more likely than not that
these items will expire either 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 and
British Virgin Islands, the taxation of these entities are summarized
below:





·
            All
      of the operating companies are located in the PRC; and GAS Investment
      China Co., Ltd., Sino Gas Construction, Ltd., and Sino Gas Investment
      Development, Ltd. are located in the British Virgin Islands. All of these
      entities are subject to the relevant tax laws and regulations of the PRC,
      and the British Virgin Islands in which the related entity domiciled. The
      maximum tax rates of the subsidiaries pursuant to the countries in which
      they domicile are: -






F-18




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Subsidiary
            
            Country of Domicile
            
            Income Tax RatePRC
      Operating Companies (per Note 2. (d) Principals of Consolidation
            
            PRC
            
            25.0%i.
            GAS
      Investment China Co., Ltd.
            
            British
      Virgin Islands
            
            0.00%ii.
            Sino
      Gas Construction, Ltd.
            
            British
      Virgin Islands
            
            0.00%iii.
            Sino
      Gas Investment Development, Ltd.
            
            British
      Virgin Islands
            
            0.00%





·
            Effective
      January 1, 2008, PRC government implements a new 25% tax rate for all
      enterprises regardless of whether domestic or foreign enterprise without
      any tax holiday, which is defined as "two-year exemption followed by
      three-year half exemption" hitherto enjoyed by tax payers. As a result of
      the new tax law, standard 15% tax rate preference terminated as of
      December 31, 2007.  However, PRC government has established a
      set of transition rules to allow enterprises already started tax holidays
      before January 1, 2008, to continue enjoying the tax holidays until being
      fully utilized.





·
            Since
      Sino Gas International Holdings, Inc. is primarily a holding company
      without any business activities in the United States, the Company shall
      not be subject to United States income tax for the year ended December 31,
      2008.






F-19




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


(s)
              Advertising





The Group
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.





(v)
            Statutory
      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 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
      to the discretionary surplus reserve, if approved in the shareholders'
      general meeting.





(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.






F-20




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


(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.





(y)
            Recent Accounting
      Pronouncements




In
February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115 (" SFAS 159").  SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair
values.  SFAS 159 is effective for fiscal years after November 15,
2007.




In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 141 (Revised 2007), Business Combinations (“SFAS 141R”).  SFAS
141R provides additional guidance on improving the relevance, representational
faithfulness, and comparability of the financial information that a reporting
entity provides in its financial reports about a business combination and its
effects.  This Statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.




In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51(“SFAS 160”).  SFAS 160 amends ARB No. 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary.  This Statement is
effective for fiscal years and interim periods within those fiscal years,
beginning on or after December 15, 2008.






F-21




SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 applies to all derivative instruments and
related hedged items accounted for under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133").
 SFAS 161 requires entities to provide greater transparency about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
SFAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
results of operations and cash flows.  SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.





In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy).  Statement 162 will become effective
60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting
Principles."





In May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1").  FSP
APB 14-1 requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to separately account for
the liability (debt) and equity (conversion option) components of the instrument
in a manner that reflects the issuer's non-convertible debt borrowing
rate.  FSP APB 14-1 is effective for fiscal years beginning after
December 15, 2008 on a retroactive basis.





Management
of the Company does not anticipate that the adoption of these six standards will
have a material impact on these consolidated financial statements.





(z)               Earnings Per
Share





Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period.  Diluted
earnings per share is computed on the basis of the weighted average number of
shares of common stock plus the effect of dilutive potential common shares
outstanding during the period using the treasury stock method for warrants and
the as-if method for convertible securities.  Dilutive potential
common shares include outstanding warrants, and convertible preferred
stock.






F-22




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


3.
            RESTRICTED
      CASH





Restricted
Cash represents compensating balances held at banks to partially secure banking
facilities in the form of loans and notes payable.  The imposed
restrictions dictate that funds cannot be withdrawn when there are outstanding
loans and notes payable, and the funds are only allowed to be used to settle
bank indebtedness.  The funds deposited as compensating balances are
interest bearing.  The amount of cash restricted varies based on the
Bank’s credit policy at the time that the Company requests for increase or
extension of credit facilities.








4.
            ACCOUNTS
      RECEIVABLE




For
natural gas sales, it is due when the gas is sold. Normally, most of them are
settled by prepayments from the customers.




For
construction projects, connection fees are generally collected in installments.
First deposits of 30% of total contract sum are received from client when the
project commences. Second payment of 30% is received at milestone set out
following the contracts. Third payment of 30% is received after the construction
is completed. The final sum of the remaining portion normally acts as retention
money for quality warranty to the developer. The retention money would be
received by the company after the 1 year warranty period.




Trade
accounts receivable are recorded at the invoiced amount, net of allowances for
doubtful accounts and sales returns. The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on
customer facts and economic conditions.  Outstanding account balances
are reviewed individually for collectibles.  Account balances are
charged off against the allowance after all means of collection have been
exhausted and collection is improbable.  To date, the Company has not
charged off any balances as it has yet to exhaust all means of
collection.  The Company does not have any off-balance-sheet credit
exposure to its customers, except for outstanding notes receivable discounted
with banks that are subject to recourse for non-payment.




The
credit and billing policy is that residential customers are billed and collected
immediately, whereas industrial customers are billed and paid according to the
contract terms from 10 days to one month.  For the construction
business, customers are billed and pay based on the percentage of completion
method of the construction project.






F-23




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Accounts
      Receivable2008
            
            
            2007Gross
      accounts receivable
            
            $
            6,049,415
            
            
            $
            7,352,013Allowance
      for bad debt
            
            
            (35,794
            )
            
            
            (36,760
            )Net
      accounts receivable
            
            $
            6,013,621
            
            
            $
            7,315,253





Allowance for Bad
      Debt2008
            
            
            2007Beginning
      balance
            
            $
            36,760
            
            
            $
            32,838Addition
            
            
            -
            
            
            
            3,922Reversal
            
            
            (966
            )
            
            
            -Ending
      balance
            
            $
            35,794
            
            
            $
            36,760





Accounts Receivable
      Aging Report2008
            
            
            200730
      Days
            
            $
            4,896,066
            
            
            $
            5,557,17230-60
      Days
            
            
            258,107
            
            
            
            1,212,41360-90
      Days
            
            
            292,988
            
            
            
            8,74790-180
      Days
            
            
            311,954
            
            
            
            -180-360
      Days
            
            
            205,745
            
            
            
            27,489>360
      Days
            
            
            48,760
            
            
            
            509,433Total
            
            $
            6,013,621
            
            
            $
            7,315,254





The
following are the ten most significant accounts receivable at December 31
2008:





Hebei
      Zhonggang Steel, Ltd.
            
            $
            430,262Xuzhou
      Shenyuan Real Estate Co., Ltd.
            
            
            324,167Peixuan
      Jiannan Development Company
            
            
            278,947Beijing
      Yincheng Construction Co., Ltd.
            
            
            283,271Tonghua
      Tongsheng Real Estate Co., Ltd.
            
            
            370,225Sihong
      Jinwan Development Co., Ltd.
            
            
            334,661Guannan
      Fangwu Construction Co., Ltd.
            
            
            341,268Lianyun
      Port Development
            
            
            368,157Shanghai
      Datun Energy Co., Ltd.
            
            
            238,705Beijing
      Zheng Real Estate Co., Ltd.
            
            
            229,811Total
            
            $
            3,199,474






F-24




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


5.
            INVESTMENT





2008
            
            
            2007Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.
            
            $
            4,817,613
            
            
            $
            4,007,310Qujing
      Gas Co., Ltd.
            
            
            341,397
            
            
            
            -Total
            
            $
            5,159,009
            
            
            $
            4,007,310





The
followings were the condensed balance sheets and statements of income ofBeijing Zhongran Xiangke
Oil Gas Technology Co., Ltd. as of and for the years ended December 31, 2008 and
2007.





Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.Condensed
      Balance SheetsAssets
            
            2008
            
            
            2007Current
      Assets
            
            $
            5,387,444
            
            
            $
            4,351,320Non-Current
      Assets
            
            
            16,320,027
            
            
            
            13,736,685Total
      Assets
            
            
            21,707,471
            
            
            
            18,088,005LiabilitiesCurrent
      Liabilities
            
            
            9,663,439
            
            
            
            7,794,262Total
      Liabilities
            
            
            9,663,439
            
            
            
            7,794,262Net
      Assets
            
            $
            12,044,032
            
            
            $
            10,293,742






Beijing
      Zhongran Xiangke Oil Gas Technology Co., Ltd.Condensed
      Statements of Income2008
            
            
            2007Sales
      revenue
            
            $
            8,676,806
            
            
            $
            5,819,210Cost
      of revenue
            
            
            (4,807,209
            )
            
            
            (3,287,090
            )Gross
      profit
            
            
            3,869,596
            
            
            
            2,532,120Operating
      expenses
            
            
            (2,276,832
            )
            
            
            (1,811,203
            )Other
      income/(expense)
            
            
            (325,765
            )
            
            
            (110,634
            )Earnings
      before taxation
            
            
            1,301,556
            
            
            
            1,319,164Income
      tax
            
            
            (234,280
            )
            
            
            (91,543
            )Net
      income
            
            $
            1,067,276
            
            
            $
            1,227,622







F-25




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


6.
            PROPERTY,PLANT, AND EQUIPMENT,
      NET





Property,
Plant, and Equipment consisted of the followings at December 31, 2008 and
2007:





At
      Cost
            
            2008
            
            
            2007Gas
      Pipelines
            
            $
            27,859,313
            
            
            $
            18,885,734Motor
      Vehicles
            
            
            5,600,508
            
            
            
            4,874,685Machinery
      & Equipment
            
            
            857,834
            
            
            
            885,997Buildings
            
            
            1,568,380
            
            
            
            1,405,638Leasehold
      Improvements
            
            
            80,101
            
            
            
            68,942Office
      Equipment
            
            
            216,435
            
            
            
            105,33636,182,572
            
            
            
            26,226,335Less: Accumulated
      depreciation
            
            
            (3,149,453
            )
            
            
            (1,653,771
            )$
            33,033,118
            
            
            $
            24,572,565





Accumulated
      Depreciation
            
            2008
            
            
            2007Gas
      Pipelines
            
            $
            1,532,478
            
            
            $
            591,419Motor
      Vehicles
            
            
            1,109,489
            
            
            
            687,354Machinery
      & Equipment
            
            
            198,072
            
            
            
            161,703Buildings
            
            
            193,126
            
            
            
            128,514Leasehold
      Improvements
            
            
            48,325
            
            
            
            34,070Office
      Equipment
            
            
            67,963
            
            
            
            50,711Total
            
            $
            3,149,453
            
            
            $
            1,653,771





Depreciation
expenses included in the consolidated statements of income for the fiscal years
ended December 31, 2008 and 2007 were $1,495,682 and $1,323,390
respectively.






F-26




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


7.
            INTANGIBLE
      ASSETS





Intangible
assets consisted of the following at December 31, 2008 and 2007:





At
      Cost
            
            2008
            
            
            2007Land
      use rights
            
            $
            510,907
            
            
            $
            452,345Franchises
            
            
            401,214
            
            
            
            359,464Goodwill
            
            
            1,677,975
            
            
            
            1,562,202Others
            
            
            17,522
            
            
            
            9,5632,607,618
            
            
            
            2,383,574Less: Accumulated
      Amortization
            
            
            (414,366
            )
            
            
            (355,324
            )$
            2,193,252
            
            
            $
            2,028,250





Accumulated
      Amortization
            
            2008
            
            
            2007Land
      use rights
            
            $
            32,938
            
            
            $
            28,245Franchises
            
            
            369,603
            
            
            
            316,939Goodwill
            
            
            -
            
            
            
            -Others
            
            
            11,825
            
            
            
            10,140Total
            
            $
            414,366
            
            
            $
            355,324





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
amortization.




Goodwill
is related to the acquisitions of Beijing Chenguang Gas and Guannan
Gas.  Management annually reviews the carrying value of goodwill using
the sum of the discounted cash flows to determine if an impairment charge is
necessary.  The Company has determined no impairment to goodwill as of
date.






F-27




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


8.
            SHORT-TERM
      BANK LOAN





Name of Bank
            
            Due Date
            
            Interest Rate
            
            
            2008
            
            
            2007Chinese
      Renmin Bank
            
            7/1/2008
            
            
            7.22
            %
            
            $
            -
            
            
            $
            2,734,444Bank
      of Dalian
            
            12/18/2009
            
            
            6.69
            %
            
            
            2,188,439
            
            
            
            -Total
            
            
            
            
            
            
            
            $
            2,188,439
            
            
            $
            2,734,444





Interest
expenses for the short-term bank loans were $187,999 and $197,959 for the years
ended December 31, 2008 and 2007.




9.
            OTHER
      PAYABLES





Other
payables consisted of the following at December 31, 2008 and 2007:





12/31/2008
            
            
            12/31/2007Employees’
      welfare payables
            
            $
            137,264
            
            
            $
            176,236Amount
      due to employees
            
            
            366,732
            
            
            
            150,711Tax
      payable
            
            
            267,790
            
            
            
            922,620Other
      Payable
            
            
            5,403,085
            
            
            
            9,134,091Total
            
            $
            6,174,871
            
            
            $
            10,383,657





All the
amounts due to employees are 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 25,269,313
shares are issued and outstanding, and (ii) 100,000,000 shares of preferred
stock, par value $0.001 per share.  The preferred stock consists of
(a) series A convertible preferred stock, with 20,000,000 shares authorized and
0 shares are issued and outstanding; (b) series B convertible preferred stock,
with 5,000,000 shares authorized and 4,579,839 shares are issued and
outstanding; and (c) series B-1 convertible preferred stock, with 3,000,000
shares authorized and 95,418 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, series B, and series B-1 convertible preferred
stock, its by-laws and by the applicable provisions of Utah law.






F-28




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Common
Stock




The
Company is authorized to issue 250,000,000 shares of common stock, with a par
value of $0.001.  There are 25,269,313 shares of common stock issued
and outstanding at December 31, 2008.  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.




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
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.  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.  On
September 12, 2007, the Company’s board of directors designated 3,000,000 shares
of its preferred stock as series B-1 convertible preferred stock with the same
right and privilege as series B convertible preferred stock, and 95,418 shares
of series B-1 preferred stock were issued in connection with the September
financing transaction.  Therefore, at December 31, 2008, the Company
has no shares of series A convertible preferred stock issued and outstanding,
and has 4,579,839 and 95,418 shares of series B and series B-1 convertible
preferred stock issued and outstanding respectively.






F-29




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


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.




Financing
Transactions




On May
15, 2007, Vision Opportunity Master Fund, Ltd. exercised 1,094,891 shares of
Series J Warrants at $2.74 per share.  The Company received $3,000,000
cash gross proceeds.  In consideration of exercise of Series J
Warrants, 1,094,891 new Series E Warrants and 109,489 Series G Warrants were
issued to Vision and placement agent Kuhns’ Brother
respectively.  Pursuant to the financial advisory agreement between
the Company and the placement agent Kuhns’ Brother, the Company totally
reimbursed $412,241 of the gross proceeds to Kuhns’ Brother, including $146,374
disbursements of Kuhns’ Brother’s legal counsel.  The Company received
$2,587,759 net proceeds.




On
September 7, 2007, the Company entered into a securities purchase agreement with
a series of private placement investors leading by Vision Opportunity Master
Fund, Ltd. for a sale of 8,340,762 shares of the Company’s common
stock.  The Company generated an aggregate of $18,766,700 gross
proceeds.  Simultaneously, the Company entered into a Warrant Purchase
Agreement, Amendment and Waiver (“WPA”) with the holders of its outstanding
Warrants and Series B Preferred Stock, who acquired those securities by private
placement in September and October of 2006. Pursuant to the WPA, all of the
Series A and Series B Warrants issued in 2006 were purchased back by the Company
for $3,500,000; the exercise price of Series C Warrants was changed to $3.375;
all of the Series D Warrants was purchased for a purchase price of issuing
additional 770,897 shares of Series B preferred Stock; all of the outstanding
Series J and Series E Warrants were cancelled; additional 271,074 Series F
Warrants and 271,074 Series R Warrants were issued respectively. Among the
$18,766,700 cash gross proceeds, $3,500,000 was used to purchase back the Series
A and Series B Warrants issued in 2006 from private placement investors;
$1,473,833 was reimbursed to the placement agent Roth Capital, including the
out-of-pocket expenses and $232,028 legal counsel expense. The Company received
$13,792,866 net proceeds.






F-30




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Financial
      Transactions5/15/2007
            
            
            9/7/2007Gross
      proceeds
            
            $
            3,000,000
            
            
            $
            18,766,700Commission
      to Placement Agent
            
            
            (265,867
            )
            
            
            (1,241,805
            )Legal
      counsel expense
            
            
            (146,374
            )
            
            
            (232,028
            )Used
      to purchase Warrants A & B
            
            
            -
            
            
            
            (3,500,000
            )Net
      proceeds
            
            $
            2,587,759
            
            
            $
            13,792,867




The
following table depicts the issued and outstanding shares of Common Stock,
Preferred Stock, and Warrants at December 31, 2008.





Authorized Shares
            
            
            Shares issued and outstandingCommon
      Stock
            
            
            250,000,000
            
            
            
            25,269,313Convertible
      Preferred Stock A
            
            
            10,000,000
            
            
            
            -Convertible
      Preferred Stock B
            
            
            5,000,000
            
            
            
            4,579,839Convertible
      Preferred Stock B-1
            
            
            3,000,000
            
            
            
            95,418





Strike Price
            
            Contractual Life
            
            ExpirationDate
            
            Shares issued and outstanding
            
            
            Weighted Average Fair ValueSeries
      A Warrants
            
            
            3.84
            
            60
      Months
            
            9/6/2011
            
            
            241,708
            
            
            
            0.70Series
      C Warrants
            
            
            3.38
            
            60
      Months
            
            9/6/2011
            
            
            3,083,589
            
            
            
            0.81Series
      F Warrants
            
            
            4.84
            
            36
      Months
            
            9/6/2010
            
            
            271,074
            
            
            
            0.20Series
      G Warrants
            
            
            3.84
            
            48
      Months
            
            9/6/2011
            
            
            109,489
            
            
            
            0.44Series
      R Warrants
            
            
            4.84
            
            36
      Months
            
            9/6/2010
            
            
            271,074
            
            
            
            0.20Outstanding
      Option
            
            
            3.00
            
            48
      Months
            
            11/1/2010
            
            
            100,000
            
            
            
            0.92




The
Company used the Black-Scholes model to calculate the values of Warrants. The
following shows the assumptions that were employed in the model:




Warrants A
            
            
            Warrants C
            
            
            Warrants F
            
            
            Warrants G
            
            
            Warrants R
            
            
            Outstanding OptionWeighted-average
      fair value of warrants
            
            
            0.70
            
            
            
            0.81
            
            
            
            0.20
            
            
            
            0.44
            
            
            
            0.20
            
            
            
            0.92Strike
      price
            
            $
            3.84
            
            
            $
            3.38
            
            
            $
            4.84
            
            
            $
            3.84
            
            
            $
            4.84
            
            
            $
            3.00Risk-free
      interest rate
            
            
            4.18
            %
            
            
            4.18
            %
            
            
            4.18
            %
            
            
            4.18
            %
            
            
            4.18
            %
            
            
            4.18
            %Expected
      volatility
            
            
            40.00
            %
            
            
            40.00
            %
            
            
            40.00
            %
            
            
            40.00
            %
            
            
            40.00
            %
            
            
            40.00
            %Years
      to maturity
            
            
            5.00
            
            
            
            5.00
            
            
            
            3.00
            
            
            
            4.00
            
            
            
            3.00
            
            
            
            4.00






F-31




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Total
Capitalization





The
following table depicts an analysis of total capitalization for the issuance of
Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional
Paid in Capital at December 31, 2008:





Preferred
      Stock B
            
            
            Preferred
      Stock B-1
            
            
            Common
      StockName
      of Shareholders
            
            Number
      of Shares outstanding
            
            
            Capital
            
            
            Number
      of Shares outstanding
            
            
            Capital
            
            
            Number
      of Shares outstanding
            
            
            Capital
            
            
            Additional
      Paid in Capital
            
            
            %
      of Equity HoldingsManager
      / Insider
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,653,662
            
            
            
            12,654
            
            
            
            4,064,862
            
            
            
            51
            %Minority
      Investor
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,428,551
            
            
            
            3,428
            
            
            
            747,457
            
            
            
            9
            %Private
      Placement- Investor
            
            
            4,579,839
            
            
            
            4,580
            
            
            
            95,418
            
            
            
            95
            
            
            
            9,187,100
            
            
            
            9,187
            
            
            
            24,307,327
            
            
            
            40
            %Beneficial-
      Conversion Feature
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,002,292
            
            
            
            -4,579,839
            
            
            
            4,580
            
            
            
            95,418
            
            
            
            95
            
            
            
            25,269,313
            
            
            
            25,269
            
            
            
            36,121,938
            
            
            
            100
            %







F-32




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


11.
            INCOME
      TAX





In
accordance with the relevant tax laws and regulations of PRC, the corporation
income tax rate is 33% on or before December 31, 2007.  However, in
accordance with the relevant taxation laws in the PRC, the Company is eligible
for tax concessions and was exempted from part of the PRC income taxes for the
year 2007.





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 year ended December 31,
2007.





2007Income
      before taxation
            
            $
            8,228,921BVI
      & Shell's operation expenses
            
            
            136,376Income
      before taxation of Chinese subsidiaries
            
            
            8,365,297Provision
      for income taxes at PRC income tax rate
            
            
            2,760,548Effect
      of tax exemption granted to the Company
            
            
            (2,228,048
            )Income
      Tax
            
            $
            532,500





Effective
January 1, 2008, PRC government implements a new tax rate for all enterprises,
and the Company is subject to the new 25% tax rate for the year
2008.








12.
            SEGMENT
      INFORMATION





The
Company has contracted with customers usually in two revenue segments
altogether, one is for the construction and installation of gas facilities and
another one is the subsequent sales of gas to the 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.






F-33




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Balance
      Sheet Segment ReportAs
      of December 31, 2008Gas Distribution
            
            
            Gas pipeline Installation
            
            
            Others
            
            
            TotalAssetsCurrent
      Assets
            
            $
            11,815,619
            
            
            $
            3,915,950
            
            
            $
            423,986
            
            
            $
            16,155,554Non-Current
      Assets
            
            
            14,474,690
            
            
            
            43,066,163
            
            
            
            -
            
            
            
            57,540,853Total
      Assets
            
            
            26,290,308
            
            
            
            46,982,113
            
            
            
            423,986
            
            
            
            73,696,407LiabilitiesCurrent
      Liabilities
            
            
            1,353,777
            
            
            
            14,487,281
            
            
            
            -
            
            
            
            15,841,057Total
      Liabilities
            
            
            1,353,777
            
            
            
            14,487,281
            
            
            
            -
            
            
            
            15,841,057Net
      Assets
            
            $
            24,936,532
            
            
            $
            32,494,832
            
            
            $
            423,986
            
            
            $
            57,855,350





Income
      Statement Segment ReportFor
      the fiscal year ended December 31, 2008Gas Distribution
            
            
            Gas pipeline Installation
            
            
            Others
            
            
            TotalSales
      Revenue
            
            $
            12,160,959
            
            
            $
            9,287,529
            
            
            $
            -
            
            
            $
            21,448,488Cost
      of Revenue
            
            
            (11,083,784
            )
            
            
            (2,894,724
            )
            
            
            -
            
            
            
            (13,978,508
            )Gross
      Profit
            
            
            1,077,175
            
            
            
            6,392,805
            
            
            
            -
            
            
            
            7,469,980Operating
      Expense
            
            
            (561,276
            )
            
            
            (3,331,055
            )
            
            
            (872,227
            )
            
            
            (4,764,558
            )Other
      Income / Expense
            
            
            31,390
            
            
            
            186,294
            
            
            
            (418,807
            )
            
            
            (201,123
            )Earnings
      before tax
            
            
            547,289
            
            
            
            3,248,044
            
            
            
            (1,291,034
            )
            
            
            2,504,299Income
      tax
            
            
            (130,329
            )
            
            
            (773,477
            )
            
            
            -
            
            
            
            (903,806
            )Net
      Income
            
            $
            416,960
            
            
            $
            2,474,567
            
            
            $
            (1,291,034
            )
            
            $
            1,600,493






F-34




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Balance
      Sheet Segment ReportAs
      of December 31, 2007Gas Distribution
            
            
            Gas pipeline Installation
            
            
            Others
            
            
            TotalAssetsCurrent
      assets
            
            $
            11,509,765
            
            
            $
            3,814,583
            
            
            $
            7,866,957
            
            
            $
            23,191,305Non-current
      assets
            
            
            10,606,803
            
            
            
            31,558,142
            
            
            
            -
            
            
            
            42,164,945Total
      assets
            
            
            22,116,568
            
            
            
            35,372,725
            
            
            
            7,866,957
            
            
            
            65,356,250LiabilitiesCurrent
      liabilities
            
            
            1,228,727
            
            
            
            13,149,074
            
            
            
            131,843
            
            
            
            14,509,644Total
      liabilities
            
            
            1,228,727
            
            
            
            13,149,074
            
            
            
            131,843
            
            
            
            14,509,644Net
      Assets
            
            $
            20,887,841
            
            
            $
            22,223,651
            
            
            $
            7,735,114
            
            
            $
            50,846,606





Statement
      of Income Segment ReportFor
      the fiscal year ended December 31, 2007Gas Distribution
            
            
            Gas pipeline Installation
            
            
            Others
            
            
            TotalSales
      revenue
            
            $
            7,294,608
            
            
            $
            12,973,148
            
            
            $
            -
            
            
            $
            20,267,756Cost
      of revenue
            
            
            (6,374,365
            )
            
            
            (3,125,387
            )
            
            
            -
            
            
            
            9,499,752Gross
      profit
            
            
            920,243
            
            
            
            9,847,761
            
            
            
            -
            
            
            
            10,768,004Operating
      expenses
            
            
            (209,418
            )
            
            
            (2,241,032
            )
            
            
            (264,769
            )
            
            
            (2,715,219
            )Other
      income/expense
            
            
            4,080
            
            
            
            43,665
            
            
            
            128,391
            
            
            
            176,136Earnings
      from continued operation
            
            
            714,905
            
            
            
            7,650,394
            
            
            
            (136,378
            )
            
            
            8,228,921Income
      tax
            
            
            (45,604
            )
            
            
            (486,896
            )
            
            
            -
            
            
            
            (532,500
            )Gain
      from discontinued operation, net of
    tax
            
            
            -
            
            
            
            -
            
            
            
            10,950
            
            
            
            10,950Net
      income
            
            $
            669,301
            
            
            $
            7,163,498
            
            
            $
            (125,428
            )
            
            $
            7,707,370





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.






F-35




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


No other
measures of segment profit or loss and assets have been provided or reviewed by
the company's chief operating decision maker.




13.
            COMMITMENTS
      UNDER OPERATING LEASES





At
December 31, 2008, 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:





Land and Buildings
            
            2008
            
            
            2007Not
      later than one year
            
            $
            49,016
            
            
            $
            45,934Over
      one year but not later than five years
            
            
            243,383
            
            
            
            228,079After
      five years
            
            
            533,620
            
            
            
            500,067Total
            
            $
            826,019
            
            
            $
            774,080








14.
            DISCONTINUED
      OPERATION





The
Company executed a disposition agreement with Petro China Co., Ltd to sell its
subsidiary Anping Weiye Gas Co., Ltd. for RMB 3,300,000 (approximately $433,230)
in June 2007.  The Company has accounted for the disposition of the
assets of discontinued operation in accordance with SFAS 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets”.  A gain of $10,950
was recorded in the Company’s statement of operations for the fiscal year ended
December 31, 2007.  The following table is a summary of its financial
position and result of operations as of and for the year ended December 31,
2007.




Anping
      Weiye Gas Co., Ltd.Condensed
      Balance Sheet
            
            Condensed
      Statement of IncomeAssets
            
            
            
            Sales
      revenue
            
            $
            -Current
      assets
            
            $
            653,474
            
            Cost
      of sales
            
            
            -Non-current
      assets
            
            
            957
            
            Gross
      Profit
            
            
            -Total
      assets
            
            
            654,430Operating
      expense
            
            
            -Liabilities
            
            
            
            
            Other
      income/expense
            
            
            -Current
      liabilities
            
            
            7,897
            
            
            
            
            -Total
      liabilities
            
            
            7,897Gain
      on sale of assets
            
            
            10,950Net
      Assets
            
            $
            646,534
            
            Income
      tax
            
            
            -Net
      Income
            
            $
            10,950






F-36




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


15.
            ACQUISITIONS





The
Company had three acquisitions during 2007 consisting of the purchase of (1)
Beijing Chenguang Gas Co., Ltd., (2) Guannan Weiye Gas Co., Ltd., and (3)
certain assets of Baishan Gas Co., Ltd.




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 would acquire all
the capital stock of Beijing Chenguang for a purchase price of RMB 26 million
(approximately $3.35 million) in cash.  Upon consummation of the
transactions contemplated by that agreement, Beijing Chenguang would 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.




On June
20, 2007, the Company, through its Beijing Gas subsidiary, acquired 100%
interests in Guannan Weiye Gas Co., Ltd. for RMB 7,000,000 (approximately $987
thousand) by cash, among which $562,968 was used to settle Guannan Gas’
outstanding loans, so that Guannan Gas became a wholly-owned subsidiary of the
Company. Guannan Gas is a regional natural gas distributor and developer of
natural gas distribution networks in China’s Jiangsu Province.  The
acquisition of Guannan includes all of the assets and customer relationships of
Guannan Gas, including concession rights to be the exclusive natural gas
distributor in Guannan County, Jiangsu Province, for a period of 30 years
beginning from June 29, 2007.




On July
9, 2007, the Company purchased certain assets of Baishan Gas Co., Ltd., a
regional distributor and developer of distribution networks for natural gas in
Jilin Province, for a price of RMB 7,000,000 (approximately $921
thousand).  Under the asset purchase agreement, the Company was
responsible for paying outstanding debts of Baishan Gas Co., Ltd. for
$4,000,000, which was due in periodic installments through the year
2030.




The
following tables are the condensed balance sheets of Chenguang Gas and Guannan
Gas as of December 31, 2006.






F-37




SINO
GAS INTERNATIONAL HOLDINGS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Chenguang
      Gas and Guannan GasCondensed
      Balance SheetsAs
      of December 31, 2006Assets
            
            Chenguang
            
            
            Guannan
            
            
            TotalCurrent
      AssetsCash
      and cash equivalent
            
            $
            484,653
            
            
            $
            1,207
            
            
            $
            485,860Other
      receivables
            
            
            533,501
            
            
            
            -
            
            
            
            533,501Inventory
            
            
            89,806
            
            
            
            61,987
            
            
            
            151,793Non-Current
      AssetsProperty,
      plan, & equipment, net
            
            
            2,569,684
            
            
            
            537,953
            
            
            
            3,107,637Construction
      in progress
            
            
            713,119
            
            
            
            -
            
            
            
            713,119Total
      Assets
            
            
            4,390,762
            
            
            
            601,147
            
            
            
            4,991,909LiabilitiesCurrent
      LiabilitiesLoans
            
            
            255,836
            
            
            
            562,968
            
            
            
            818,804Other
      payables
            
            
            1,911,214
            
            
            
            1,207
            
            
            
            1,912,421Total
      Liabilities
            
            
            2,167,050
            
            
            
            564,175
            
            
            
            2,731,225Net
      Assets
            
            $
            2,223,712
            
            
            $
            36,972
            
            
            $
            2,260,684




Acquisition Price
            
            
            Proceeds used to settleloans
            
            
            Net Assets
            
            
            GoodwillChenguang
      Gas
            
            $
            3,350,000
            
            
            $
            -
            
            
            $
            2,223,712
            
            
            $
            1,126,288Guannan
      Gas
            
            
            987,000
            
            
            
            562,968
            
            
            
            36,972
            
            
            
            387,060Total
            
            $
            4,337,000
            
            
            $
            562,968
            
            
            $
            2,260,684
            
            
            $
            1,513,348





The
followings tabulations were retroactive restatements of pro forma consolidated
balance sheets as of December 31, 2007 and 2006, and the statements of income
for the years then ended. The retroactive restatements were based on the
assumption that the acquisitions of Chenguang Gas and Guannan Gas were made at
the beginning of 2006 for the purpose of trading and comparative
analysis.






F-38




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


Sino
      Gas International Holdings, Inc.Pro forma
      Condensed Consolidated Balance Sheets2006
            
            
            2007Sino Gas
            
            
            Chenguang
            
            
            Guannan
            
            
            Total
            
            
            Sino GasAssetsCurrent
      assets
            
            $
            15,249,331
            
            
            $
            584,277
            
            
            $
            12,811
            
            
            $
            15,846,419
            
            
            $
            23,191,305Non-current
      assets
            
            
            18,633,465
            
            
            
            5,489,774
            
            
            
            622,793
            
            
            
            24,746,032
            
            
            
            42,164,945Total
      assets
            
            
            33,882,796
            
            
            
            6,074,051
            
            
            
            635,604
            
            
            
            40,592,451
            
            
            
            65,356,250LiabilitiesCurrent
      liabilities
            
            
            8,568,483
            
            
            
            2,104,579
            
            
            
            320,268
            
            
            
            10,993,330
            
            
            
            16,365,964Total
      liabilities
            
            
            8,568,483
            
            
            
            2,104,579
            
            
            
            320,268
            
            
            
            10,993,330
            
            
            
            16,365,964Net
      Assets
            
            $
            25,314,313
            
            
            $
            3,969,472
            
            
            $
            315,336
            
            
            $
            29,599,121
            
            
            $
            48,990,286





Sino
      Gas International Holdings, Inc.Pro
      forma Condensed Consolidated Statements of Income2007twelve
      months
            
            
            six
      months ended JuneSino Gas
            
            
            Guannan
            
            
            TotalSales
      revenue
            
            $
            20,267,756
            
            
            $
            68,551
            
            
            $
            20,336,307Cost
      of revenue
            
            
            (9,499,752
            )
            
            
            (40,367
            )
            
            
            (9,540,119
            )Gross
      profit
            
            
            10,768,004
            
            
            
            28,184
            
            
            
            10,796,188Operating
      expenses
            
            
            (2,715,219
            )
            
            
            (52,630
            )
            
            
            (2,767,849
            )Other
      income/(expense)
            
            
            176,136
            
            
            
            (1,199
            )
            
            
            174,937Earnings
      from continued operation
            
            
            8,228,921
            
            
            
            (25,645
            )
            
            
            8,203,276Income
      tax
            
            
            (532,500
            )
            
            
            (1,131
            )
            
            
            (533,631
            )Gain
      from discontinued operation
            
            
            10,950
            
            
            
            -
            
            
            
            10,950Net
      income
            
            $
            7,707,370
            
            
            $
            (26,776
            )
            
            $
            7,680,595




F-39




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


2006Sino Gas
            
            
            Chenguang
            
            
            Guannan
            
            
            TotalSales
      revenue
            
            $
            10,870,718
            
            
            $
            4,084,700
            
            
            $
            16,981
            
            
            $
            14,972,399Cost
      of revenue
            
            
            (4,389,142
            )
            
            
            (2,849,441
            )
            
            
            (10,576
            )
            
            
            (7,249,158
            )Gross
      profit
            
            
            6,481,576
            
            
            
            1,235,260
            
            
            
            6,405
            
            
            
            7,723,241Operating
      expenses
            
            
            (1,251,628
            )
            
            
            (477,981
            )
            
            
            (45,329
            )
            
            
            (1,774,938
            )Other
      income/(expense)
            
            
            266,625
            
            
            
            26,787
            
            
            
            (226
            )
            
            
            293,186Earnings
      before tax
            
            
            5,496,573
            
            
            
            784,066
            
            
            
            (39,150
            )
            
            
            6,241,489Income
      tax
            
            
            (423,284
            )
            
            
            (42,754
            )
            
            
            -
            
            
            
            (466,038
            )Net
      income
            
            $
            5,073,289
            
            
            $
            741,311
            
            
            $
            (39,150
            )
            
            $
            5,775,451






F-40




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


16.
            EARNINGS
      PER SHARE





Components
of basic and diluted earnings per share were as follows:





2008
            
            
            2007Net
      Income
            
            $
            1,600,493
            
            
            $
            7,707,370Preferred
      Dividends
            
            
            -
            
            
            
            -Constructive
      Preferred Dividends
            
            
            -
            
            
            
            (1,264,500
            )Income
      Available to Common Stockholders
            
            $
            1,600,493
            
            
            $
            6,442,870Original
      Shares
            
            
            24,877,271
            
            
            
            14,693,186Addition
      to Common Stock
            
            
            238,404
            
            
            
            3,182,892Basic
      Weighted Average Shares Outstanding
            
            
            25,115,675
            
            
            
            17,876,078Addition
      to Common Stock from Conversion of Preferred Stock B
            
            
            4,733,455
            
            
            
            4,044,407Addition
      to Common Stock from Conversion of Preferred Stock B-1
            
            
            95,418
            
            
            
            23,855Addition
      to Common Stock from Exercise of Warrants
            
            
            -
            
            
            
            597,571Diluted
      Weighted Average Shares Outstanding
            
            
            29,944,548
            
            
            
            22,541,911Earnings
      Per ShareBasic
            
            $
            0.064
            
            
            $
            0.36Diluted
            
            $
            0.053
            
            
            $
            0.29Weighted
      Average Shares OutstandingBasic
            
            
            25,115,675
            
            
            
            17,876,078Diluted
            
            
            29,944,548
            
            
            
            22,541,911







F-41




SINO
GAS INTERNATIONAL HOLDINGS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE FISCAL YEARS ENDED DECEMBER 31, 2008 AND 2007
 (Stated
in U.S. Dollars)


17.
            LIQUIDATED
      DAMAGE





The
Company entered into a registration rights agreement related to a private
placement financing transaction with accredited investors on September 13,
2007.  Pursuant to the agreement, the Company had to (1) file the
registration statement within 45 days of the execution, and (2) declare the
effectiveness within 150 days of filing the registration
statement.  However, the Company did not meet the aforementioned
requirements under the registration rights agreement, and was subjected to
liquidated damages.  The Company has paid $481,805 in liquidated
damages to investors in 2008, which was reported as other expense in the
statements of income.








18.
            CONTINGENT
      LIABILITIES





Pursuant
to the warrants purchase agreement related to 2006 private placement financing
transactions, the Company was required to reach $7.9 million and $11 million net
income target for the fiscal years ended 2007 and 2008
respectively.  However, the Company did not meet the stipulated 2007
and 2008 net income target and therefore incurred certain contingent
liabilities. The Company is liable to issue 1.2 million and 1.5 million shares
make good common stock to the accredited investors in 2009 in compensation of
not attaining the 2007 and 2008 net income target respectively.