**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
        10-KSB**


Amendment
        No. 3





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





For
      the
      fiscal year ended December 31, 2006





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





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)





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




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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





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


Yes o No x





State
      Issuer’s revenue for its most recent fiscal year: $10,870,718




As
      of
      March 26, 2007 the aggregate market value of the common stock held by
      non-affiliates was approximately $ 6,792,498 based upon the last reported
      closing price on March 6, 2007 of $4.99. As of March 26, 2007, there were
      14,920,346 shares of common stock outstanding.





Documents
      incorporated by reference: Please refer to notes at the end of exhibits
      table.





Transitional
      Small Business Disclosure Format: Yes o No x





Explanatory
        Notes: This Form 10-KSB/Amendment No. 3 is filed to respond to the
        Commission’s comments issued in February 7, 2008.







TABLE
      OF
      CONTENTS





PAGEPART
                IItem
                1.
            Description
                of Business
            2Item
                2.
            Description
                of Property
            20Item
                3.
            Legal
                Proceedings
            21Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            21PART
                IIItem
                5.
            Market
                for Common Equity and Related Stockholder Matters
            22Item
                6.
            Managements
                Discussion and Analysis or Plan of Operation
            23Item
                7.
            Financial
                Statements
            32Item
                8.
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            32Item
                8A.
            Controls
                and Procedures
            32Item
                8B.
            Other
                Information
            32PART
                IIIItem
                9.
            Directors,
                Executive Officers, Promoters and Control persons; Compliance with
                Section
                16(a) of the Exchange Act.
            32Item
                10.
            Executive
                Compensation
            35Item
                11.
            Security
                ownership of Certain Beneficial Owners and Management
            35Item
                12.
            Certain
                Relationships and Related Transactions
            37PART
                IVItem
                13.
            Exhibits
            40Item
                14.
            Principal
                Accountant Fees and Services
            41Signatures
            43




1





**PART
      I**





**Item
      1.**  **Description
      of Business**





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





Our
      disclosure and analysis in this annual report contains some forward-looking
      statements. Certain of the matters discussed concerning our operations, cash
      flows, financial position, economic performance and financial condition,
      including, in particular, future sales, demand, the market for natural gas
      in
      the People's Republic of China, competition, exchange rate fluctuations and
      the
      effect of economic conditions include forward-looking statements within the
      meaning of section 27A of the Securities Act and Section 21E of the Exchange
      Act.





Statements
      that are predictive in nature, that depend upon or refer to future events or
      conditions or that include words such as "expects," "anticipates," "intends,"
      "plans," "believes," "estimates" and similar expressions are forward-looking
      statements. Although we believe that these statements are based upon reasonable
      assumptions, including projections of orders, sales, operating margins,
      earnings, cash flow, research and development costs, working capital, capital
      expenditures and other projections, they are subject to several risks and
      uncertainties, and therefore, we can give no assurance that these statements
      will be achieved.





Investors
      are cautioned that our forward-looking statements are not guarantees of future
      performance and the actual results or developments may differ materially from
      the expectations expressed in the forward-looking statements.





As
      for
      the forward-looking statements that relate to future financial results and
      other
      projections, actual results will be different due to the inherent uncertainty
      of
      estimates, forecasts and projections may be better or worse than projected.
      Given these uncertainties, you should not place any reliance on these
      forward-looking statements. These forward-looking statements also represent
      our
      estimates and assumptions only as of the date that they were made. We expressly
      disclaim a duty to provide updates to these forward-looking statements, and
      the
      estimates and assumptions associated with them, after the date of this filing
      to
      reflect events or changes in circumstances or changes in expectations or the
      occurrence of anticipated events.





We
      undertake no obligation to publicly update any forward-looking statement,
      whether as a result of new information, future events or otherwise. You are
      advised, however, to consult any additional disclosures we make in our reports
      on Form 10-KSB, Form 10-QSB, Form 8-K, or their successors. We also note that
      we
      have provided a cautionary discussion of risks and uncertainties under the
      caption "Risk Factors" in our registration statement filed with the SEC on
      October 27, 2006. These are factors that we think could cause our actual results
      to differ materially from expected results. Other factors besides those listed
      here could also adversely affect us.





Information
      regarding market and industry statistics contained in this annual report is
      included based on information available to us which we believe is accurate.
      We
      have not reviewed or included data from all sources, and cannot assure
      stockholders of the accuracy or completeness of the data included in this annual
      report. Forecasts and other forward-looking information obtained from these
      sources are subject to the same qualifications and the additional uncertainties
      accompanying any estimates of future market size, revenue and market acceptance
      of products and services. This discussion is provided as permitted by the
      Private Securities Litigation Reform Act of 1995.





Unless
      otherwise noted, all currency figures in this filing are in U.S. dollars.
      References to the “PRC” or “China” are to the People’s Republic of China.
      References to "yuan" or "RMB" are to the Chinese yuan (also known as the
      renminbi). According to the currency exchange website www.xe.com, on March
      26,
      2007, $1.00 = 7.74730 yuan.





“Sino
      Gas,” “we” and “the Company” refer to Sino Gas International Holdings, Inc. and
      our subsidiaries or, as context requires, Sino Gas International Holdings,
      Inc.
      alone. “Exchange Act” refers to the Securities Exchange Act of 1934, as
      amended.





Unless
      otherwise indicated, “2006” and “2005” refer to the fiscal years ended December
      31, 2006 and December 31, 2005, respectively.


2





**Overview
      of Our Business**




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





We
      own
      and operate 23 natural gas distribution systems serving approximately 63,000
      residential and five commercial and industrial customers. Our facilities include
      approximately 700 kilometers (“km”) of pipeline and delivery networks with a
      designed daily capacity of approximately 70,000 cubic meters of natural gas.
      Currently, we are constructing an additional four natural gas distribution
      systems. We own and operate natural gas distribution systems primarily in Hebei,
      Jiangsu, Shandong and Anhui Provinces. The following table presents, for the
      periods indicated, selected operating data:





At and for the year ended
                December 31,2006
              
              2005Total
                  gas distributed and supplied (US$)
              
              
              3,912,502
              
              
              3,925,664Distribution
                  network (km)
              
              
              390
              
              
              187.8Number
                  of industrial customers
              
              
              5
              
              
              4Number
                  of residential customers
              
              
              48,199
              
              
              23,700




The
        amounts are translated into United States dollars from Renminbi at average
        exchange rates of 7.9819 and 8.2033 for the years ended December 31, 2006
        and
        2005, respectively.




We
      buy
      natural gas for distribution in three forms: (i) piped natural gas—we use piped
      natural gas (“PNG”) if the gas source, or long distance pipeline, is located
      within a reasonably short distance of our system; (ii) compressed natural gas
      (“CNG”); and (iii) liquefied natural gas (“LNG”). Both CNG and LNG are natural
      gas that has been compressed into canisters so as to enable transportation,
      usually by truck, to the point of distribution or consumption. Typically CNG
      is
      compressed under 200 times pressure and transported at normal temperature,
      while
      LNG is compressed at 600 times pressure and transported at sub zero degree
      temperature. CNG is generally transported within a distance of 300 km. There
      is
      no distance restriction in transporting LNG. As LNG is compressed at much higher
      pressure and transported at much lower temperature than CNG, the cost of
      compression and processing of LNG is higher than that of CNG.




Generally,
      if a customer is located within 300 km of our natural gas supplier, we transport
      CNG to the customer. We transport LNG to a customer if the customer is located
      more than 300 km away from a supplier. Approximately 99% of the natural gas
      we
      purchase is CNG and approximately 1% is LNG.





We
      generate revenues in two ways: (i) connection fees for the sale of
      interconnections to our natural gas distribution system and (ii) the sale of
      natural gas. In 2004, we also generated sales from the sale of natural gas
      appliances and equipment, gas meters, and repair, maintenance and related
      services. In 2005, we ceased supplying gas appliances, equipment and gas meters
      as sales of such items were not very profitable and our customers can find
      more
      varieties of these items readily available on the open market. We have two
      types
      of customers: (i) residential and (ii) commercial or industrial. The following
      table presents, for the periods indicated, the revenues generated from each
      of
      our major categories of operations:





At and for the year ended December 31,2006
              
              2005(in US$ millions)
              
              (in US$ millions)Connection
                  fees (as % of total Sales)
              
              
              6.96
                  (64
              )%
              
              6.98
                  (64
              )%Gas
                  sales
              
              
              3.91(36
              )%
              
              3.93
                  (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.


3




The
      following table presents Beijing Gas’s costs of sales for the periods
      indicated:





At and for the year ended December 31,2006
              
              2005(in US$ millions)
              
              (in US$ millions)Gas
                  cost
              
              
              2.95
              
              
              2.77Connection
                  cost
              
              
              1.44
              
              
              1.36





Our
      business is generally affected by two seasonal factors: First, between December
      and March, the weather is too cold in northern China for construction. For
      a
      given gas distribution project, to avoid running into this time period, we
      generally start the process of pipeline installation, which has a duration
      of
      six to eight months, in April so as to complete the process before December.
      As
      a result, most of our revenues from connection fees are recorded in the fourth
      quarter. Second, winter is our peak season for gas sales, as our customers
      tend
      to consume more natural gas for heating purposes.




**Our
      Strategy**





Our
      strategy involves a four-part plan: (i) serve smaller cities each with a
      population of no more than one million, where there is little competition to
      obtain a franchise, and where our franchise grants us exclusivity; (ii) contract
      for long term supplies of natural gas on favorable prices and terms; (iii)
      finance our Company using a well-designed financing plan that will give us
      a
      favorable cost of capital; and (iv) employ the best management.





***(i)
      Small Cities; Exclusive Franchises.*** We focus
      on small- to medium-sized cities, generally near a larger metropolitan area.
      In
      such places in the PRC, we are in a better position to obtain exclusive natural
      gas distribution system development and supply franchise agreements in
      negotiating with the cities, which urgently need to provide their citizens
      with
      energy, and usually don’t have the leverage of very large cities, which can
      attract multiple bidders for their franchises. Accordingly, we require and
      receive an exclusive franchise entitling us to be the sole natural gas utility
      in such city. Usually, our franchises are for a period of 25-30
      years.





***(ii)
      Favorable Natural Gas Contracts.*** We have
      established and developed stable and long term contracts with China’s major
      natural gas suppliers, including close cooperation with such major state-owned
      entities in the petroleum and natural gas industry as Petro China Company
      Limited and Sinopec Corporation.





***(iii)
      Financing Plan.*** We
      anticipate using our financing plan as a competitive tool. Our goal is to
      duplicate the type of financing plan and related financial instruments used
      by
      utilities in the United States, including the issuance of subsidiary level,
      non-recourse debt, preferred stock and holding company fixed income issuances.
      Such a financing plan can not only give us a favorable cost of capital, but
      enhance investor returns and keep investor dilution at a minimum.





We
      are in
      a very capital-intensive business. Our income will depend on our ability to
      issue the above-mentioned financial instruments. There can be no assurance,
      however, that we will be successful in issuing or selling such instruments
      to
      investors which would have a direct and negative impact on our future
      earnings.





***(iv)
      Employ the Best Management.*** **** We
      have a
      team of senior executives who are industry experts each with a track record
      of
      success in managing larger Chinese petroleum and/or gas companies. Our founder
      and Chief Executive Officer, Mr. Yu-Chuan Liu, is a natural gas industry expert
      with over 20 years experience in senior management positions at Petro China
      and
      China Gas Holdings Limited, a Hong Kong Stock Exchange-listed PRC company.
      Our
      Chief Operating Officer, Mr. Zhou Zhi Cheng, served as the director and General
      Manager of Beijing Chenguang Gas Co., Ltd. from late 2002 to 2006. Prior to
      that, Mr. Zhou served as the Associate General Manager and later General Manager
      of Beijing Zhong Ran Xiang Ke Petroleum and Oil Technology Co., Ltd. from 2001
      to 2002. Our Chief Engineer, Mr. Shu-Kui Bian, is one of the draftsmen of the
      PRC national standard for urban gas supply, and was previously the chief
      executive officer of the First Oil Extraction Plant of North China
      Oilfield.


4




**Organization
      and Structure of the Company**





We
      operate through our indirectly-owned subsidiaries in the PRC, Beijing Gas and
      its subsidiaries. A separate subsidiary with nominal operations, Pegasus Tel,
      owns and operates payphones. We did spin off Pegasus Tel in the form of a
      dividend to our shareholders of record as of August 30, 2006.  Please
      refer to our Schedule 14 (c) filed on May 4, 2007.




As
      of
      December 31, 2006, our corporate structure is set forth
      below:





**** SINO GAS INTERNATIONAL HOLDINGS




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




**Subsidiary**
            
            **Beijing**
              **Gas’s**
              **Equity**
              **Interest**Yu
                Tian county Zhong Ran Wei Ye Gas Ltd.
            
            
            90
            %Ning
                Jing Wei Ye Gas Ltd.
            
            
            95
            %Xing
                Tang County Wei ye Gas Ltd.
            
            
            95
            %Lin
                Zhang County Wei Ye Gas Ltd.
            
            
            85
            %Jin
                Zhou Wei Ye Gas Ltd.
            
            
            95
            %Wu
                Qiao County Gas Ltd.
            
            
            95
            %Long
                Yao County Zhong Ran Wei Ye Gas Ltd.
            
            
            95
            %Shen
                Zhou Wei Ye Gas Ltd.
            
            
            95
            %Pei
                County Wei Ye Gas Ltd.
            
            
            90
            %Si
                Hong Wei Ye Gas Ltd.
            
            
            95
            %Si
                Shui Wei Ye Gas Ltd.
            
            
            95
            %Lang
                Fang Development Zone Wei Ye Dangerous Goods Transportation
                Ltd.
            
            
            95
            %Beijing
                Zhong Ran Xiang Ke Gas Technology Ltd.
            
            
            40
            %Zhangjiakou
                City Xiahuayuan Jinli Gas Ltd. Co.
            
            
            100
            %Yuxian
                Jinli Gas Ltd. Co.
            
            
            100
            %Beijing
                Chenguang Gas Ltd., Co.
            
            
            100
            %Changli
                Gas Co. Ltd.
            
            
            100
            %Hengshui
                Gas Co. Ltd.
            
            
            100
            %


5





**Organizational
      History**





Sino
      Gas
      International Holdings, Inc. was incorporated under the laws of the State of
      Utah on August 19, 1983 as Evica Resources, Inc. On April 5, 1984, we changed
      our name to American Arms, Inc. American Arms, Inc. commenced the manufacture
      and sale of weapons and laser sights. On December 31, 1984, our Articles of
      Incorporation were suspended for failure to file an annual report. Our Articles
      of Incorporation were reinstated on December 19, 1985 by the Utah Department
      of
      Commerce, Division of Corporations. On October 1, 1984, our Articles of
      Incorporation were suspended a second time for failure to file an annual report.
      Our Certificate of Incorporation was reinstated on November 21, 1986 again
      by
      the State of Utah, Department of Commerce, Division of
      Corporations.





On
      April
      12, 1988, we changed our name to American Industries, Inc. as we were no longer
      engaged in the manufacturing and sale of weapons and laser sights. American
      Industries, Inc. was in the business of providing room safes for
      hotels.





On
      February 19, 2002, we formed a subsidiary corporation named Pegasus Tel, Inc.
      under the laws of the State of Delaware, in order to enter into the
      telecommunications business. On March 28, 2002, Pegasus Tel, Inc. merged with
      Pegasus Communications, Inc., a New York corporation, with Pegasus Tel, Inc.
      as
      the surviving entity. On January 14, 2002 we purchased payphone assets
      consisting of 29 payphones and associated equipment from the Margaretville
      Telephone Company for $11,600.00. On May 21, 2002, we changed our name to Dolce
      Ventures, Inc.




On
      September 7, 2006, we consummated a share exchange transaction with the
      shareholders of GAS Investment China Co., Ltd. (“Gas (BVI)”), the parent company
      of Beijing Gas, whereby we exchanged 14,361,646 shares of our series A
      convertible preferred stock, par value $0.001 per share, for all of the issued
      and outstanding stock of Gas (BVI) held by the shareholders of Gas (BVI). As
      a
      result of the share exchange transaction, Gas (BVI) became our wholly-owned
      subsidiary, and Beijing Gas became our indirectly wholly-owned subsidiary.
      In
      addition, as a result of the share exchange transaction, we ceased being a
      shell
      company as such term is defined in Rule 12b-2 under the Exchange Act and are
      now
      engaged in the development of natural gas distribution systems and the
      distribution and supply of natural gas in the PRC.





On
      November 17, 2006, we changed our name to Sino Gas International Holdings,
      Inc.,
      announced our new trading symbol, SGAS, and effected a 304.44-for-1 reverse
      stock split.




**Organizational
      History of Gas (BVI) and Beijing Gas**





Gas
      (BVI)
      was incorporated on June 19, 2003 in the Territory of the British Virgin Islands
      with Mr. Liu Yu Chuan as its sole shareholder. Gas (BVI) is the holding company
      for Beijing Gas. Prior to the acquisition of all of the equity interests of
      Beijing Gas by Gas (BVI) as described below, Gas (BVI) had no business
      operations, assets or liabilities, apart from organizational expenses and
      fees.




Beijing
      Gas was originally formed as a limited liability company under the laws of
      the
      PRC in 2001 under the name Beijing Yuan Wang Yu Cheng Construction Ltd., and
      changed its name to its current name, Beijing Zhong Ran Wei Ye Gas Co. Ltd.,
      in
      June 2003.  On February 17, 2004, Gas (BVI) acquired all the outstanding
      capital stock of Beijing Gas from its then shareholders. On July 14, 2004,
      Gas
      (BVI) transferred 1% of the capital stock of Beijing Gas to Shen Zhen Shen
      Qi
      Cheng Tong Investment Ltd., a limited liability company organized under the
      laws
      of the PRC (“Shen Zhen Shen Qi”), and, simultaneously, Shen Zhen Shen Qi
      invested RMB 20 million in Beijing Gas in exchange for 50% of its capital stock.
      As a result, Gas (BVI) and Shen Zhen Shen Qi held 49% and 51% of the capital
      stock of Beijing Gas, respectively. On April 30, 2006, Gas (BVI) acquired all
      of
      the capital stock of Beijing Gas held by Shen Zhen Shen Qi in exchange for
      RMB
      20.4 million. As a result of this transaction, Beijing Gas is now a “wholly
      foreign owned entity” under PRC law by virtue of its status as a wholly-owned
      subsidiary of Gas (BVI).




Beijing
      Gas has subsidiaries, known as project companies, in four provinces, and four
      branch offices in Beijing. The project companies are the operating subsidiaries
      of Beijing Gas. Each project company operates as a local natural gas distributor
      in a city or county, which we refer to as an operational location, pursuant
      to
      an exclusive franchise agreement with the local government or entities
      responsible for administering and/or regulating gas utilities, pursuant to
      which
      Beijing Gas is granted the exclusive right to develop and operate natural gas
      distribution systems and distribute natural gas at the operational
      location.


6




Each
      of
      the project companies is organized as a limited liability company under PRC
      law
      with Beijing Gas holding an equity interest of 85% to 100% and an individual
      shareholder nominally holding the remainder of the equity interest in such
      project company. Each such individual shareholder has relinquished any and
      all
      rights, power and interest of a shareholder in the respective project companies
      under enforceable contracts. This structure was intended to comply with a PRC
      law that required a limited liability company to have at least two shareholders,
      which requirement was removed in January 2006. Beijing Gas intends to cause
      the
      individual shareholders to transfer their shares in each of the project
      companies back to Beijing Gas in the near future.





In
      addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang
      Ke
      Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
      venture entity engaged in the business of development, licensing and sale of
      oil
      and gas technologies and equipment, and sale of self-produced
      products.





Set
      forth
      below are the subsidiaries of Beijing Gas:




**Subsidiary**
            
            **Beijing**
              **Gas’s**
              **Equity**
              **Interest**Yu
                Tian county Zhong Ran Wei Ye Gas Ltd.
            
            
            90
            %Ning
                Jing Wei Ye Gas Ltd.
            
            
            95
            %Xing
                Tang County Wei ye Gas Ltd.
            
            
            95
            %Lin
                Zhang County Wei Ye Gas Ltd.
            
            
            85
            %Jin
                Zhou Wei Ye Gas Ltd.
            
            
            95
            %Wu
                Qiao County Gas Ltd.
            
            
            95
            %Long
                Yao County Zhong Ran Wei Ye Gas Ltd.
            
            
            95
            %Shen
                Zhou Wei Ye Gas Ltd.
            
            
            95
            %Pei
                County Wei Ye Gas Ltd.
            
            
            90
            %Si
                Hong Wei Ye Gas Ltd.
            
            
            95
            %Si
                Shui Wei Ye Gas Ltd.
            
            
            95
            %Lang
                Fang Development Zone Wei Ye Dangerous Goods Transportation
                Ltd.
            
            
            95
            %Beijing
                Zhong Ran Xiang Ke Gas Technology Ltd.
            
            
            40
            %Zhangjiakou
                City Xiahuayuan Jinli Gas Ltd. Co.
            
            
            100
            %Yuxian
                Jinli Gas Ltd. Co.
            
            
            100
            %Beijing
                Chenguang Gas Ltd., Co.
            
            
            100
            %Changli
                Gas Co. Ltd.
            
            
            100
            %Hengshui
                Gas Co. Ltd.
            
            
            100
            %




**Recent
      Developments**





In
      January, 2007, we formed two companies incorporated under the laws of the
      British Virgin Islands: Sino Gas Construction Ltd. and Sino Gas Investment
      Development Ltd., both of which are 100% owned by Sino Gas. Sino Gas
      Construction Ltd. acquired 100% of the common stock of Beijing Chenguang Gas
      Co., Ltd. in January 2007.





On
      November 30, 2006, we granted an option to purchase 100,000 shares of our common
      stock at $3.00 per share to CCG Partners, LLC, as partial consideration for
      investor relations services it is providing to us.





On
      October 19, 2006, our Board of Directors met and approved the establishment
      of
      an Audit Committee and a Compensation Committee of the Board. At the same
      meeting, the Board approved the resignation of Shu-wang Li from the position
      of
      Chief Operating Officer of the Company, and appointed Zhi-cheng Zhou as the
      new
      Chief Operating Officer of the Company.


7




On
      December 17, 2006, Beijing Gas acquired 100% of the common shares of two natural
      gas companies operating in Hebei Province, Hebei Jinli Xiahuayuan Gas Co.,
      Ltd.,
      and Hebei Jinli Yuxian Gas Co., Ltd., both of which became its operating
      subsidiaries.





In
      December 2006, Beijing Gas set up two new domestic subsidiaries: Changli Gas
      Co., Ltd. and Hengshui Gas Co., Ltd.




**PRC Natural
      Gas Industry Overview**





***Sources
      of Energy***





Although
      the PRC is the world’s second largest energy consumer, its energy consumption
      per capita is lower than the per capita level in most other countries. This
      is
      largely due to the fact that a large portion of the Chinese population lives
      in
      rural areas where access to energy sources is limited and the energy supply
      infrastructure in the PRC is still relatively underdeveloped. Energy consumption
      is concentrated in the urban areas where there is greater access to energy
      sources.





Traditionally,
      the PRC has relied heavily on coal and crude oil as its energy sources.
      According to the China Statistical Yearbook, in 2004, coal, crude oil,
      hydro-electricity and natural gas accounted for 65.0%, 23.2%, 8.8% and 3%,
      respectively, of the PRC’s total energy consumption. In 2003, the ratios were
      68.0%, 23.0%, 7.9% and 2.5% respectively. Traditionally, natural gas has been
      primarily used as a raw material for chemical fertilizer and to operate oil
      and
      gas fields. Accordingly, most natural gas is consumed for production of
      fertilizer. Only a little over 10% of natural gas is consumed as a fuel for
      cogeneration and residential use. (Source: The Institute of Energy Economics
      of
      Japan).





The
      PRC’s
      heavy reliance on coal is out of line with world consumption rates for the
      same
      time period which was 22.2% (Source: Energy Information Administration, U.S.
      Department of Energy). The use of coal, however, causes air pollution and other
      negative consequences to the environment. In the PRC, the heavy use of unwashed
      coal has lead to large emissions of sulfur dioxide and particulate matter.
      An
      air pollution study conducted by the World Health Organization in 1998 showed
      that seven of the 10 most polluted cities in the world were located in the
      PRC.
      As such, there have been serious environmental concerns in many countries around
      the world and resulted in a global trend to reduce coal usage. In consideration
      of such trends, the PRC set out a policy to raise the share of natural gas
      in
      the country’s energy mix in its Ninth 5-Year Plan (1996-2000). At the local
      government level, in many locations where natural gas supply is available,
      local
      governments often require all new residential buildings to incorporate piped
      gas
      connections in their designs as a condition to the issuance of the construction
      or occupancy permits. Before 2000, the gas distribution had principally been
      served by local municipal governments. Since then, the industry has been open
      to
      private sector, whose investments have fostered the wide use of natural gas
      in
      the PRC. The natural gas industry has been deemed by the PRC government as
      a
      suitable industry for public and private investments.





***China’s
      Natural Gas Reserves and Gas Pipeline Infrastructure***





Recognizing
      the serious problems caused by heavy reliance on coal usage, the PRC government
      has aggressively moved to reduce coal usage by substituting coal with other,
      more environmentally friendly forms of fuel, such as natural gas. The PRC
      abounds in rich natural gas reserves, which are distributed principally in
      Xinjiang, Sichuan and Inner Mongolia in western and north-central China.
      According to the Second Oil and Gas Reserve Assessment published by the
      Geological and Mineral Resources Department of China, natural gas reserves
      in
      China are estimated to be 38,000 billion cubic meters with 30,000 billion cubic
      meters onshore and 8,000 billion cubic meters offshore. These reserves are
      sufficient for 74 to 120 years of Chinese consumption based on current
      consumption levels.





Because
      the PRC’s largest reserves of natural gas are located in western and
      north-central China, it requires a significant investment in gas transportation
      infrastructure to carry natural gas to eastern cities and the rest of the PRC.
      Until recent years, the PRC’s natural gas consumption was limited to local
      natural gas producing provinces because of the lack of national long-distance
      pipeline infrastructure. For example, Sichuan province, which is well known
      for
      its production of natural gas, has a local gas transport network. In the
      northwest, areas near the Daqing field in Heilongjiang province and the Liaohe
      oil field in Liaoning province have benefited from associated gas sent via
      gas
      pipeline. Because natural gas transportation was limited to areas near
      production sites, low cost gas supply was possible.


8





The
      principal method for transportation of natural gas from a source to end users
      is
      by means of pipelines. In order to develop the natural gas industry, it is
      essential that the necessary pipeline infrastructure be in place so that natural
      gas is easily accessible for distribution to end users at affordable
      cost.





In
      accordance with the PRC government’s Tenth 5-Year Plan (2001-2005), the
      country’s longest pipeline, known as the West-East Pipeline, was constructed and
      went into operation in January 2005. It transports natural gas to demand centers
      in the southeast from deposits in the western Xinjiang province to Shanghai,
      picking up additional gas in the Ordos Basin along the way. The West-East
      Pipeline starts at Lunnan in the Xinjiang Autonomous Region and ends at Baihe
      Town in Shanghai. It travels through 10 provinces including Xinjiang, Gansu,
      Ningxia, Shaanxi, Shanxi, Henan, Anhui, Jiangsu, Zhejiang and Shanghai. The
      full
      length of the pipeline is about 4,200 km with a designed annual throughput
      capacity of 20 billion cubic meters, a delivery pressure of 10 megapascals
      and 35 processing stations along the pipeline.




There
      are
      other pipelines linking smaller natural gas deposits to consumers, such as
      the
      pipeline linking the Sebei natural gas field in the Qaidam Basin with consumers
      in the city of Lanzhou, Ganshu province in the northwest, and a pipeline linking
      natural gas deposits in Sichuan province in the southwest to demand centers
      in
      Hubei and Hunan provinces in the central PRC.




In
      its
      Eleventh 5-Year Plan (2006 - 2010), the PRC government re-affirmed its
      commitment to making significant investments in the expansion of the natural
      gas
      pipeline infrastructure over a period of 20 years.





***The
      Gas Delivery Process***





The
      natural gas delivery process is categorized by three segments: production,
      transmission and distribution. Production involves underground exploration,
      drilling, extraction and purification of the natural gas. After extraction
      from
      a gas well, natural gas is transported to nearby refineries for removal of
      water
      and other impurities. The natural gas is then transported from the refineries
      via long distance pipelines under extremely high pressure facilitating the
      supply to a large number of locations near these pipelines at high speeds.
      The
      long distance pipelines are owned and operated by PRC state owned oil and gas
      exploration and production companies.





Distribution
      companies (such as Beijing Gas) distribute natural gas to end users and often
      own the gas pipeline infrastructure rights of an operational location (including
      the intermediate pipelines, the processing stations, the main pipelines and
      the
      branch pipelines). A distribution company purchases natural gas from oil and
      gas
      exploration and production companies. The distribution company determines the
      method of delivering natural gas to its desired destination after taking into
      account factors such as the distance between the collection and delivery points
      and the expected demand for gas from the relevant gas supply
      locations.





The
      collection of CNG and LNG involves the delivery of the gas by truck from gas
      wells or stations located along the relevant long distance pipeline to a
      processing station. If an intermediate pipeline is constructed, the intermediate
      pipeline transports the natural gas under high pressure to a processing station.
      Such processing stations may contain CNG or LNG pressure regulating facilities
      which will depressurize the CNG or LNG to natural gas under medium pressure
      and/or natural gas pressure regulating facilities to reduce the pressure of
      natural gas from high pressure to medium pressure, before transferring the
      natural gas to a local pipeline.


9





The
      processing station is usually located on the outskirts of an operational
      location for safety reasons and it provides certain ancillary
      facilities:





To
                add bromine to the gas to enable the detection of leakages when the
                gas is
                transmitted through the main pipelines,
                and




To
                store gas under high, medium or low pressure to be used as reserves
                for
                future unexpected fluctuation in
                demand.




High
      pressure gas storage tanks usually have thicker walls and therefore, are more
      expensive to construct than gas storage tanks for storage of gas under medium
      or
      low pressure.





After
      processing, the gas is transmitted under medium pressure to the local pipelines.
      Local pipelines are laid within an operational location and represent the
      backbone of the local gas delivery system. Different sections of the local
      pipelines operate at slightly different pressures, with computer controlled
      regulators controlling the flow of natural gas for delivery to end users via
      the
      branch pipelines and customers’ pipelines.




When
      there is a demand for a connection of gas to a particular area within a gas
      supply location, the distribution company will invest in the construction of
      the
      branch pipelines to connect the main pipelines to the pressure regulating boxes
      located in the end-users’ buildings or premises. The pressure regulating box
      reduces the natural gas to a lower pressure before the natural gas is
      transmitted to the customers’ pipelines. Customers’ pipelines transmit the
      natural gas through the pressure regulating box to the end users.





***Demand
      for Natural Gas***




Currently,
      natural gas consumption in the PRC accounts for less than 3% of its total energy
      consumption. However, driven by environmental pressure from the demand side
      and
      improvements in social infrastructure with economic growth, in the west in
      particular, and stable energy supply, it is anticipated that the use of natural
      gas will grow very rapidly in the PRC over the next 20 years.





***Natural
      Gas Suppliers***





There
      are
      approximately 60 natural gas supply companies in the PRC. Among them, China
      National Petroleum Corporation Group (“CNPC”), China Petroleum and Chemical
      Corporation Group (“Sinopec”), and China National Offshore Oil Corporation Group
      (“CNOOC”) account for more than 90% of the total national production. In 2002,
      production by CNPC, Sinopec and CNOOC accounted for 68.9%, 15.2% and 11.4%,
      respectively, of the total national production. CNPC and Sinopec own and
      primarily operate onshore pipelines while CNOOC owns and operates virtually
      all
      off shore pipelines. Before 2000, the gas distribution had been principally
      served by local municipal governments. Since then, natural gas industry has
      been
      designated by the PRC government as a suitable industry for public and private
      investment and has been open to private investment which has fueled the
      development of the industry and fostered a wider use of natural gas in the
      PRC.





**Our
      Business Activities**





Our
      business projects proceed in three stages, ending in our eventual ownership
      and
      operation of a natural gas distribution system in a given operational
      location:





1.
      Development—(i) identifying distribution opportunities by conducting preliminary
      reviews and feasibility studies of new operational locations, and (ii) securing
      authorization by and/or franchise arrangements with local governments,
      negotiating supply agreements with potential customers, and implementing the
      related documentation;





2.
      Construction—building both natural gas storage and distribution networks;
      and





3.
      Operations—supply and sale of natural gas and related services to customers at
      the operating location.





***Development***





(i) *Identifying distribution opportunities in new operational
      location:* Our
      business development team actively explores and identifies suitable areas of
      service by conducting market research on potential operational locations where
      the demand for piped natural gas is desired. Because of experience and ongoing
      cooperation with governmental authorities, we also receive invitations from
      local governments to bid for new natural gas projects or to take over existing
      natural gas projects.


10




As
      the
      piped natural gas supply industry in the PRC is still in the early stages of
      development, most areas in the PRC are not yet supplied with piped natural
      gas
      even though they may be in close proximity to natural gas sources. Due to the
      capital intensive nature of new natural gas distribution projects, we are very
      selective in our choices for new operational locations.





The
      selection of new operational locations is determined after conducting
      preliminary evaluation and studies on the target locations, and return on
      investment. The criteria for any potential operational location that are
      investigated and documented by us are:





1.
            Size
                and density of population.




2.
            Economic
                statistics of the targeted
                locations.




3.
            Extent
                and concentration of industrial and commercial
                activities.




4.
            New
                property development in the target
                location.




5.
            Projected
                levels of connection fees and gas usage
                charges.




6.
            Extent
                of the local government’s commitment to environmental protection,
                environmental policies in place, and the local population’s awareness of
                environmental issues.




7.
            A
                determination of exclusive operational rights and preferential treatment
                on tax and governmental fees.




8.
            Types
                of gas supply (piped natural gas, CNG or LNG) and methods of delivery.
                Intermediate pipeline is used if the gas source, or long distance
                pipeline, is located within 100 km. CNG trucks are deployed if the
                gas
                source, or long distance pipeline, is located within 300 km. There
                is no
                distance restriction for LNG delivery. Generally, LNG trucks are
                used if
                the gas source, or long distance pipeline, is located beyond 300
                km.




9.
            For
                an acquisition of existing natural gas projects, the cost of acquisition,
                quality of assets and/or business are also valued. In addition, the
                liabilities of the business are analyzed along with any other perceived
                or
                actual problems encountered.





Based
      on
      the findings of the investigation, our business development team will decide
      whether to make a recommendation to management for approval to proceed with
      discussions and negotiations on a new project. We have conducted dozens of
      preliminary evaluations since our inception in 2003. We have an aggregate of
      26
      completed or partially completed operational locations and 12 operational
      locations under development.





*(ii)
      Securing a New operational location.* Once we
      have approved a potential natural gas distribution project in an operational
      location, we normally set up a local independent subsidiary, also know as a
      project company, to administer the project for its lifetime. We then prepare
      and
      submit a detailed gas project proposal to the local government and commence
      negotiations on major issues such as the granting of exclusive rights or rights
      of first refusal to supply gas to that location, proposed connection fees and
      gas usage charges and whether any tax and other concessions or favorable
      policies will be granted by the local government. Once established, the project
      company will conduct a series of marketing and promotional campaigns (which
      may
      include joint promotional campaigns with the local government) to increase
      public awareness of piped natural gas in the operational location. Concurrently,
      we begin actively seek out potential customers in the operational location
      and
      negotiate the terms of supply contracts with the aim of entering into supply
      contracts as soon as possible with such customers.





***Construction***




*(i)
      Design stage.* **** The
      design of the gas pipeline infrastructure for a natural gas distribution project
      includes the processing stations, the local pipelines and other ancillary
      facilities such as gas storage tanks. It is carried out by a government approved
      design institute in accordance with our requirements and specifications. It
      also
      takes into account the local population size, the development of the economy,
      the utilization of energy resources and the environmental conditions. The design
      takes into consideration our technical requirements, the needs of the local
      population and the environmental conditions of the area covered by the design.
      The master design is subject to approval by the local city construction
      department. The design stage normally takes two to three months.




11




*(ii)
      Construction Stage.* **** Once
      the
      design is approved, we invite independent qualified contractors to tender bids
      for the construction work. The selection criteria for the contractors include
      their qualifications, experience, expertise, reputation, familiarity with the
      local environment, prior experience with us and price. We generally enter into
      turnkey contracts with independent contractors for construction, installation
      and maintenance of the natural gas pipelines. We pay a down payment with the
      remainder to be paid upon completion of the project. At the time of entering
      into turnkey contracts, we source raw materials such as piping, gas regulating
      equipment and machinery. We have strict quality control procedures for the
      sourcing of supplies for all construction purposes.





Our
      internal engineers and independent external inspectors monitor the entire
      construction process to ensure that each stage of construction meets our quality
      and safety standards and the relevant regulatory requirements.





For
      a
      given operational location, although the gas pipeline infrastructure is designed
      to cover the entire operational location, our construction program focuses
      on
      early gas delivery to areas of concentrated customer demand within such
      operational location. This ensures that natural gas supply can begin as soon
      as
      the essential gas pipeline infrastructure and facilities such as the processing
      stations and the intermediate pipelines are completed. Construction work in
      a
      target area will gradually extend to cover the whole operational location,
      which
      typically takes two to five years.





***Operation***





Once
      the
      necessary gas pipeline infrastructure is in place in a given operational
      location, we begin the design and construction of the branch pipelines and
      customers’ pipelines pursuant to gas supply contracts with customers. The
      designs of branch pipelines and customers’ pipelines are normally prepared by
      us, reviewed by a government approved design institute, and carried out by
      external contractors. Upon completion of the construction of the branch
      pipelines and customer pipelines in the operational location, we begin to supply
      and sale natural gas and related services to customers within the operational
      location pursuant to supply contracts with such customers.





**Gas
      Distribution System**





The
      chart
      below illustrates our gas distribution system. We purchase gas from our
      suppliers, which are state-owned petroleum companies, at their processing
      centers close to our operational locations. The natural gas we purchase is
      compressed from piped natural gas into CNG or LNG and placed in canisters.
      We
      then transport the CNG and LNG by truck to our processing stations in various
      operational locations for storage, decompression and gasification. From those
      locations, the gas is transported through our pipeline system to our end
      users.


12




**SINO GAS INTERNATIONAL HOLDINGS**




**Products
      and Services**





Presently,
      we generate revenues primarily from the sale of connection services to end
      users’ pipelines to our natural gas distribution system for which we charge
      connection fees, and sale of natural gas for which we charge the customers
      based
      on usage.





Historically,
      connection fees and sales of natural gas have constituted more than 90% of
      our
      total revenues. We recorded connection fees in the amounts of $7.22 million
      and
      $8.2 million for the fiscal years ended December 31, 2006 and 2005,
      respectively, constituting 66% and 75.2% of total revenues for those years.
      Sales of natural gas were $3.65 million and $2.7 million for the fiscal years
      ended December 31, 2006 and 2005, respectively, constituting 34% and 24.8%
      of
      the total revenues for those years.





**Sales
      and Marketing**





Our
      main
      sales office, which is located in Beijing, is responsible for managing our
      overall sales and devising our marketing strategy. We establish a project
      company at each operational location and the local sales and marketing team
      for
      each project company works together with the main office team to structure
      an
      appropriate plan accommodating the specific needs and circumstances of the
      operational location. The sales and marketing team is responsible for company
      image and brand building, as well as promoting the advantages and concept of
      using natural gas as a necessary part of modern day life. Once established,
      a
      project company will implement a series of promotional campaigns (which may
      include joint promotional campaigns with the local government) to increase
      public awareness of piped natural gas in an operational location. At the same
      time, the project company begins to actively seek out potential customers in
      the
      operational location and negotiate the terms of supply contracts with the aim
      of
      entering into supply contracts with such customers as soon as
      possible.


13




Our
      marketing team plays an active role in lobbying the relevant government
      authorities during the negotiation stage.





**Materials
      and Suppliers**





***Natural
      Gas***





The
      principal supplies purchased for our business are natural gas, pipes, machinery
      and equipment. Purchase of natural gas represented 65% and 61.64% of our total
      purchase of supplies for the for the fiscal years ended December 31, 2006 and
      2005, respectively. Generally, approximately 99% of the natural gas we purchase
      is CNG and approximately 1% is LNG.





Our
      principal CNG supplier has been the Fourth Oil Extraction Plant of the North
      China Oilfield (the “North China Oilfield”), a subsidiary of Petro China. Our
      LNG supplier has been Henan Zhong Yuan Lu Ye Advanced Technology Ltd. Co.
      (“Henan Zhong Yuan”). Historically, we have purchased approximately 90% of our
      total purchases of CNG from North China Oilfield and 100% of our total purchases
      of LNG from Henan Zhong Yuan.





We
      have
      long-term supply contracts with these suppliers and have not experienced any
      shortage of natural gas supply in the past. To prepare for growth, we have
      also
      entered into agreements with new suppliers to meet our growing demands.
 These contractual relationships with our suppliers allow us to pursue
      natural gas distribution projects in a wide range of operational
      locations.





The
      wholesale price of natural gas is agreed upon between the suppliers and us
      with
      reference to the wellhead price, distance of transportation, purification fees
      and the supplier’s operating costs. The wellhead price of natural gas, which is
      determined by the PRC State Development and Planning with approval from the
      PRC
      State Council, is currently set at $0.12 per cubic meter with a 10% allowance
      for upward or downward adjustments as a result of negotiations between suppliers
      and distribution companies, such as Beijing Gas. Generally, we are only required
      to pay for the actual quantity purchased and there is no penalty should we
      purchase less than the stated amount.





***Pipes,
      Machinery and Equipment***





We
      purchase pipes of various size and thickness domestically for installation
      in
      different segments of our natural gas pipeline infrastructure according to
      specifications that comply with PRC standards and regulations. We also purchase
      machinery and equipment, both domestically and abroad. Machinery and equipment
      are sourced domestically and internationally from the United States and Europe.
      Payments for equipment, pipes and machinery are purchased with credit terms
      ranging from 30 to 90 days.





***Gas
      Appliances***





As
      residential customers often require us to provide gas appliances such as gas
      meters, we purchase gas appliances in bulk directly from manufacturers in China
      and maintain a limited inventory of them. We also provide repair and maintenance
      service to the gas appliances supplied. We generally provide a one-year warranty
      of our gas distribution system to our customers, during which time we provide
      free check-ups of the pipeline and repair for any appliances we
      provided.





**Customers**





We
      have
      two principal types of customers: (i) residential customers and (ii) commercial
      and industrial customers. Our connetion fee sales to residential customers
      and
      industrial customers represented 90% and 10% of our net sales for the fiscal
      year ended December 31, 2006, and 77% and 23% of our net sales for the fiscal
      year ended December 31, 2005, respectively. Sales to miscellaneous customers
      who
      are neither residential nor commercial and industrial customers accounted for
      the remainder of our sales.





***Residential
      Customers*** ****





Natural
      gas is primarily used by residential owners for cooking as well as water and
      space heating. We market directly to property developers, government departments
      and organizations, private companies and state-owned enterprises, as these
      entities enter into master supply contracts with us for the connection of gas
      to
      all the units within a residential development (new or existing, owned by such
      entities or their respective employees). These entities are responsible for
      making, or they coordinate with the end users to facilitate our efforts in
      collecting the advance payment of, connection fees, while gas usage charges
      are
      paid by the individual end users. With new residential developments, connection
      fees are collected in advance by installment based on the ratio-of-completion
      of
      the pipeline construction work. We receive full payment of connection fees
      when
      construction is completed regardless of whether the units are sold or occupied.
      The actual supply of gas commences after the unit is occupied.


14





We
      also
      market to existing buildings without piped natural gas supplies. Representatives
      of the buildings will consult individual households as to whether they wish
      to
      have piped natural gas supply and coordinate the collection of connection fees
      from the end users on our behalf. Both connection fees and gas usage charges
      are
      payable in advance by the individual end users. We provide connection services
      and supply gas at market price after receiving payment. Pipelines and gas
      appliances are owned by the end users, with one-year quality guarantee by us.
      We
      maintain the pipelines outside the end user’s homes. The contracts are generally
      renewable on a yearly basis.





At
      present, we have approximately 220 master supply agreements for the supply
      of
      gas to 63,000 end users in Beijing and Tian Jin Municipalities and Hebei,
      Jiangsu and Anhui Provinces. Our top five residential customers, who are
      developers or owners of residential areas, are Shanghai Datun Energy Holdings,
      Jinzhou Chengzhen Development Co., Xuzhou Ganglong Real Estate Development
      Co.,
      Kailun Weizhou Minerals Co., and Jinzhou Real Estate Co. The percentage of
      our
      connection fees for which each of them accounts is 36.43%,8.73%, 7.34%,7.2%
      and
      5.54%, respectively.





***Industrial
      and Commercial Customers*** ****





Our
      industrial and commercial customers use natural gas primarily for heating,
      air
      conditioning, water heating and cooking purposes. These customers include owners
      of hotels, restaurants, office buildings, shopping centers, hospitals,
      educational establishments, sports and leisure facilities and exhibition halls.
      Natural gas has a wide variety of applications for industrial customers such
      as
      fuelling industrial boilers, furnaces, ovens, incinerators, foundries and
      steamers as well as water and space heating in staff canteens and dormitories
      within the industrial customers’ premises. We enter into supply contracts with
      these customers for the connection of gas to their premises, and both connection
      fees and gas usage charges are borne by such customers.





The
      table
      below presents information about our industrial and commercial customers for
      the
      periods indicated:




Percentage
                of SalesFiscal
                year ended
              December
                31,Customers
            
            2006
            
            2005Hebei
                Zhong Gang Steel
            
            
            51.78
            %
            
            15.1
            %Pei
                County Tian Ma Wu Ye
            
            
            0
            %
            
            10.6
            %Elite
                (Lang Fang) Textile
            
            
            0.2
            %
            
            0.4
            %Tang
                Shan Chang Sheng
            
            
            9.04
            %
            
            1.0
            %Tang
                Shang Heng Tong
            
            
            0
            %
            
            2.4
            %Total
            
            
            61.02
            %
            
            29.5
            %





Our
      agreement with Tang Shang Heng Tong expired in March 2006.





During
      the fiscal year ended December 31, 2006, our largest two customers were Heibei
      Zhong Gang Steel and Tang Shan Chang Sheng. Our sales generated from Beijing
      Zhong Ran Xiang Ke were $334,326 for the fiscal year ended December 31,
      2006.





**Pricing
      and Regulations**





We
      determine connection fees based on a detailed analysis of factors such as
      estimated capital expenditure, number of users, expected penetration rates,
      income levels and affordability to local residents. We arrive at gas usage
      charges after taking into consideration the wholesale price of gas, operating
      costs, price of substitute products, internal business model margins and the
      purchasing power of local residents. Connection fees and gas usage fees are
      subject to the approval of the local state price bureau. Future price increases
      are also subject to the same approval process. In considering applications
      for
      an increase in gas usage charges, the local state price bureau may consider
      factors such as increases in the wholesale price of gas or operating expenses,
      inflation, additional capital expenditure, and whether the profit margin remains
      fair and reasonable.


15





***Connection
      Fees***





We
      charge
      residential customers a flat connection fee for connections to each type of
      gas
      appliance, typically cooking stoves, water heaters and boilers. The level of
      connection fees varies among operational locations and is approved by the
      relevant local state price bureau. The average of these connection fees for
      the
      company in 2006 was approximately $267 per household.





For
      commercial and industrial customers, the connection fee is determined based
      on
      the facility capacity (on a cubic meter per day basis). Should additional
      capacity be needed, these customers are required to pay additional connection
      fees for the additional capacity installed. When entering into master supply
      contracts for mass connections, we usually require the payment of deposit from
      customers while the balance is payable in accordance with the terms set out
      in
      the contracts. In the event customers default in the payment of connection
      fees,
      we will not start the supply of natural gas until the connection fees are
      paid.




The
      deposit received from customers upon the signing of supply contracts generally
      funds the majority of our capital costs in any new operational
      location.





***Gas
      Usage Charges*** ****





Gas
      usage
      charges are based on actual usage on a per cubic meter basis. The gas usage
      charges per cubic meter  vary
      between operational locations and the payment mechanism between different
      categories of customers varies.





Since
      our
      inception, the majority of our residential customers have purchased gas units
      in
      cash at our sales outlets with details of the prepaid gas units stored
      electronically on a debit card. The debit card is inserted into a debit card
      debit gas meter installed at the end user’s premises to activate the gas supply.
      Units of gas used are deducted from the debit card. When the level of prepaid
      gas units drops to a certain level (currently pre-set at three cubic meters),
      the gas meter will produce a sound signal to remind the customer to replenish
      the value stored in the debit card. Over 70% of our residential customers
      utilize the debit card payment method. This payment method provides significant
      advantages to us as all gas purchases are prepaid - not at the point of sale
      or
      in arrears.





For
      those
      residential customers without a debit card gas meter installed and for
      commercial and industrial customers, payments for natural gas usage are made
      in
      arrears. Gas meters that record actual gas consumption are installed at the
      end
      users’ premises and meter readings are taken physically by US every month.
      Monthly bills based on the prior month’s actual usage are then sent to
      customers. In the event customers default in payment of gas usage charges,
      gas
      supply will be suspended within one month of billing.





**Regulatory
      Framework for Natural Gas Distribution Companies**




***Pricing
      Regulations*** ****





We
      purchase natural gas from natural gas wholesalers, which are state-owned
      enterprises and which must comply with PRC natural gas pricing regulations.
      The
      wholesale price of natural gas payable by distribution companies, such as
      Beijing Gas, to the suppliers of natural gas is comprised of three components,
      the wellhead price, the pipeline transportation tariff and the purification
      fee.
      The wellhead price is fixed by the PRC State Development Planning Commission,
      and is currently set at $.12 per cubic meter with a 10% allowance for upward
      or
      downward adjustments for negotiation between suppliers and distribution
      companies. The pipeline transmission tariffs are determined by reference to
      the
      investment costs of the relevant long distance pipeline, depreciation, wear
      and
      tear and the distance of delivery. The purification fee is based on the actual
      purification costs of the suppliers. Both the pipeline transmission tariffs
      and
      the purification fee must also be approved by the PRC State Development Planning
      Commission.


16




**Pricing
      of Natural Gas - US$ per cubic meter**




**2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006**Wellhead
            
            $
            0.08
            
            $
            0.09
            
            $
            0.09
            
            $
            0.08
            
            $
            0.11Pipeline
            
            $
            0.09
            
            $
            0.09
            
            $
            0.09
            
            $
            0.09
            
            $
            0.09Purification
            
            $
            0.01
            
            $
            0.01
            
            $
            0.01
            
            $
            0.01
            
            $
            0.01Total
            
            $
            0.18
            
            $
            0.19
            
            $
            0.19
            
            $
            0.18
            
            $
            0.21




***Operational
      and Construction Permits***





In
      the
      PRC, companies in the gas distribution business must also obtain an operational
      permit from the PRC Ministry of Construction to begin operation. In addition,
      a
      construction permit must be obtained if such gas distribution company also
      engages in construction. In both cases, the PRC Ministry of Construction will
      review the qualifications and experience of the management and technical staff
      of the distribution company and consider whether the distribution company is
      capable of fulfilling the operational and construction standards.





As
      of the
      date of this annual report, Beijing Gas and all of our project companies and
      branch offices have the necessary operational permits.





***Safety
      Regulations***





As
      a
      natural gas distributor, Beijing Gas is regulated by the relevant stipulations
      of Administrative Rules on the City Gas Safety jointly promulgated by the PRC
      Ministry of Construction, PRC Ministry of Labor and PRC Ministry of Public
      Security effective in May 1991.  According to such rules, the manufacture,
      storage, transportation, operation, usage of city gas, design and construction
      of gas-related projects, and the manufacture of gas-related facilities shall
      be
      subject to relevant safety requirements and qualifications.





***Income
      Taxes***




Pursuant
      to the tax laws of PRC, general enterprises are subject to income tax at an
      effective rate of 33%. Beijing Gas is in the natural gas industry, whose
      development is encouraged by the government. However, PRC income tax regulations
      provide that any company operating in the natural gas industry enjoys a
      favorable tax rate. In addition, Beijing Gas has been approved as a high
      technology company and as such has been enjoying preferential income tax
      treatment under the PRC’s income tax policies. Under these policies, Beijing Gas
      was exempt from corporate income taxes for the first two years commencing from
      its first profitable year, and thereafter will be entitled to a 50% tax
      reduction for the succeeding three years. Our first profitable tax year was
      2003. Accordingly, our income is subject to a reduced tax rate of 7.5% from
      2005
      to 2007. Beginning in 2008, our income tax rate will be 9%. The subsidiaries
      of
      Beijing Gas are subject to the effective rate of 33%, but almost all income
      is
      earned by Beijing Gas.




**Safety
      and Quality Control**





***Safety
      Control***





We
      are
      focused on safety, have implemented a safety system and set up a safety
      department to oversee safety issues for all of our operations. We carry out
      routine inspection of the branch pipelines, customers’ pipelines, gas meters and
      gas appliances at the customers’ premises twice annually. These semi-annual
      inspections are free unless major repairs are required in which case we charge
      the customers for labor, replacement parts and other materials used for the
      repairs.





We
      believe in educating users about safety procedures. Before gas is actually
      supplied, we provide a thorough explanation of safety procedures to end users,
      hold regular seminars, and distribute brochures and booklets on safety. We
      have
      a 24-hour telephone help line for enquiries and reporting of emergency
      matters.


17




In
      order
      for us to monitor the operations of the pipelines for abnormal gas usage, gas
      leakages, or any other irregularities, we collect information about the
      temperature, pressure and volume of gas from key points along the main
      pipelines. The information is collated in the control center located in the
      head
      office of each operational location for analysis. We use process control
      instruments known as Supervisory Control and Data Acquisition systems, in which
      a number of small detectors are installed along the pipelines to collect
      information and process the data electronically in real time at the control
      center. Each project company conducts a major inspection of its pipelines,
      processing station(s) and other equipment at least once annually. If gas
      leakages or any other irregularities are detected, we will take remedial action
      immediately.




Due
      to
      the strict implementation of safety control procedures, there have been no
      major
      accidents which have resulted in serious injury or death since our
      inception.





***Quality
      Control***





Quality
      control begins in the design and construction phase of the natural gas supply
      infrastructure. Our quality control team regularly makes inspection visits
      and
      conducts tests to ensure that the construction work meets our required standards
      as well as national and local regulations.





We
      also
      have strict quality control procedures for the sourcing of raw materials. We
      only purchase from our approved list of qualified suppliers and such suppliers
      have fulfilled the relevant requirements in accordance with national
      standards.





In
      order
      to monitor the quality of gas purchased by us, we obtain gas composition reports
      regularly from our gas suppliers with data on important measures such as the
      heat content and composition of impurities in our gas supply. We also conduct
      regular tests on the gas purchased in order to verify its quality.





**Research
      and Development**





We
      have
      eight full-time employees engaged in the company-sponsored research and
      development efforts. These employees specialize in the fields of energy,
      mechanical and electronic engineering. For the fiscal year ended December 31,
      2006 and 2005, $543,500 and $545,350, respectively, on R&D activities. Areas
      that are targets of our ongoing research and development activities
      include:





Methodology
                and practices to increase operating efficiency and safety
                standards.




Expansion
                of the applications for natural gas, such as gas-fuelled air conditioners,
                washing machines and dryers, and the use of CNG in motor
                vehicles.




Improvements
                in gas storage and transportation
                systems.





Our
      research and development department stays abreast of natural gas-related
      developments domestically and internationally by regularly attending domestic
      and international natural gas conferences that include exchange programs with
      international natural gas companies.





**Competition**





Since
      our
      inception, we have focused on supplying natural gas to small cities in the
      PRC
      where the average population is 250,000 and below, where the natural gas
      penetration rate is typically 0%, and where we are able to obtain exclusivity
      for natural gas distribution from the local government. In entering into these
      small cities, we are generally authorized to be the sole supplier of natural
      gas
      by the local governments pursuant to franchise agreements for a typical term
      of
      25 to 30 years. This differs from the bigger natural gas distribution companies
      which have focused on a few areas with large populations. The larger cities
      are
      very competitive markets that tend to offer less flexibility for advantageous
      pricing arrangements. For a typical small city project, our initial investment
      is only about $500,000 with an average internal rate of return of 31% over
      the
      life of the project. Due to its small city focus where the operating cost is
      low
      and competition is much less intense, we believe we generate profit margins
      and
      returns at or above industry-average levels.


18




As
      we
      compete principally with small- to medium- sized private companies in the
      natural gas distribution industry, the information about our competition and
      competitive position is limited. Based on the information available to us,
      we
      estimate that there are approximately 200 hundred small- to medium- sized
      private gas distribution companies in the PRC. Most of these companies target
      local towns, rather than take the approach that we do, of targeting cities
      in
      different provinces. Also, most of these companies operate an average of three
      or four natural gas distributions systems, as compared to the 20 natural gas
      distribution systems that we operate.





Based
      on
      the division of the administrative districts in the PRC as of December 31,
      2005,
      it has been estimated that there are approximately 2,862 small cities in the
      PRC
      with a population between 100,000 to 300,000. Among them, approximately 800
      small cities have the potential to be supplied with natural gas and 100 small
      cities have already been supplied with natural gas. Among the 100 small cities
      where natural gas is already available, Beijing Gas is the distributor to 23
      of
      them, and, therefore, we believe we have the largest market share among our
      peer
      businesses that target the natural gas market among small cities. Another
      favorable contrast between our peer businesses and us is that, many other gas
      distribution companies do not secure long-term stable supply contracts with
      natural gas suppliers and have few industrial customers, while we do secure
      long-term stable supply contracts and have many industrial
      customers.





There
      are
      five gas distribution companies in China listed on the Hong Kong Stock Exchange:
      Xinao Gas Holdings Limited, China Gas Holdings Limited, Panva Gas Holdings
      Limited, Zhengzhou Gas Company Ltd., and Chinese People Gas Holdings Company
      Limited. **** These
      companies focus more on supplying natural gas in bigger metropolitan areas,
      and
      therefore do not compete with us directly. However, Beijing Gas operates very
      similarly to some of these publicly listed PRC gas companies (with the exception
      of Zhengzhou Gas Company Ltd. and Panva Gas Holdings Ltd.) where significant
      revenue and profit are generated from the construction of local gas pipeline
      and
      connection of the pipeline to end users. This is primarily due to the PRC’s
      extremely low natural gas penetration rate (below 3% on a national basis).
      Therefore, PRC gas companies behave very differently from traditional gas
      utilities elsewhere and exhibit financial characteristics such as high growth
      rate, high profit margin and relatively longer receivable collection periods
      due
      to the construction cycle. We plan to compete with some of these companies
      in
      the future as our operations grow.





**Intellectual
      Property**





We
      do not
      hold any registered trademarks or patents. **** *Please
      refer to “We may be exposed to intellectual property infringement and other
      claims by third parties, which, if successful, could cause us to pay significant
      damage awards and incur other costs,” in the section titled “Risk
      Factors” in our registration statement filed with the SEC on October 27,
      2006 for risks related to the technology we use.*





We
      own
      and operate a website under the internet domain name www.sino-gas.com. The
      information contained in our websites is not incorporated by reference to this
      annual report or the registration statement of which this annual report forms
      a
      part.





**Insurance**





We
      currently do not carry any product liability or other similar insurance, nor
      do
      we have property insurance covering our plants, manufacturing equipment and
      office buildings. While product liability lawsuits in the PRC are rare and
      Beijing Gas has never experienced significant failures or accidents, there
      can
      be no assurance that Beijing Gas would not face liability in the event of any
      failure or accident. We plan to purchase property insurance to cover our
      manufacturing plants, equipment and office buildings in the near
      future.




Beijing
      Gas and its subsidiaries maintain social insurance for their staff and employees
      in accordance with relevant requirements under PRC law and have compulsory
      insurance and fixed-sum insurance for cars and other vehicles.





**Employees**




As
      of
      March 7, 2007, we had approximately 246 full-time employees, including
      approximately 50 technicians, six management personnel, 32 department and branch
      managers, 30 engineers and 15 research and development
      personnel.


19


**Government
      Regulation**




The
      pricing of natural gas in China is subject to central and local government
      regulation or approval. The wholesale price of natural gas payable by
      distribution companies, such as Beijing Gas, to suppliers of natural gas in
      the
      PRC is comprised of three components: the wellhead price, the pipeline
      transportation tariff, and the purification fee. The wellhead price is fixed
      by
      the PRC State Development Planning Commission (“SDPC”). Both the pipeline
      transmission tariffs and the purification fee must also be approved by
      SDPC. *Please refer to “Regulatory Framework for Natural Gas Distribution Companies” in
      the section titled “Description of Business” of this annual report for a more
      detailed discussion.*





Under
      certain regulations in the form of public notices issued by the PRC State
      Administration of Foreign Exchange, or SAFE, our shareholders who are PRC
      resident entities or individuals are subject to certain registration
      requirements due to the status of GAS (BVI) and Sino Gas under Chinese law
      as
      offshore special purpose companies, or SPCs. These regulations would prohibit
      Beijing Gas from distributing dividends or profits to GAS (BVI) and/or Sino
      Gas
      as SPCs unless we comply with the registration requirements set forth by SAFE.
      As of the date hereof, Mr. Liu Yu Chuan, our President, Chief Executive Officer
      and Chairman of the Board, has completed the registration with the SAFE and
      has
      been issued a SAFE certificate in August 2006. We are in the process of
      determining whether there are additional shareholders who are subject to the
      SAFE regulations and whose compliance status will have a material effect on
      our ability to remit any of our profits out of the PRC as dividends or
      otherwise. *Please
      refer to “Recent PRC State Administration of Foreign Exchange (“SAFE”)
      Regulations regarding offshore financing activities by PRC residents, have
      undertaken continuous changes which may increase the administrative burden
      we
      face and create regulatory uncertainties that could adversely affect the
      implementation of our acquisition strategy, and a failure by our shareholders
      who are PRC residents to make any required applications and filings pursuant
      to
      such regulations may prevent us from being able to distribute profits and could
      expose us and our PRC resident shareholders to liability under PRC law” under
“Risks Related to Doing Business in the PRC” in the section titled “Risk
      Factors” of this annual report for information regarding the risks related to
      the SAFE regulations that we are subject to.*





We
      are
      subject to PRC regulations that require a company that is in the gas
      distribution business to obtain an operation permit, and a construction permit
      if such company also engages in construction, from the PRC Ministry of
      Construction to begin operation and/or construction, as the case may be. Fuel
      service station standards are subject to regulation by the PRC’s Ministry of
      Construction, General Administration of Quality Supervision, and Bureau of
      Inspection and Quarantine. Required certificates are issued upon satisfactory
      inspection of service stations. In addition, there are various standards that
      must be met for filling stations, including handling and storage of gas, tanker
      handling, and compressor operation. These standards are regulated by local
      construction and gas operations regulating authorities. Inspections are carried
      out and certificates for the handling of dangerous agents are issued by relevant
      local authorities.





Other
      than the foregoing, Beijing Gas is not subject to any significant government
      regulation of its business or production, or any other government permits or
      approval requirements, except for the laws and regulations of general
      applicability for corporations formed under the laws of the PRC.




**Item
      2.**  **Description
      of Property**





We
      have
      offices at all operational locations. The facilities are added with each new
      project or operational location as part of the execution of the
      project.





Under
      PRC
      law, most land is owned by the government, which sells "land use rights" to
      individuals or entities. A “land use right” allows the holder the right to use
      the land for a specified long-term period of time and confers to the holder
      all
      the incidents of ownership of the land during that period. Beijing Gas and
      its
      subsidiaries hold land use rights for two parcels of land registered under
      their
      names, and lease land use rights from third parties for additional parcels
      of
      land that are used for its gas distribution projects. In addition, Beijing
      Gas
      leases office buildings and warehouse facilities for its business
      operations.


20


Set
      forth
      below is the detailed information regarding these land use rights registered
      under the names of Beijing Gas or its subsidiaries:





Registered owner of land
              use
                right
            
            Location
                & certificate of
              land
                use right
            
            Usage
            
            (approximate)
              square
                meters
            
            Date
                of
              Issuance
              or
                Grant
            
            Expiration
              DateBeijing
                Gas
            
            South
                side of Huang He
              Road, Cai Yuan Town, Wu
              Qiao County
              
              Wu
                Guo Yong (2003) Zi
              Di
                Chu No. 208
            
            Other
              commercial
              use
            
            1,520
            
            November 25,
              2003
            
            November 25,
              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




In
      addition to the land use rights described above, we have the right to use an
      aggregate of approximately 36,283 square meters for our operations either
      through grants or transfers of land use rights or lease arrangements. The rights
      range in duration from six to 20 years.




As
      of the
      date of this annual report, Beijing Gas owns 700 km of high-pressure underground
      pipeline all with a diameter greater than 110 millimeters. Beijing Gas owns
      and
      operates 23 natural gas stations with accompanying buildings, gas compression
      facilities and other equipment. We own 17 cars, 13 trucks and 25 containers.
      We
      also lease trucks from PetroChina Company Limited.




**Item
      3.**  **Legal
      Proceedings**





To
      our
      knowledge, there is no material litigation pending or threatened against
      us. *Please refer to “We may be exposed to intellectual property infringement and
      other claims by third parties, which, if successful, could cause us to pay
      significant damage awards and incur other costs” in the section titled “Risk
      Factors” in our registration statement filed with the SEC on October 27,
      2006 for information regarding risks related to the technology we
      use.*





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




On
      September 16, 2006 the majority shareholders of the Company resolved to approve
      and authorize the following actions:





·
              to
                  change the name of the Company from Dolce Ventures, Inc. to Sino
                  Gas
                  International Holdings, Inc. (the “Name
                  Change”).




·
              to
                  authorize the Board of Directors to effect a three hundred four
                  and
                  forty-four one-hundredths-for-one (304.44:1) reverse stock split
                  of the
                  outstanding shares of Common Stock (the "Reverse Split", and together
                  with
                  the Name Change, the “Corporate
                  Actions”).




The
      Corporate Actions did not become effective until the filing with, and acceptance
      by, the Office of the Secretary of State of Utah of an Amendment to the
      Company’s Articles of Incorporation (the “Amendment”) on November 17,
      2006.




On
      October 16, 2006, the holder of the majority of our series B convertible
      preferred shares, Vision Opportunity Master Fund, Ltd., authorized, by written
      consent, the designation of some of the Company’s preferred stock as series B-1
      convertible preferred shares.


21


**PART
      II**





**Item
      5.**  **Market
      for Common Equity and Related Stockholder Matters**





Our
      common stock is currently quoted under the symbol "SGAS" on the National
      Association of Securities Dealers’ over-the-counter Bulletin Board. There is a
      limited trading market for our common stock. During the fourth quarter of 2006,
      the bid price for our common stock ranged from a high of $6.00 to a low of
      $3.50, and in 2007, through March 26, the bid price for our common stock ranged
      from $4.99 to $5.00, according to the Web site www.otcbb.com . There
      has been no participation of a broker or dealer in the trading of our common
      stock.





As
      of
      March 31, 2007, there were 658 holders of record of our common
      stock.





Over
      the
      past two years, we have not declared any cash dividend on our common shares,
      and
      we have no plan to issue a cash dividend in the future.




The
      following table sets forth for the respective periods indicated the prices
      of
      the common stock in the over-the-counter market, as reported and summarized
      by
      the OTC Bulletin Board. Such prices are based on inter-dealer bid and asked
      prices, without markup, markdown, commissions, or adjustments and may not
      represent actual transactions.





CALENDAR
                QUARTER ENDED
            
            HIGH
                BID(S)
            
            LOW
                BID(S)March
                31, 2005
            
            $
            0.02
            
            $
            0.005June
                30, 2005
            
            $
            0.10
            
            $
            0.005September
                30, 2005
            
            $
            0.10
            
            $
            0.005December
                31, 2005
            
            $
            0.10
            
            $
            0.005March
                31, 2006
            
            $
            0.03
            
            $
            0.0061June
                30, 2006
            
            $
            0.01
            
            $
            0.0075September
                30, 2006
            
            $
            0.04
            
            $
            0.014December
                31, 2006
            
            $
            5.00
            
            $
            3.60




As
      of
      March 31, 2007, there were 658 holders of record of our common
      stock.





we
      have
      not issued equity based incentive compensation.




**Penny
      Stock Regulations**





The
      SEC
      has adopted regulations which generally define "penny stock" to be an equity
      security that has a market price of less than $5.00 per share. Our common stock
      falls within the definition of penny stock and is subject to rules that impose
      additional sales practice requirements on broker-dealers who sell such
      securities to persons other than established customers and accredited investors
      (generally those with assets in excess of $1,000,000, or annual incomes
      exceeding $200,000 or $300,000, together with their spouse).





For
      transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchase of such securities and have received
      the purchaser's prior written consent to the transaction. Additionally, for
      any
      transaction involving a penny stock, other than an exempt transaction, the
      rules
      require the delivery, prior to the transaction, of a risk disclosure document
      mandated by the SEC relating to the penny stock market. The broker-dealer also
      must disclose the commissions payable to both the broker-dealer and the
      registered representative, current quotations for the securities and, if the
      broker-dealer is the sole market-maker, the broker-dealer must disclose this
      fact and the broker-dealer's presumed control over the market. Finally, monthly
      statements must be sent disclosing recent price information for the penny stock
      held in the account and information on the limited market in penny stocks.
      Consequently, the "penny stock" rules may restrict the ability of broker-dealers
      to sell our common stock and may affect the ability of investors to sell their
      common stock in the secondary market.




**Dividends**





Our
      board
      of directors has not declared a dividend on our common stock during the last
      two
      fiscal years or the subsequent interim period and we do not anticipate the
      payment of dividends in the near future, as we intend to reinvest our profits
      to
      grow operations. We rely on dividends from Beijing Gas for our funds and PRC
      regulations may limit the amount of funds distributed to us from Beijing Gas,
      which will affect our ability to declare any dividends. **


22


**Item
      6.**  **Management’s
      Discussion and Analysis or Plan of Operation**




The
      following discussion and analysis of our consolidated financial condition and
      results of operations should be read in conjunction with the consolidated
      financial statements and related notes of Beijing Gas appearing elsewhere in
      this annual report. This discussion and analysis contains forward-looking
      statements that involve risks, uncertainties and assumptions. Actual results
      may
      differ materially from those anticipated in these forward-looking statements
      as
      a result of certain factors, including, but not limited to, those set forth
      under "Risk Factors" in our registration statement filed with the SEC on October
      27, 2006.





**Overview**





We
      are
      engaged in the development of natural gas distribution systems in small- and
      medium-sized cities in China, as well as the distribution of natural gas to
      residential, commercial and industrial customers in China, through our
      indirectly-owned subsidiaries in the PRC, Beijing Gas and its subsidiaries.
      We
      also have a subsidiary, Pegasus Tel, Inc. which owns and operates payphones.
      We
      did spin off our payphone operation by making a dividend of the Pegasus Tel,
      Inc. shares to our shareholders of record as of August 30, 2006. Please see
      our
      Schedule 14 (c) filed on May 4, 2007. Because the operations of Pegasus Tel,
      Inc. are negligible, the discussion and analysis in this section is focused
      on
      our natural gas business operated by Beijing Gas and its subsidiaries in
      China. *Please refer to the section titled “Organization and Business of the Company” of
      this annual report for more details regarding the reverse merger transactions
      and our corporate structure and history.*





Beijing
      Gas is organized as a holding company with 18 subsidiaries, known as project
      companies, in four provinces, and four branches offices in Beijing, as shown
      on
      the corporate structure chart provided below. The project companies are the
      operating subsidiaries of Beijing Gas. Each project company operates as a local
      natural gas distributor in a city or county, known as an operational location,
      under an exclusive franchise agreement between Beijing Gas and the local
      government or entities in charge of gas utility, pursuant to which Beijing
      Gas
      formed the project company to operate the natural gas distribution project
      in
      the operational location.





In
      addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang
      Ke
      Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint
      venture entity engaged in the business of development, licensing and sale of
      oil
      and gas technologies and equipment, and sale of self-produced
      products.





Beijing
      Gas owns and operates natural gas distribution systems primarily in Hebei,
      Jiangsu, Shandong and Anhui provinces in the PRC.





Through
      its subsidiaries, Beijing Gas is a natural gas services operator, principally
      engaging in the investment, operation and management of city gas pipeline
      infrastructure, in the distribution of natural gas to residential an industrial
      users, in the construction and operation of oil stations and natural gas
      stations, and in the development and application of oil and natural gas related
      technologies. Beijing Gas and it subsidiaries own and operate 23 natural gas
      distribution systems serving approximately 63,000 residential and four
      commercial or industrial customers. Our facilities include approximately 700
      km
      of pipeline and delivery networks with a designed daily capacity of
      approximately 70,000 cubic meters of gas. Currently, we are constructing an
      additional four natural gas distribution systems. We own and operate natural
      gas
      distribution systems primarily in Hebei, Jiangsu, Shandong and Anhui
      provinces.


23


Below
      is
      our corporate structure:




SINO GAS INTERNATIONAL HOLDINGS





(1) *See
“Organizational History of Gas (BVI) and Beijing Gas” under “Description
      of Business” of this annual report regarding the subsidiaries of Beijing
      Gas.*





**RESULTS
      OF OPERATIONS**





**Fiscal
      years ended December 31, 2006 and 2005**





In
      the
      fiscal year ended December 31, 2006, our primary measures of financial health
      remained flat or decreased. As shown in the table below, our net sales remained
      approximately flat, due primarily to a decrease in connection fees from the
      previous year, although partly offset by a substantial increase in gas sales.
      Gross profit and gross margin decreased slightly, and operating income and
      net
      income decreased somewhat more significantly.





Sino
      Gas
      expands mainly through merger and acquisition activities.





In
      2006,
      several planned Merger and Acquisition activities could not be fulfilled as
      a
      result of delayed financing from investors, which results in "remained flat
      or
      decreased" financial health.





Other
      financial measures the company uses to monitor its performance are the growth
      in
      sales, costs, gross profit, profit before taxation and net profit, and the
      selling expenses to sales ratio going down.





For
                  the 12 months ended
                December
                  31,2006
              
              2005
              
              ChangeUS$
              
              US$%Net
                  Sales
              
              
              10,870,718
              
              
              10,907,289
              
              
              -0.34
              %Gross
                  Profit
              
              
              6,481,576
              
              
              6,774,898
              
              
              -4.32
              %Operating
                  Income
              
              
              5,229,948
              
              
              5,800,949
              
              
              -9.84
              %Net
                  Income
              
              
              5,073,289
              
              
              5,702,433
              
              
              -11.03
              %Gross
                  Margin
              
              
              59.62
              %
              
              62.11
              %
              
              -2.49
              %Net
                  Margin
              
              
              46.67
              %
              
              52.28
              %
              
              -5.61
              %




The
      increase in revenues is mainly driven by increase in connection fees. Below
      is a
      list of top five projects in terms of contributions to our connection revenues
      in 2005:





Industrial
      project:




Hebei
      Zhonggang Co., Ltd, Hebei Province, $1.7million





Residential
      projects:




Jingxi
      Residential Area Real Estate Management Center, Miyun County, Beijing,
      $0.24million


Peixian
      Tianma Real Estate Management Center, Pei County, Jiangsu Province, $0.69
      million


Xuzhou
      Jinxiu Real Estate Co., Ltd, Pei County, Jiangsu Province
      $0.7million


Beijing
      Xincheng Yuanjing Real Estate Co., Ltd. Beijing, $0.6million





Due
      to
      the capital-intensive nature of our industry, the expansion rate of our business
      is closely related to capital availability. We received capital inflows from
      equity financing in September and November of 2006. We believe that these
      inflows occurred too close to the end of 2006 to have a substantial effect
      on
      our financial performance for that year. However, we expect that they will
      have
      a positive effect on our financial performance in 2007.





As
      described below, we have reason to believe that the decrease in our income
      in
      2006 was only temporary and does not provide a reason to change our business
      strategies. With respect to the overall business in 2007, we expect to grow
      our
      business through active expansion into new cities and further penetration of
      existing markets. We are considering several potential acquisition targets,
      which would substantially contribute to our sales and net income if successfully
      acquired.


24


We
      plan
      continue to pursue the following strategies in 2006:





(i)
      Focus
      on small- to mid-sized cities each with a population of no more than one
      million, where there is little competition to obtain a franchise, and where
      our
      franchise grants us exclusivity. We are a leading player in the small-to-mid
      sized city market. In the meantime, we do not exclude the possibility of
      expanding into big cities, so long as that we can gain competitive advantages
      through our expertise in the industry.





(ii)
      Secure contracts for long-term supplies of natural gas from major gas suppliers
      in China at favorable prices and on favorable terms, which would support the
      continuous expansion of our customer base. Our current long-term gas supply
      contracts have given us a significant advantage in gaining new markets and
      building a reputation for guaranteed gas supply.





(iii)
      Finance our operations using a well-designed financing plan that will give
      us a
      favorable cost of capital. The successful listing of our common stock on the
      National Association of Securities Dealers’ Over the Counter Bulletin Board has
      provided us with access to the international capital markets, a financing
      advantage that most of our competitors don’t have. As we are in a very
      capital-intensive business, our income will depend on our ability to issue
      financial instruments in a timely manner.





(iv)
      Employ the best management with rich experience in the industry and improve
      operating efficiency and corporate governance. People factor is one of our
      core
      competitive advantages.





**Net
      Sales**





Net
        Sales, which consist of connection fees and gas sales, were $10.87 million
        for
        the year ended December 31, 2006, as compared to $10.91 million for the year
        ended December 31, 2005, representing a decrease of $40,000, or 0.37%. The
        slight decrease was primarily the result of a decrease in connection fees,
        which
        was largely offset by an increase in sales of natural gas. Connection fees
        declined nearly $0.02 million, or 0.29%, from $6.98 million in 2005 to $6.96
        million in 2006.




For
                  the 12 months ended December 31,(In
                  $ million)
              
              2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Net
                  Sales
              
              
              10.87
              
              
              100
              %
              
              10.91
              
              
              100
              %
              
              -0.37
              %Connection
                  Fees
              
              
              6.96
              
              
              64
              %
              
              6.98
              
              
              64
              %
              
              -0.29
              %Gas
                  Sales
              
              
              3.91
              
              
              36
              %
              
              3.93
              
              
              36
              %
              
              0.51
              %




Company
        has two distinct sets of customers:


(1)
          Land
          Developers/Construction Companies. The Developers/Construction Companies
          hire
          the Company to install gas lines on the land or in the building project.
          The
          Company also earns revenue by building the connection pipelines between
          the main
          pipelines (which the Company owns) and the lines on the land or buildings
          under
          development. The Company is acting as a sub-contractor and the service
          fees are
          paid by the Developers/Construction Companies.
 
 (2)
          The
          Company also sells gas to end consumers. Company earns revenue from two
          distinct
          business lines: (A) construction of pipelines for land developers, and
          (B) the
          sales of piped gas to end consumers. Connection fees are required to be
          paid by
          the customers that buy piped gas. However, as a matter of simplifying the
          logistics and the administration of the connection fees, the land developers
          pay
          the fees upfront, on behalf of the end customers that buy the piped gas.
          The
          earnings process is considered finished upon completion of the build-out
          of the
          gas pipelines. There is little to no additional work that must be performed
          by
          the Company in order to earn the connection fees. In other words the connection
          fee is a one time setup fee for initiating gas delivery through the
          pipeline.


We
      typically sell natural gas to customers after we completed connection service.
      We treat them as two separate businesses, based on the following
      reasons:





1,
      Different cost structure, the gas cost is just the cost we purchased from
      supplier plus the delivery cost; but for the connection service, it is consisted
      of the construction cost we paid. It is hard to match the cost with revenue
      when
      put this two business together




2,
      Different revenue recognition measure method; the gas revenue is recognized
      periodically based on the volume used by customers, and the connection revenue
      is recognized based on the completion of the pipeline construction.





Natural
      gas distribution industry in China is heavily capital-driven. Before the company
      distributes gas to any users, it needs to build the gas distribution
      infrastructures, like the city pipelines, gas stations, which require heavy
      investment. Connection fees are generated when the company completes the
      construction of pipelines into the residential areas and residential buildings
      under the agreements signed with real estate developers. The up-front investment
      will be recovered when the number of connected residential households reaches
      to
      a break-even level.





Our
      business performance has significant seasonality feature. During the winter
      season, most of our building activities are halted due to cold weather. The
      connection activities pick up from late March and completes in the second half
      of the year. As a result, we recognize most of our connections fee revenues
      in
      the third and fourth quarter. Also, gas consumption by residential users is
      seasonally higher in winter season than other seasons, as more gas is consumed
      for heating purpose.





The
      situation will be the same in the near term.





*Connection
      Fees*





In
      2006,
      54% of revenues were recognized in the fourth quarter, due to higher connection
      fees and gas sales during the season. And we expect it will recur in the
      future.





The
      majority of connection fee revenue recognized in the third quarter and fourth
      quarter, with fourth quarter historically being the largest quarter, due to
      the
      following reasons:





1.
      Most
      connection fee revenue comes from pipeline connection built into new residential
      condos. Connection fee revenue correlated with level of residential condo
      construction.




2.
      In our
      markets (northern China), construction activities halt in winter (December
      -
      early March). Developers start construction in late March and complete
      construction in November-December.





Gas
      consumption is historically higher in winter months and lower in summer months,
      due to heating demands during winter in Northern China.





The
      decrease in connection fees is mainly due to our inability to take advantage
      of
      several business opportunities because of delay and reduction in size of our
      planned private financing transactions. Connection fees are generated in the
      early stages of development of a particular project location, and can be
      generated only after significant investment in distribution infrastructure,
      including pipelines and gas stations. Our business plan for 2006 included
      raising approximately $12.6 million in financing from the capital markets by
      mid-year to finance our investments in two industrial projects and expansion
      into one middle-sized city and three small-sized cities, which would have
      enabled us to record increased connection fees..





The
      financing we did obtain in 2006 occurred later and provided a smaller amount
      of
      funds than we had intended. We received financing in two transactions completed
      on September 7 and October 20, 2006, The total net proceeds from these two
      transactions were $7.43 million, little more than half of the proceeds intended.
      The result of the reduced amount and later date of the financings was that
      we
      missed some of the opportunities we had originally targeted. Specifically,
      we
      were able to invest in only one of the two targeted industrial projects, and
      we
      were not able to expand into the targeted middle-sized city.


25


Had
      we
      been able to invest in the second industrial project as planned, our revenues
      would have increased by approximately $400,000. Expanding into the middle-sized
      city would have added approximately 4,000 residential household users to our
      customer base and contributed approximately $1 million to our net sales in
      2006.
      We therefore would have had recognized approximately $1.4 million in additional
      net sales if our financing had occurred as planned and on schedule.





We
      had
      been in touch with two potential industrial users before the financing
      completes. Due to the late coming of financing proceeds and the capital needs
      for the connection service provided to the industrial projects, we were only
      able to get hold of one of them and lost the other one to our competitors.
      The
      one we have signed with is Qingxian North China Petroleum Machineries Co.
      (“Qingxian”), which generated $0.69 million in connection fees in 2006. We
      estimate the connection fees from the second industrial project would have
      been
      about $400,000 if we had been able to provide service to it.





We
      were
      also in talks with a middle-sized city project in the middle of the year. The
      city was also lost to our competitors due to the late coming of our financing.
      We estimate the city would bring us additionally 4,000 new residential
      households in 2006 if successfully developed, thus generating about $ 1million
      to our net sales.




The
      industrial and city project together would bring us approximately $1.4 million
      in additional net sales in 2006 if we had completed the financing as
      planned.




For
                  the 12 months ended December 31,(in
                  US$ millions)
              
              2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Connection
                  Fees
              
              
              6.96
              
              
              100
              %
              
              6.98
              
              
              100
              %
              
              -0.29
              %Residential
                  Users
              
              
              6.26
              
              
              90
              %
              
              5.37
              
              
              77
              %
              
              1.66
              %Industrial
                  Users
              
              
              0.70
              
              
              10
              %
              
              1.61
              
              
              23
              %
              
              -56.5
              %





With
        regard to the source of connection fees, $6.26 million, or 90% of total
        connection fees, came from the development of new residential users in 2006,
        an
        increase of 1.66% from prior one-year period. We connected 24.5 thousand
        residential users in 2006, an increase of approximately 3,000 users from
        2005.
        Expanding into the middle-sized city would have added approximately 4,000
        residential household users to our customer base and contributed approximately
        $1 million to our net sales in 2006. We therefore would have had recognized
        approximately $1.4 million in additional net sales if our financing had occurred
        as planned and on schedule.





Industrial
        users contributed a relatively small $0.70 million, or 10%, to our total
        connection fees in 2006, compared with $1.61 million, or 23% of total connection
        fees, in 2005. The main reason is that we developed only one new industrial
        project due to the delay of financing.





Our
      top
      five residential customers, who are developers or owners of residential areas,
      are Shanghai Datun Energy Holdings, Jinzhou Chengzhen Development Co., Xuzhou
      Ganglong Real Estate Development Co, Kailun Weizhou Minerals Co., and Jinzhou
      Real Estate Co.





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





**Residential
                Customers**
            
            **Connected
                Household Users**
              **(thousand)**
            
            **Connection Fees:**
              **($
                million)**
            
            **Percentage
                of**
              **Connection Fees**
              **(%)**Shanghai
                Datun Energy Holdings
            
            
            12
            
            
            2.63
            
            
            36.43
            %Jinzhou
                Chengzhen Development Co.
            
            
            0.25
            
            
            0.63
            
            
            8.73
            %Xuzhou
                Ganglong Real Estate Development Co
            
            
            0.2
            
            
            0.53
            
            
            7.34
            %Kailun
                Weizhou Minerals Co.
            
            
            0.16
            
            
            0.52
            
            
            7.20
            %Jinzhou
                Real Estate Co.
            
            
            0.16
            
            
            0.4
            
            
            5.54
            %





As
      the
      table shows, Shanghai Datun Energy Holdings alone contributed nearly 40% of
      our
      total connection fees. Given the size of this residential project, we expect
      it
      to generate 6,000 newly-connected household customers in 2007..





We
      had
      one new industrial customer in 2006, Qingxian North China Petroleum Machineries
      Co. (“Qingxian”), which generated $0.69 million in connection fees in
      2006


26


*Gas
      Sales*





Gas
        Sales
        accounted for 36% of total sales in 2006, nearly 10% higher than in 2005,
        due to
        Heibei Zhonggang steel company beginning to use gas in 2006.




No
      gas
      sales were generated from Qingxian in 2006. Beginning on March 8, 2007, however,
      that customer has been using approximately 15,000 to 20,000 cubic meters of
      natural gas per day, placing it among our largest customers for gas sales as
      of
      the date of this annual report.





In
        terms
        of volume, we sold 11.84 million cubic meters of natural gas in 2006, compared
        with 9.85 million cubic meters in 2005. In terms of value, gas sales in 2006
        were $3.91 million, an decrease of $0.02 million, or 0.51%, from 2005. The
        increase of gas sales in both volume and value can be mainly attributed to
        our
        increased gas sales to Hebei Zhonggang Steel Co., Ltd., one of our existing
        industrial customers.





The
      table
      below is a breakdown of our major industrial customers for gas consumption
      in
      2006:





**Industrial
                Customers**
            
            **Gas Usage (cubic**
              **meters)**
            
            **Gas Usage**
              **($ million)**
            
            **Percentage of**
              **Gas Sales (%)**Hebei
                Zhong Gang Co.
            
            
            5,243,079
            
            
            1.67
            
            
            45.75
            %Hebei
                Tangshan Cangsheng Ceramics Co.
            
            
            990,314
            
            
            0.29
            
            
            7.95
            %




Gas
      usage
      by Hebei Zhong Gang accounted for almost half of our total gas sales in 2006.
      Throughout 2006, daily gas consumption by Hebei Zhongguang was roughly 15,000
      cubic meters, and daily gas consumption by Hebei Tangshan Cangsheng Ceramics
      Co.
      was nearly 2,000 cubic meters. In 2007, daily gas consumption by Hebei
      Zhongguang has increased to roughly 20,000 to 30,000.




In
      addition to these two industrial projects, we anticipate that in 2007,
      natural gas consumption by Qingxian may reach approximately 20,000 cubic
      meters per day, as Qingxian’s operation goes into full swing, further increasing
      our gas sales.




Gas
        sales
        to residential users decreased 16.03%, from $1.06 million in 2005 to $0.89
        million in 2006. Gas sales to industrial users increased 357.45%, from $0.47
        million in 2005 to $2.15 million in 2006. Gas sales of $1.89 million were
        contributed by a single industrial project, Hebei Zhong Gang, which started
        to
        use gas at the beginning of 2006. Other gas sales, primarily sales to our
        affiliates, decreased 50% in 2006, as we intentionally reduced gas sales
        to
        affiliates, where the profit margin is approximately 2%, much lower than
        the
        approximately 15% profit margin for sales to industrial and residential
        users.




For
                  the 12 months ended December 31,($
                  million)
              
              2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Gas
                  Sales
              
              
              3.91
              
              
              100
              %
              
              3.93
              
              
              100
              %
              
              0.51
              %Residential
                  Users
              
              
              0.89
              
              
              23
              %
              
              1.06
              
              
              27
              %
              
              -16.03
              %Industrial
                  Users
              
              
              2.15
              
              
              55
              %
              
              0.47
              
              
              12
              %
              
              357.45
              %Others
              
              
              0.86
              
              
              22
              %
              
              2.40
              
              
              61
              %
              
              -
                  64.17
              %




**Cost
      of sales**





Cost
        of
        sales in fiscal 2006 was $ 4.39 million, an increase of $ 0.26 million, or
        6.29%, from $4.13 million in fiscal 2005.




For
                  the 12 months ended December 31,($
                  million)
              
              2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Cost
                  of Sales
              
              
              4.39
              
              
              100
              %
              
              4.13
              
              
              100
              %
              
              6.29
              %Connection
                  Cost
              
              
              1.44
              
              
              33
              %
              
              1.36
              
              
              33
              %
              
              5.90
              %Gas
                  Cost
              
              
              2.95
              
              
              67
              %
              
              2.77
              
              
              67
              %
              
              6.50
              %


27





Our
        cost
        of sales has two components, cost of connections and cost of gas sales. Cost
        of
        connections increased 5.90% to $1.44 million in 2006, as compared with $1.36
        million in 2005. Cost of gas sales increased to $2.95 million in 2006 from
        $2.77
        million in 2005, an increase of 6.50%. Given the 0.51% increase in gas sales,
        the cost of gas per cubic meter decreased significantly. This decrease is
        due
        primarily to our improved control over transportation costs and gas leakage
        during in 2006.





We
      continued to purchase natural gas from wholesalers in 2006. One of our key
      competitive advantages is that we have a long-term gas supply contract with
      a
      major gas supplier in China. In 2006, our biggest gas supplier was PetroChina’s
      North China Oilfield Fourth Plant, with which we have signed long term gas
      supply agreement. The purchase price for natural gas from this plant is $0.21
      per cubic meters as of the end of 2006. We expect the price will remain
      unchanged in the short term




The
      table
      below details our major gas suppliers in 2006 and 2005:





Supplier
            
            2006
            
            2005North
                China Oilfield, PetroChina
            
            $
            1,910,645.87
            
            $
            1,409,677.47Hebei
                Natural Gas Co. Ltd
            
            $
            115,593.50
            
            $
            170,945.79





**Gross
      Income**





Gross
        income decreased slightly, from $6.77 million in 2005 to $6.48 million for
        2006.




For
                  the 12 months ended December 31,($million)
              
              2006
              
              2005
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Gross
                  Income
              
              
              6.48
              
              
              100
              %
              
              6.77
              
              
              100
              %
              
              -4.28
              %Connection
              
              
              5.51
              
              
              85
              %
              
              5.62
              
              
              83
              %
              
              -1.96
              %Gas
              
              
              0.97
              
              
              15
              %
              
              1.15
              
              
              17
              %
              
              -15.7
              %





Gross
        income from connection operations decreased 14.48%, from $6.63 million in
        2005
        to $5.67 million in 2006, and accounted for 88% of total gross income in
        2006.
        The decrease was due to the lower-than-expected increase in industrial customers
        described above.





Gross
        income from gas salesdecreased 15.7%, from $1,152,813 in 2005 to 967,370
        in
        2006, accounting for 15% of total gross income in 2006. The substantial increase
        was due to effective cost-control measures, reduced gas leakage in
        transportation and storage, and a change in the make-up of our customer base
        to
        include a greater proportion of higher-margin customers.





Our
        gross
        margin decreased slightly, from 62.11% in 2005 to 59.62% in fiscal
        2006.


28




**Selling,
      General and Administrative Expenses**





Selling
        expenses remained largely unchanged at $0.1 million for fiscal 2006. We incurred
        $1.15 million in general and administrative expenses in 2006, an increase
        of
        $281,668, or 32%, from the same period one year ago. General and administrative
        expenses are composed of fees related to business trips, phone usages, social
        insurance, depreciation, and office equipment, among other expenses. The
        increase is due to the increase in our operational projects, subsidiaries
        and
        employees. The table below sets forth our of general and administrative expenses
        in 2006:




For
                  the 12 months ended December 31,($
                  million)
              
              2006
              
              2005
              
              ChangeUS$
              
              US$
              
              %General
                  & administrative expenses
              
              
              1.15
              
              
              0.87
              
              
              32.18
              %





We
      expect
      that general and administrative expenses will continue to grow in year 2007,
      as
      we expand our business and engage in more financing activities.





The
      General & Administrative expenses mainly consist of the office, support
      function expense and Financing expense, with the financing expense increased
      fast mainly due to the financing activity in Year 2006.





**Other
      Income**




Other
        Income was $ 0.44 million in 2006, an increase of 33% from $ 0.44 million
        in
        2005. Other income represents the income for our investment in 40% equity
        of
        Beijing Zhongran Xiangke Oil & Gas Tech Co.





**Income
      tax**




Income
        tax was $0.42 million in fiscal 2006, 21% lower than $0.53 million in fiscal
        2005. Pursuant to the tax laws of the PRC, general enterprises are subject
        to
        income tax at an effective rate of 33%. Sino Gas is in the natural gas industry,
        whose development is encouraged by the government. According to income tax
        regulation, any company engaged in the natural gas industry enjoys a favorable
        tax rate. In addition, Sino Gas has been certified by regulatory authorities
        as
        a high technology company and as such has been enjoying preferential income
        tax
        treatment under the PRC’s income tax policies. Under such policies, Sino Gas was
        exempt from corporate income taxes for the first two years commencing from
        its
        first profitable year, and thereafter will be entitled to a 50% tax reduction
        for the succeeding three years. Our first profitable tax year was 2003.
        Accordingly, our income would be subject to a reduced tax rate of 7.5% from
        2005
        to 2007. From 2008, the income tax rate will be 9%. The subsidiaries of Sino
        Gas
        are subject to the effective rate of 33%, but almost all income is earned
        by
        Sino Gas.





**Net
      Profit**




Net
        profit for the twelve months ended December 31, 2006 was $5.07 million, a
        decrease of 11.1% from $5.70 million in the same period one year ago. It
        was due
        to the slight decrease of our revenues and substantial increase of
        expenses.





Net
        profit margin in 2006 was 46.64%, as compared with 52.24% in 2005. The 5.6%
        decrease in net profit margin was primarily the result of the decrease of
        connection fees, the margin of which is relatively higher than the margin
        of gas
        sales.





In
      2007,
      we plan to actively acquire small-to-mid sized cities while penetrating the
      existing markets. We expect both the connection fees and the percentage of
      connection fees to net sales in 2007 will increase sizably, as compared with
      the
      levels in fiscal 2006. We expect to add 40,000 household users and two
      industrial users, and sell 21 million cubic meters of natural gas in 2007.
      The
      projected growth rate of our net income in 2007 is above 30% on a year-on-year
      basis.


29


**Cash
      and cash equivalents**




Cash
        and
        cash equivalents were $3.64 million as of December 31, 2006, an increase
        of
        $3.07 million over our $571,194 of cash and cash equivalents one year
        earlier. The major source of cash was from the Company’s financing activities.
        The money we use for investment and working capital normally comes from our
        shareholders and operating earnings. The Company completed two equity financings
        in September and November 2006 separately, with net proceeds of $7.43 million
        after deducting various fees related to financing. We used $1.48 million
        for the
        acquisitions of Yuxian Jinli and Xiahuayuan Jinli, and the rest for working
        capital and acquisitions in 2007.





We
      borrowed RMB 19 million ($2,430,445) through a short-term loan from Shenzhen
      Development Bank for operational purposes in late 2006 by using $3 million
      from
      the two equity financings as collateral. Interest on the loan is payable at
      a
      rate of 5.022% per annum, and repayment of the loan is in May 2007. We repaid
      the loan in full in March 2007.




**Cash
      Flows**





Net
      Cash
      Flow from Financing Activities was $9.86 million in 2006, as compared with
      $0 in
      2005. We raised $7,430,965 by issuing common stock and $2,430,445 by borrowing
      debt from banks in 2006.





Net
        Cash
        Flow from Operating Activities was $2.16 million in 2006, an increase of
        $0.7
        million from $2.86 million in 2005, primarily because we have successfully
        reduced accounts payable and other payables by $0.08 million in 2006, as
        compared with an increase of $3.56 million for the same period one year ago,
        and
        accounts receivable and other receivables decreased by $0.41 million in 2006,
        as
        compared with an increase of $6.17 million in 2005.





In
      the
      cash flow from the financing activity, we would like to explain it based on
      Cash
      flow statements items. For the item of" Cash flow from Financing activities",
      there are two material items. The first one is "Issuance of common stock" with
      the amount of "$7.43M". It is from the activity of the equity financing in
      September and October. The second one is "Bank borrowing" with the amount of
      "$2.43M". It is from the activity of short term loan from local banks, for
      the
      operational purpose in later 2006. The interest rate is 5.022%. The repayment
      of
      the loan is in May 2007. We repaid the loan in full in March 2007.





Net
        Cash
        Outflow from Investment Activities was $9.14 million in 2006, an increase
        of
        nearly $6.2 million from $2.97 million in 2005. The table below is a breakdown
        of Cash Outflow from Investment Activities in 2006:





Purchase
                  of plant and equipment
              
              $
              7,563,222Payment
                  for the construction in progress
              
              
              1,556,579Payment
                  of cost of intangible assets
              
              
              20,565Net
                  cash used in investing activities
              
              $
              9,140,366





We
      expect
      the returns on these investment activities will be visible on our financial
      statements in the near-to-middle term.





**Accounts
      Receivable**




Accounts
        Receivable as of December 31, 2006 were $6.53 million, a decrease of $1.24
        million from $7.77 million one year ago. The collection period for accounts
        receivable in the natural gas distribution industry is usually no more than
        one
        year. Approximately 80% of accounts receivable incurred in 2005 were collected
        in 2006, and most of them were collected in the second half of the year,
        when
        natural gas distribution companies traditionally collect the majority of
        the
        connection fees for the distribution systems they construct.





The
      table
      below is a breakdown of our 10 largest accounts receivable as of December 31,
      2006.





Shanghai
                Datun Energy Resources Co., Ltd
            
            $
            1,509,641Jinzhou
                City & Town Development & Construction Co., Ltd
            
            
            639,591Xuzhou
                Ganglong Real Estate Development Co., Ltd
            
            
            559,232Kailuan(Group)
                Weizhou Coal Mining Co., Ltd
            
            
            532,139Hebei
                Zhong Gang Steel Co., Ltd
            
            
            440,5861st
                Machinery Works of North China Petroleum
            
            
            383,754Beijing
                Kailong Real Estate Development Co., Ltd
            
            
            299,328Beijing
                Xincheng Real Estate Development Co., Ltd
            
            
            282,604Pei
                Xian Zheng Yuan Construction Engineering Co.
            
            
            258,906Beijing
                Hong Ji Co., Ltd
            
            
            227,754$
            5,133,535


30




**Fixed
      Assets**




Fixed
      Assets as of December 31, 2006 was $10.94 million, an increase of $7.59 million
      from $3.35 million in 2005. The table below is a breakdown of our fixed assets
      at cost:





2006
            
            2005*At
                Cost*Gas
                Pipelines
            
            $
            8,255,231
            
            $
            2,819,341Motor
                Vehicles
            
            
            2,204,621
            
            
            99,376Machinery
                & Equipment
            
            
            273,943
            
            
            253,536Buildings
            
            
            89,799
            
            
            86,952Leasehold
                Improvements
            
            
            47,543
            
            
            46,036Office
                Equipment
            
            
            67,774
            
            
            41,607$
            10,938,911
            
            $
            3,346,848





**Short
      term loans**




Our
      short-term bank loans as of December 31, 2006 are as follows:




2006
            
            2005Loans
                from Shen Zhen Development Bank Co., Ltd.
            
            $
            2,430,445





The
      half-year bank loan, with the interest rate of 5.022% per annum, is due on
      May
      22, 2007. Interest expense for the loan was $9,522 for the year ended December
      31, 2006. We repaid the loan in full in March 2007.





The
      company paid $681,250 owed to Shenzhen Shi Yi Long Da Co., Ltd. with our normal
      operating proceeds and $500,409 owed to Beijing Qian Shi Li Technology
      Development Co., Ltd. with the September and October 2006 financing
      proceeds.





31





**Item
      7.**  **Financial
      Statements**




Our
      financial statements appear toward the end of this annual report beginning
      on
      page F-1.




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





On
      August
      30, 2006, our Board of Directors approved the dismissal of Robison, Hill &
Co. (“Robison") as our registered independent certified public accounting firm
      effective on September 7, 2006. Concurrent with this action, our board of
      directors appointed Samuel H. Wong & Co., LLP as our new registered
      independent certified public accounting firm. Samuel H. Wong & Co., LLP is
      located at Room 703, Nan Dao Commercial Building, 359-361 Queen’s Road Central,
      Hong Kong.





Beijing
      Gas’s operating businesses have previously been audited by Samuel H. Wong &
Co., LLP and management elected to continue this existing relationship. There
      have been no disagreements with Robison during the previous two fiscal years
      or
      any subsequent interim period.




The
      audit
      opinions of Robison, Hill & Co. on the financial statements for the fiscal
      years ended December 31, 2004 and 2005 did not contain an adverse opinion,
      a
      disclaimer of opinion, nor was it qualified or modified as to uncertainty,
      audit
      scope or accounting principles, except that the report of Robison, Hill &
Co. for the fiscal years ended December 31, 2004 and 2005 indicated conditions
      which raised substantial doubt about our ability to continue as a going
      concern.





**Item
      8A.**  **Controls
      and Procedures**




At
      the
      conclusion of the fiscal year ended December 31, 2006, we carried out an
      evaluation, under the supervision and with the participation of our management,
      including our Chairman and Chief Executive Officer and Chief Accounting Officer,
      of the effectiveness of the design and operation of our disclosure controls
      and
      procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act.
      Based on this evaluation, our officers concluded that, as of December 31, 2006,
      our disclosure controls and procedures were effective and adequately designed
      to
      ensure that the information required to be disclosed by us in the reports we
      submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the applicable rules and forms and that
      such information was accumulated and communicated to our chief executive officer
      and chief financial officer, in a manner that allowed for timely decisions
      regarding required disclosure.




**Item
      8B.**  **Other
      Information**





None.





**Part
      III**





**Item
      9.**  **Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange Act**





In
      connection with the reverse merger transaction, there was a change of control
      of
      our board of directors and management. The following persons were appointed
      our
      executive officers and directors. Except for John D. Kuhns, each of our current
      directors and executive officers is a resident of the PRC. As a result, it
      may
      be difficult for investors to effect service of process within the United States
      or British Virgin Islands upon them, or to enforce court judgments obtained
      against them in the United States courts or British Virgin Islands’
courts.





**Directors
      and Executive Officers of the Company**




Directors and Executive Officers
            
            Position/Title
            
            AgeLiu Yu
                Chuan
            
            President
                & Chief Executive Officer, director and Chairman of the
                Board
            
            43Zhou
                Zhi Cheng
            
            Chief
                Operating Officer
            
            43Zhong
                Zhi Min
            
            Marketing
                Director
            
            52Bian
                Shu Kui
            
            Vice
                President & Chief Engineer
            
            43Chen
                Fang
            
            Chief
                Financial Officer, director
            
            34Chen
                Guo Wei
            
            Director
            
            51Sun
                Quan Dong
            
            Director
            
            41John
                D. Kuhns
            
            Director
            
            56




There
      are
      no family relationships among our directors or executive officers.





All
      our
      directors hold office until the next annual meeting of our shareholders, and
      until their successors have been qualified after being elected or appointed.
      Officers serve at the discretion of our board of directors.




32




Set
      forth
      below is the biographical information about our directors and executive
      officers:




*Mr.
      Liu Yu Chuan* Mr.
      Liu was appointed our Chairman, Chief Executive Officer and President on
      September 7, 2006. Mr. Liu graduated from North Industrial University, Beijing,
      PRC with a B.S. degree in electrical engineering. Mr. Liu has been a licensed
      Senior Engineer in the PRC since 1997. Mr. Liu was the Chairman of the board
      of
      directors and General Manager of Beijing Xiang Ke Jia Hua Petroleum and Natural
      Gas Co., Ltd. between 2000 and 2003. Prior to that, Mr. Liu served as CEO of
      Lang Fang Zhong Gong Petroleum and Natural Gas Technology Co., Ltd. from 1997
      to
      1999. Prior to that, Mr. Liu served as the Chief of Research and Development
      Department of Petro China from 1983 to 1997.




*Mr.
      Zhou Zhi Cheng* Mr.
      Zhou Zhi Cheng was appointed our Chief Operating Officer on October 19, 2006.
      Previously, Mr. Zhou served as the director and General Manager of Beijing
      Chenguang Gas Co., Ltd. from late 2002 to 2006. Prior to that, Mr. Zhou served
      as the Associate General Manager and later General Manager of Beijing Zhong
      Ran
      Xiang Ke Petroleunm and Oil Technology Co., Ltd. between 2001 and
      2002.





*Mr.
      Zhong Zhi Min* Mr.
      Zhong was appointed our Marketing Director on September 7, 2006. ** Mr.
      Zhong
      graduated from Nanjing University with a B.S. in Philosophy. Mr. Zhong was
      Vice
      President of Shen Zhen Guo Qi Real Estate Co. Ltd from 1995 to 2004. Prior
      to
      that, Mr. Zhong served as a government official in several cities in Jiang
      Xi
      Province between 1978 and 1995.





*Mr.
      Bian Shu Kui* Mr.
      Bian
      was appointed our Vice President and Chief Engineer on September 7, 2006. Mr.
      Bian graduated from Daqing Petroleum Institute with a B.S. and Petroleum
      University with a M.S. He served as Vice President of Beijing Zhong Ran Xiang
      Ke
      Petroleum and Oil Technology Co., Ltd. between 2000 and 2006. Prior to that,
      Mr.
      Bian had been with North China Oilfield The First Refinery Factory for fourteen
      years. Mr. Bian was one of the industry experts that drafted The National
      Standard of Natural Gas Usage in Cities in China.




*Ms.
      Chen Fang* Ms. Chen
      was appointed our director and the Chief Financial Officer on September 7,
      2006. ** Ms.
      Chen
      graduated from Sun Yat-Sen University, PRC, with a B.A in law, and from Zhongnan
      University of Economics and Law, PRC, with an MBA. Ms. Chen has been a licensed
      attorney in PRC since 1995. She served as Vice-President and General Manager
      at
      Zhuhai Brightzone Securities Investment and Consulting Ltd. from 2000 to 2002.
      Prior to that, Ms. Chen served as Manager of Investment Department at Zhuhai
      International Trust and Investment Ltd. from 1994 to 2000. Ms. Chen has a wide
      range of experience in the financial industry.





*Mr.
      Chen Guo Wei* Mr.
      Chen was appointed our director on September 7, 2006 and a member of the auditor
      committee of our board and a member of the compensation committee of our board
      on October 19, 2006. Mr. Chen graduated from East China College of Metallurgy
      with a major in Accounting. From March 2006 to present, Mr. Chen has been the
      general manager and chairman of the board of Shen Zhen Jia Xin Real Estate
      Development Co., Ltd. Prior to that, he was the general manager of Hang Zhou
      Steal Group from 2001 to February 2006. Mr. Chen is very experienced in general
      and financial management.





*Mr.
      Sun Quan Dong* Mr. Sun
      was appointed our director on September 7, 2006 and a member of the auditor
      committee of our board and a member of the compensation committee of our board
      on October 19, 2006. Mr. Sun graduated from Shanghai Maritime University with
      a
      B.S. Mr. Sun has been Chairman of Jidong Shipping Co., Ltd from 1995. Prior
      to
      that, Mr. Sun served as Manager in the Shipping Department of Shekou Shipping
      Co., Ltd between 1987 to 1994.





*John
      D. Kuhns* Mr. John
      D. Kuhns was appointed a director of our company on September 7, 2006 and a
      member of the auditor committee of our board and a member of the compensation
      committee of our board on October 19, 2006. Mr. Kuhns has been a 95%
      shareholder, a director and chairman of Kuhns Brothers, Inc., a holding company
      founded in 1987 for its subsidiary, Kuhns Bros. & Co., Inc., an investment
      banking firm specializing in providing financing for power technology ventures,
      and, more recently, manufacturing operations within the PRC. Additionally,
      Kuhns
      Brothers, Inc. owns 100% of Kuhns Brothers Securities Corporation, a broker
      dealer, registered with the SEC, in which Mr. Kuhns is the Chairman. Since
      March
      2005, Mr. Kuhns has been a director and chairman of Deli Solar (USA), Inc.,
      a
      U.S. reporting company with solar hot water heaters manufacturing operation
      in
      the PRC. Since, December, 2005, Mr. Kuhns has served as a Director of Fushi
      International, Inc. Since 2002, Mr. Kuhns has been a director and chairman
      of
      Distributed Power, Inc., a public company that owns electric generating
      projects. Mr. Kuhns is also a director of China Sciences Conservational Power
      Limited, a company listed on the Hong Kong Stock Exchange. Neither of the
      foregoing Kuhns companies, nor Deli Solar (USA), Inc., Distributed Power, Inc.,
      Fushi International, Inc. or China Sciences Conservational Power Limited are
      affiliated with us. Mr. Kuhns holds a bachelors degree in sociology and fine
      arts from Georgetown University, a master's degree in fine arts from the
      University of Chicago and an MBA degree from the Harvard Business
      School.





33




To
      our
      knowledge, during the last five years, none of our directors and executive
      officers (including those of our subsidiaries) has:





Had
                a bankruptcy petition filed by or against any business of which such
                person was a general partner or executive officer either at the time
                of
                the bankruptcy or within two years prior to that
                time.




Been
                convicted in a criminal proceeding or been subject to a pending criminal
                proceeding, excluding traffic violations and other minor
                offenses.




Been
                subject to any order, judgment or decree, not subsequently reversed,
                suspended or vacated, of any court of competent jurisdiction, permanently
                or temporarily enjoining, barring, suspending or otherwise limiting
                his
                involvement in any type of business, securities or banking
                activities.




Been
                found by a court of competent jurisdiction (in a civil action), the
                SEC,
                or the Commodities Futures Trading Commission to have violated a federal
                or state securities or commodities law, and the judgment has not
                been
                reversed, suspended or vacated.





**Audit
      Committee Financial Expert**





Our
      board
      of directors appointed an audit committee on October 19, 2006. Because we only
      recently consummated the reverse merger transaction and appointed the current
      members of our board of directors, our board of directors has not yet appointed
      a member who qualifies as an "audit committee financial expert" as defined
      in
      Item 401(e) of Regulation S-B, and is "independent" as the term is used in
      Item
      7(d)(3)(iv) of Schedule 14A under the Exchange Act.





**Audit
      Committee**





Our
      board
      of directors appointed an audit committee on October 19, 2006. Our audit
      committee members are Sun Quan Dong, Chen Guo Wei and John D. Kuhns. At the
      present time, we believe that the members of our audit committee are
      collectively capable of analyzing and evaluating our financial statements and
      understanding internal controls and procedures for financial reporting. Our
      company, however, recognizes the importance of good corporate governance and
      intends to identify and appoint an audit committee comprised entirely of
      independent directors, including at least one financial expert, in the near
      future.




34




**Item
      10.**  **Executive
      Compensation**





**Summary
      Compensation Table**




Name
                  and Principal Underlying
                Positions
              
              Year
              
              Salary
              
              Bonus
              
              Option
                Awards
              
              StockAwards
              
              All
                  Other Compensation
              
              TotalYuchuan
                  Liu - President & CEO
              
              
              2006
              
              $
              22,800
              
              $
              1,913
              
              
              —
              
              
              —
              
              
              —
              
              $
              24,7132005
              
              $
              19,000
              
              $
              750
              
              
              
              
              
              
              
              
              
              
              $
              19,750Li
                  Shuwang
              
              
              2006
              
              $
              11691
              *
              $
              1,913
              
              
              —
              
              
              
              
              
              —
              
              $
              136042005
              
              $
              18304
              
              $
              750
              
              
              
              
              
              
              
              
              
              
              $
              19054




*
      Mr. Li
      only worked for the Company from January to September of 2006.




**Compensation
      Discussion and Analysis**




Overview
      of Compensation Program and Philosophy




The
      Company has three executive officers, Mr. Liu Yu Chuan, Mr. Zhou Zhi Cheng,
      and
      Ms. Chen Fang. Mr. Liu and Ms. Chen are also directors of the Company.  The
      Board of Directors also serves as the Company’s compensation
      committee.





The
      Board
      of Directors’ goal in determining compensation levels is to adequately reward
      the efforts and achievements of executive officers for the management of the
      Company.  The Company has no pension plan or non-equity incentive plan or
      deferred compensation arrangement.




Each
      of
      our executive officers has an employment agreement with the Company that
      outlines salary and benefit arrangements.  The three agreements have
      similar terms, which include, but are not limited to: base salaries of cash,
      the
      provision of labor-related insurance, termination for cause, termination on
      30
      days’ notice and termination without notice and the provision of labor-related
      benefits in conformance with PRC labor laws. The agreements are for a term
      of
      three years. Officers serve at the discretion of our board of
      directors.




Compensation
      of Directors




Persons
      who are directors and employees are not currently additionally compensated
      for
      their services as a director.  Persons who are directors who are not
      employees receive a cash allowance of $10,000 per year. All our directors hold
      office until the next annual meeting of our shareholders, and until their
      successors have been qualified after being elected or appointed.




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





The
      following table sets forth, as of March 12, 2007, certain information with
      respect to the beneficial ownership of our equity securities, by (i) any person
      or group with more than 5% of any class of our voting securities, (ii) each
      director, (iii) our chief executive officer and each other executive officer
      whose cash compensation for the most recent fiscal year exceeded $100,000 and
      (iv) all executive officers and directors as a group. The table reflects the
      ownership of our equity securities by the foregoing parties after the
      304.44-for-1 reverse stock-split of our common stock.





As
      of the
      date of this annual report, we had outstanding (i) 14,920,346 shares of common
      stock, (ii) no shares of series A convertible preferred stock,
      (iii) 3,795,571 shares of series B convertible preferred stock, (iv) series
      A warrants to purchase an aggregate of 3,854,599 shares of common stock at
      $3.84
      per share, (v) series B warrants to purchase an aggregate of 1,693,723 shares
      of
      common stock at $5.48 per share, (vi) series J warrants to purchase an aggregate
      of 3,083,588 shares of common Stock at $3.01 per share, (vii) series C warrants
      to purchase an aggregate of 3,083,588 shares of common stock at $4.22 per share,
      and (viii) series D warrants to purchase an aggregate of 1,541,794 shares of
      common stock at $6.03 per share.




The
      series A and B warrants have a term of five years. Each series J warrant is
      exercisable for a period of twelve months following its issuance. Each series
      C
      or D warrant is only exercisable once the series J warrant of such holder is
      exercised and for such number of shares of common stock that have been exercised
      by such holder pursuant to the series J warrant of such holder. The terms of
      series C and D warrants are for five years following the date of issuance of
      such series C or D warrants, as applicable.





Shares
      of
      Series A and Series B convertible preferred stock vote together with shares
      of
      common stock on all matters upon which stockholders are entitled to vote, except
      to the extent a class vote is required under Utah law or as otherwise provided
      in the certificate of designations creating such series. On those matters upon
      which the series A convertible preferred stock votes together with the common
      stock and the series B convertible preferred stock as a single class, each
      share
      of series A convertible preferred stock carries a number of votes equal to
      the
      number of shares of common stock issuable in a mandatory conversion based on
      the
      then applicable conversion rate. On those matters upon which the series B
      convertible preferred stock votes together with the common stock and series
      A
      convertible preferred stock as a single class, each share of series A
      convertible preferred stock carries a number of votes equal to the number of
      shares of common stock that would be issuable upon conversion. Each holder
      of
      series A convertible preferred stock or series B convertible preferred stock
      shall be entitled to notice of any stockholders’ meeting in accordance with our
      bylaws.




35




In
      determining beneficial ownership of the common stock after the 304.44-for-1
      reverse stock-split, the number of shares shown includes shares which the
      beneficial owner may acquire upon exercise of warrants or options which may
      be
      acquired within 60 days. In determining the percent of common stock owned by
      a
      person on March 12, 2007, (a) the numerator is the number of shares of the
      class
      beneficially owned by such person, including shares which the beneficial
      ownership may acquire within 60 days upon conversion of the series A convertible
      preferred stock or series B convertible preferred stock or exercise of the
      warrants and option, and (b) the denominator is the sum of (i) the total shares
      of that class outstanding on March 12, 2007, and (ii) the total number of shares
      that the beneficial owner has acquired or may acquire upon conversion
      of the series B convertible preferred stock or exercise of the warrants and
      option. Unless otherwise stated, each beneficial owner has sole power to vote
      and dispose of the shares.





Except
      as
      otherwise stated, the address of the directors and executive officers listed
      in
      the table is:





c/o
                Beijing Zhong Ran Wei Ye Gas Co., Ltd.N0.18
                Zhong Guan Cun Dong St.Haidian
                DistrictBeijing,
                China 10083




Amount and Nature of
              Beneficial Ownership
            
            Percent of ClassShareholder
            
            Series B
              Preferred
              Stock(1)
            
            Common
              Stock (2)
            
            Series B
              Preferred
              Stock
            
            Common
              Stock**Owner of More
                than 5% of Class**GAS
                (BVI)
            
            
            
            
            
            238,371
            
            
            
            
            
            1.62
            %Eloten
                Group Ltd.
            
            
            
            
            
            6,632,460
            
            
            
            
            
            44.40
            %Leading
                King Investment Limited
            
            
            
            
            
            5,474,300
            
            
            
            
            
            36.65
            %Vision
                Opportunity Master Fund, Ltd.
            
            
            3,205,829
            
            
            14,229,910
            
            
            79.68
            %
            
            49.20
            %**Directors
                and Executive Officers**Liu
                Yu Chuan
            
            
            
            
            
            6,632,460
            (5)(6)
            
            
            
            
            45.14
            %Sun
                Quan Dong
            
            
            
            
            
            5,474,300
            (7)(8)
            
            
            
            
            37.26
            %Zhong
                Zhi Min
            
            
            
            
            
            400,113
            (3)
            
            
            
            
            2.72
            %Zhou
                Zhi Cheng
            
            
            
            
            
            -Bian
                Shu Kui
            
            
            
            
            
            176,850
            (3)
            
            
            
            
            1.20
            %Chen
                Fang
            
            
            
            
            
            66,693
            (3)
            
            
            
            
            0.45
            %Chen
                Wei Guo
            
            
            
            
            
            -
            (3)
            
            
            
            
            -John
                Kuhns
            
            
            
            
            
            808,697
            (4)
            
            4.24
            %
            
            4.16
            %**All
                Directors and Executive Officers**
            
            
            
            
            
            13,559,114
            
            
            4.24
            %
            
            87.33
            %




(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.





36





(2)
      Includes the shares of common stock issuable upon conversion of series B
      convertible preferred stock and shares of common stock issuable upon exercise
      of
      the warrants.





(3)
      Shares of common stock issued to Gas (BVI) as a result of the consummation
      of
      the share exchange agreement are beneficially attributed to each of the Gas
      (BVI) shareholders based on each shareholder's percentage ownership interest
      in
      Gas (BVI) immediately prior to execution of the share exchange
      agreement.




(4)
      Includes common shares issued upon the conversion, on February 23, 2007, of
      (i)
      113,847 shares of series B convertible preferred stock issued to Kuhns Brothers,
      Inc., which are beneficially attributed to John Kuhns, and (ii) 56,925 shares
      of
      series B convertible preferred stock issued to John Kuhns.





(5)
      Includes 6,524,174 common shares issued upon conversion of series A convertible
      preferred stock to Eloten Group Ltd., which are beneficially attributed to
      Mr.
      Liu Yu Chuan. Mr. Liu and his wife hold an aggregate of 100% ownership interest
      in Eloten Group Ltd.





(6)
      Includes 108,286 shares of common stock beneficially attributed to Eloten Group
      Ltd. based on Eloten Group Ltd.'s ownership interest in Gas (BVI).





(7)
      Includes 5,384,923 common shares issued upon conversion of series A convertible
      preferred stock to Leading King Investment Limited, which are beneficially
      attributed to Mr. Sun Quan Dong. Mr. Sun holds 50% ownership interest in Leading
      King Investment Limited.





(8)
      Includes 89,377 shares of common stock beneficially attributed to Leading King
      Investment Limited based on Leading King Investment Limited's ownership interest
      in Gas (BVI). Mr. Sun holds a 50% ownership interest in Leading King Investment
      Limited.




**Item
      12.**  **Certain
      Relationships and Related Transactions, and Director
      Independence**





**Share
      Exchange Agreement and the Issuance and Conversion of Series A
      Stock**





On
      September 7, 2006, we entered into and consummated a share exchange agreement
      with the holders of all of the outstanding capital stock of Gas (BVI), which
      were: Eloten Group Ltd., Leading King Investment Limited, Zhong Zhi Min, Li
      Shu
      Wang, Chen Si, Xiang Shun Ying, Chong Shun, Liu Xiao Bing, Zhuo Qing Hui, Bian
      Shu Kui, Chen Fang, Shang Jian Zhong and Wang Wei Dong, or, collectively, the
      Gas (BVI) shareholders.





Pursuant
      to the terms of the share exchange agreement, we issued an aggregate of
      14,361,646 shares of our series A convertible preferred stock in exchange for
      the 9,950,000 shares of common stock of Gas (BVI) held by the Gas (BVI)
      shareholders, which constituted all of Gas (BVI)’s capital stock. Each share of
      series A convertible preferred stock was converted automatically into one share
      of our common stock, par value $0.001 per share, upon the completion of the
      304.44-for-1 reverse stock-split of our common stock more as fully described
      in
“Reverse Stock-Split” in the section titled “Annual report Summary” of this
      annual report. Therefore, the shares of series A convertible preferred stock
      issued to the Gas (BVI) Shareholders were automatically converted into an
      aggregate of 14,361,646 shares of our common stock.





As
      a
      result of the consummation of the share exchange transaction, we ceased being
      a
      shell company as such term is defined in Rule 12b-2 under the Exchange Act.
      Gas
      (BVI) is now our wholly-owned subsidiary, and Beijing Gas is now our indirectly
      wholly-owned subsidiary in the PRC.





37




The
      foregoing description of the share exchange agreement is qualified in its
      entirety by the text of the agreement, which is annexed hereto as Exhibit
      10.1.





**Private
      Placement Offering of Series B Stock and Warrants**




On
      September 7, 2006, we entered into and closed a stock purchase transaction
      with
      Vision Opportunity Master Fund, Ltd., SEI Private Trust Co. FAO - The JM Smucker
      Co. Master Fund, and Coronado Capital Partners LP, pursuant to which we issued,
      for an aggregate of $6,876,800 in gross cash proceeds, to the investors, an
      aggregate of 2,509,782 shares of our series B convertible preferred stock,
      and
      series A, B, J, C and D warrants to purchase shares of our common stock as
      described below, and to Kuhns Brothers, Inc. and its designees, an aggregate
      of
      635,822 shares of our series B convertible preferred stock, and warrants to
      purchase shares of our common stock as described below.




On
      October 20, 2006, we entered into and closed a stock purchase transaction with
      Vision Opportunity Master Fund, Ltd., Nite Capital LP and Ijaz Malik, pursuant
      to which we issued to the investors, for an aggregate of $2,404,800 in gross
      cash proceeds, an aggregate of 877,664 shares of our series B convertible
      preferred stock, at $2.74 per share, and series A, B, J, C and D warrants as
      described below.





The
      series A warrants allow their holders to purchase an aggregate of 3,854,599
      shares of our common stock at $3.84 per share. The series B warrants allow
      their
      holders to purchase an aggregate of 1,693,723 shares of our common stock at
      $5.48 per share. The series J warrants allow their holders to purchase an
      aggregate of 3,083,588 shares of our common stock at $3.01 per share. The series
      C warrants allow their holders to purchase an aggregate of 3,083,588 shares
      of
      our common stock at $4.22 per share. The series D warrants allow their holders
      to purchase an aggregate of 1,541,794 shares of our common stock at $6.03 per
      share.





The
      series A and B warrants are exercisable for a term of five years. Each series
      J
      warrant is exercisable for a period of twelve (12) months following its
      issuance. Each series C or D warrant is only exercisable once the holder has
      exercised his or its series J warrant, and for the same number of shares of
      common stock that the holder’s series J warrant was exercised for. The terms of
      the series C and D warrants are for five years following the date of issuance
      of
      such series C or D warrants, as applicable. *Please refer to “Recent Developments” in the section titled “Organization and
      Business of the Company” of this annual report for additional information
      regarding the private offerings of series B convertible preferred stock and
      the
      warrants.*




The
      foregoing description of the stock purchase agreements is qualified in its
      entirety by the text of the agreement and amendments thereto, which are annexed
      hereto as Exhibits 4.1, 4.4, 4.5 and 4.6.





**Registration
      Rights Agreements**





In
      connection with the stock purchase agreements, we entered into registration
      rights agreements with the investors of the series B convertible preferred
      stock
      on September 7, 2006 (as amended on October 3, 2006) and October 20, 2006,
      respectively. Pursuant to these registration rights agreements, we are required
      to file with the SEC a "resale" registration statement on Form SB-2, providing
      for the resale of all share of our common stock issuable upon conversion of
      the
      series B convertible preferred stock and shares of our common stock issuable
      upon exercise of our warrants, and 1,314,405 shares of common stock issued
      upon
      conversion of series A convertible preferred stock issued to certain
      shareholders of Gas (BVI) pursuant to the share exchange
      transaction.





The
      foregoing description of the registration rights agreements is qualified in
      its
      entirety by the text of the agreements, which are annexed hereto as Exhibits
      4.2
      and 4.7.




38




Please
      refer to “Recent Developments” under the section titled “Organization and
      Business of the Company” of this annual report for additional information
      regarding the registration rights agreement.





**Lock-Up
      Agreement**





Simultaneously
      and in connection with our entry into the stock purchase agreement on September
      7, 2006, we entered into a Lock-Up Agreement with the Gas (BVI) Shareholders,
      pursuant to which the Gas (BVI) Shareholders agreed to not transfer any of
      the
      shares of our common stock issuable upon conversion of the series A convertible
      preferred stock issued in the share exchange transaction described above during
      the period commencing on the closing date of the stock purchase agreement and
      expiring on the date that is the later of one year following the closing date
      of
      the stock purchase agreement or six months following the effective date of
      the
      registration statement filed by us with the SEC providing for the resale of
      the
      shares of common stock issuable upon conversion of the series A convertible
      preferred stock and exercise of any warrants; provided, however, that no Gas
      (BVI) Shareholder shall, during the twelve months following such period, sell
      more than one-twelfth of their total holdings of our common stock or series
      A
      convertible preferred stock during any one month.





The
      foregoing description of the Lock-Up Agreement is qualified in its entirety
      by
      the text of the agreement, which is annexed hereto as Exhibit 4.3.




**Placement
      Agent Compensation**




In
      connection with the private financing transactions, Kuhns Brothers, Inc.,
      received the following compensation: (i) $80,000 cash as signing fee,
      documentation fee and purchase fee, (ii) $120,000 cash as purchase fees in
      connection with the purchase by Gas (BVI) of the common stock of Dolce Ventures,
      Inc. from certain shareholders of Dolce pursuant to a stock purchase agreement
      dated as of August 24, 2006, (iii) 10% of the total cash paid for the series
      B
      convertible preferred stock and warrants, and (iv) a warrant to purchase an
      aggregate of 467,153 shares of our common stock at $3.84 per share. In addition,
      Kuhns Brothers, Inc. is to receive 10% of the proceeds of any exercise of the
      warrants sold to investors of the series B convertible preferred stock. Upon
      the
      closing of the private financing transactions, a non-refundable monthly retainer
      of $10,000 per month will be paid to Kuhns Brothers for 24 months. Dolce
      Ventures, Inc. was the name of our company at an earlier stage of its
      development. See “Organizational History of Sino Gas” in the section of this
      annual report titled “Description of Business.”





Kuhns
      Brother acted as a placement agent for helping the company complete the Reverse
      Takeover and PIPE transactions.





Pursuant
      to a Consulting Agreement dated as of August 8, 2006 that we entered into with
      Kuhns Brothers, Inc., Kuhns Brothers is entitled to receive an aggregate of
      635,822 shares of Series B Stock and a warrant to purchase an aggregate of
      241,708 shares of our common stock at $3.84 per share. In May 2007, Kuhns
      Brothers received 109,489 warrants with exercise price $2.74. by helping the
      company with a $3 million financing through arranging the early exercise of
      Warrant J held by Vision Opportunity Master Fund, Ltd..





Kuhns
      Brothers was not an underwriter but was acting as a placement
      agent.





**Consulting
      Agreement**





Kuhns
      Brothers provide the following three types of consulting service: financial
      advisory, Merger &Acquisition and strategic planning. Kuhns distribute the
      shares to its affiliates. Pursuant to a Consulting Agreement dated as of
      August 8, 2006 that we entered into with Kuhns Brothers, Inc., Kuhns Brothers
      is
      entitled to receive an aggregate of 635,822 shares ($2.74 per share) of Series
      B
      Stock. Kuhns Brothers designated the following persons to receive a portion
      of
      these series B convertible preferred shares:





**Name**
            
            **Shares**“James”
                Tie Li
            
            
            27,373Sam
                Shoen
            
            
            25,875Paul
                Kuhns
            
            
            5,175Kuhns
                Brothers, Inc.
            
            
            113,847John
                Kuhns
            
            
            56,925Mary
                Fellows
            
            
            56,925Vision
                Opportunity Master Fund, Ltd.
            
            
            286,120Belmont
                Partners, LLC
            
            
            31,791Guzov
                Ofsink, LLC
            
            
            31,791




39




**Beijing
      Chenguang Agreement**





One
      of
      the selling shareholders under the Beijing Chenguang agreement described
      elsewhere in this annual report, Mr. Zhou Zhi Cheng, has been our Chief
      Operating Officer since October 19, 2006. Mr. Zhou owned 30% of the Beijing
      Chenguang stock immediately prior to the signing of the Beijing Chenguang
      Agreement. Mr. Zhou is also a shareholder and legal representative of another
      selling shareholder, Beijing Chenguang Weizhong Management Technology Consulting
      Ltd., Co., which owned 10% of the Beijing Chenguang stock immediately prior
      to
      the signing of the agreement.





Mr.
      Zhou
      Zhicheng, as the company’s Chief Operating Officer, was not instrumental with
      the acquisition of Chenguang on behalf of the company. The acquisition decision
      was made by the board, of which Mr. Zhou is not a member. The decision to
      purchase Beijing Chenguang was made before Zhou Zhicheng joined the Company
      and
      the Company finalized the purchase of Beijing Chenguang with fair
      consideration.





The
      company did due diligence with Beijing Chenguang, researched on the markets
      that
      Beijing Chenguang had developed and used financial measures to ensure Beijing
      Chenguang qualify our criteria for acquisition.




**Information
      relating to compliance with Section 16(a) of the Exchange
      Act**





None.




**ITEM
      13.**  **EXHIBITS**




Exhibit
                No.
            
            Description
                of Exhibit3.1
            
            Articles
                of Incorporation, as amended and corrected.*3.2
            
            Bylaws.*3.3
            
            Specimen
                of Common Stock certificate.*3.4
            
            Certificate
                of Designations authorizing the Series A Convertible Preferred
                Stock.*3.5
            
            Certificate
                of Designations authorizing the Series B Convertible Preferred
                Stock.*3.6
            
            Amended
                and Restated Certificate of Designations authorizing the Series B
                Convertible Preferred Stock.*


4.1
            
            Form
                of Series B Stock Purchase Agreement, dated as of September 7, 2006,
                by and among, Dolce Ventures, Inc., Vision Opportunity Master Fund,
                Ltd.
                and each of the other investors party thereto.*4.2
            
            Form
                of Registration Rights Agreement, dated as of September 7, 2006, by
                and between, Dolce Ventures, Inc., Vision Opportunity Master Fund,
                Ltd.*4.3
            
            Form
                of Lock-Up Agreement, dated as of September 7, 2006, by and among,
                Dolce Ventures, Inc., Leading King Investment Limited, Eloten Group,
                Ltd.,
                Cheng Fang and certain other parties named therein.*4.4
            
            Form
                of Series A Warrant*4.5
            
            Form
                of Series B Warrant*4.6
            
            Form
                of Series C Warrant*4.7
            
            Form
                of Series D Warrant*





4.8
            
            Form
                of Series J Warrant*4.9
            
            Form
                of Warrant issued to Kuhns
                Brothers*




40


Exhibit
                  No.
              
              Description
                  of Exhibit10.1
              
              Form
                  of Share Exchange Agreement dated as of September 7, 2006, by and
                  between,
                  Dolce Ventures, Inc., Yu-chuan Liu, and each of the other parties
                  named
                  therein.*10.2
              
              Form
                  of Stock Purchase Agreement dated as of August 24, 2006, by and
                  between,
                  Gas Investment China Co., Ltd. and each of the other parties named
                  therein.*10.3
              
              Form
                  of Consulting Agreement dated August 8, 2006, by and between Kuhns
                  Brothers, Inc. and Dolce Ventures, Inc.*10.4
              
              Form
                  of Engagement Letter dated May 22, 2006, by and between, Beijing
                  Zhong Ran
                  Wei Ye Gas Co., Ltd. and Kuhns Brothers, Inc.*10.5
              
              Form
                  of Escrow Agreement dated September 7, 2006, by and between, Gas
                  Investment China Co., Ltd., Vision Opportunity Master Fund, Ltd.
                  and
                  Kramer Levin Naftalis & Frankel LLP.*16.1
              
              Letter
                  dated September 7, 2006 from Dolce Ventures, Inc. to Robison, Hill
&
                  Co.*16.2
              
              Letter
                  dated September 12, 2006 from Robison, Hill & Co. to the
                  SEC.*21.1
              
              List
                  of Subsidiaries**23.1
              
              Consent
                  of Samuel H. Wong & Co., LLP.**31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002.32.1
              
              Certification
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                  the
                  Sarbanes-Oxley Act of 2002.




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


**
        Filed previously.




**Item
      14.**  **Principal
      Accountant Fees and Services**




Aggregate
      fees billed by the Company's current principal accountants, Samuel H.
      Wong & Co., LLP, for audit services related to the most recent fiscal
      year, and for other professional services billed in the most recent fiscal
      year, were as follows:




41





FISCAL 2006Audit
                Fees (1)
            
            $
            100,000Audit-Related
                Fees
            
            
            —Tax
                Fees (2)
            
            
            —All
                Other Fees
            
            
            —Total
            
            $
            100,000





(1)
            Comprised
                of the audit of the Company's  annual  financial 
                statements  and  reviews of the Company's quarterly 
                financial  statements,  as well as consents related to and
                reviews of other documents filed with the Securities and Exchange
                Commission.




(2)
            Comprised 
                of  preparation  of all federal and
                state corporate income tax returns for the Company and its
                subsidiaries.




Under
      the
      Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by the
      Company's independent  accountants must now be approved in advance by the
      Audit  Committee  to assure that such  services  do not
      impair the  accountants' independence  from the Company.  The
      Company  does not have an Audit  Committee; therefore,  the Board
      of Directors  reviews and approves  audit and  permissible
      non-audit  services  performed by Samuel H. Wong & Co.,
      L.L.P., as well as the fees charged by them for such services.




42


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:
                    May 22, 2008
                By:
                */s/
                    Liu Yu Chuan**Liu
                    Yu Chuan**Chairman
                    of the Board, Director,*
                  *President
                    and Chief Executive
                    Officer*
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, this Report has been signed below by the following persons on behalf
        of
        the Registrant and in the capacities and on the dates indicated.
  Date:
                    May 22, 2008
                
                */s/
                    Liu Yu Chuan**Liu
                    Yu Chuan**Chairman
                    of the Board, Director*
  Date:
                      May 22, 2008
                
                */s/
                    Zhicheng Zhou**Zhicheng
                    Zhou**Director*
  Date:
                      May 22, 2008
                
                */s/
                    Yong Zhang**Yong
                    Zhang**Chief
                    Financial Officer*
  Date:
                      May 22, 2008
                
                */s/
                    Chen Guo Wei**Chen
                    Guo Wei**Director*
  Date:
                      May 22, 2008
                
                */s/
                    Sun Quan Dong**Sun
                    Quan Dong**Director*
  Date:
                      May 22, 2008
                
                */s/
                    Xinmin Zhang**Xinmin
                    Zhang**Director*
  43
  **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
 **INDEX
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 **DECEMBER
        31, 2006, AND 2005**
  **Sino
        Gas International Holdings, Inc.**
  CONTENTS
              
              PAGESREPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              
              
              F-1CONSOLIDATED
                  BALANCE SHEETS
              
              
              F-2
                  - F-3CONSOLIDATED
                  STATEMENTS OF INCOME
              
              
              F-4CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS’ EQUITY
              
              
              F-5CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
              
              
              F-6NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              
              
              F-7
                  - F-28
  
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To:
              Board
                  of Directors and Stockholders of Sino Gas International Holdings,
                  Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of Sino Gas International
        Holdings, Inc. as of December 31, 2006 and 2005, and the related consolidated
        statements of income, stockholders' equity, and cash flows for the years
        then
        ended December 31, 2006 and 2005. These financial statements are the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these financial statements based on our audit.
 
 We
        conducted our audit in accordance with auditing standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Sino Gas International Holdings,
        Inc. as of December 31, 2006 and 2005, and the results of its operations,
        and
        its cash flows for the years then ended in conformity with accounting principles
        generally accepted in the United States of America.
  South
                    San Francisco, California
                Samuel
                    H. Wong & Co., LLPMay
                    2, 2008
                Certified
                    Public Accountants
  F-1
 
 **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
  **CONSOLIDATED
        BALANCE SHEETS**
 **AS
        AT DECEMBER 31, 2006 AND 2005**
 **(STATED
        IN US DOLLARS)**
  Note
                
                2006
                
                2005**Assets***Current
                    assets*Cash
                    and cash equivalents
                
                
                
                
                $
                3,638,673
                
                $
                571,194Restrict
                    cash
                
                
                
                
                
                3,124,541
                
                
                -Notes
                    receivable
                
                
                
                
                
                477,390
                
                
                -Accounts
                    receivable
                
                
                3
                
                
                6,534,740
                
                
                7,770,168Advances
                    to suppliers
                
                
                
                
                
                68,309
                
                
                372,442Prepaid
                    expenses
                
                
                
                
                
                141,878
                
                
                12,097Other
                    receivables
                
                
                4
                
                
                1,263,800
                
                
                437,922Total
                    current assets
                
                
                
                
                $
                15,249,331
                
                $
                9,163,823*Long
                    term assets*Investments
                
                
                5
                
                $
                2,939,029
                
                $
                2,443,378Plant
                    and equipment, net
                
                
                6
                
                
                10,608,530
                
                
                3,200,682Construction
                    of pipelines in progress
                
                
                
                
                
                4,628,076
                
                
                3,071,497Intangible
                    assets
                
                
                7
                
                
                457,830
                
                
                437,265Total
                    long term assets
                
                
                
                
                $
                18,633,465
                
                $
                9,152,822**Total
                    Assets**
                
                
                
                
                $
                33,882,796
                
                $
                18,316,645**Liabilities
                    and Shareholders’ Equities***Current
                    liabilities*Short-term
                    bank loans
                
                
                8
                
                $
                2,430,445
                
                $
                -Accounts
                    payable
                
                
                
                
                
                3,891,388
                
                
                3,090,870Other
                    payables
                
                
                9
                
                
                1,790,500
                
                
                2,264,965Unearned
                    revenue
                
                
                
                
                
                37,760
                
                
                133,035Accrued
                    liabilities
                
                
                
                
                
                418,390
                
                
                201,384Total
                    current liabilities
                
                
                
                
                $
                8,568,483
                
                $
                5,690,254**Total
                    Liabilities**
                
                
                
                
                $
                8,568,483
                
                $
                5,690,254
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-2
  **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
  **CONSOLIDATED
        BALANCE SHEETS (Continued)**
 **AS
        AT DECEMBER 31, 2006 AND 2005**
 **(STATED
        IN US DOLLARS)**
  Note
                
                2006
                
                2005**Stockholders’
                    Equity**Preferred
                    stock A US$0.001 par value; 20,000,000 authorized; nil and nil
                    issued and
                    outstanding as of December 31, 2006 and 2005 respectively
                
                
                10
                
                $
                -
                
                $
                -Preferred
                    stock B US$0.001 par value; 5,000,000 authorized; 4,023,268 and
                    nil issued
                    and outstanding as of December 31, 2006 and 2005
                    respectively
                
                
                10
                
                
                4,023
                
                
                -Common
                    stock US$0.001 par value; 250,000,000 authorized; 14,693,186
                    and
                    14,361,646 issued and outstanding as of December 31, 2006 and
                    2005
                    respectively
                
                
                10
                
                
                14,694
                
                
                14,362Additional
                    paid-in-capital
                
                
                
                
                
                18,488,040
                
                
                4,812,650Statutory
                    reserves
                
                
                
                
                
                2,025,022
                
                
                1,219,720Retained
                    earnings
                
                
                
                
                
                3,958239
                
                
                6,311,794Accumulated
                    other comprehensiveIncome
                
                
                
                
                
                824,296
                
                
                267,865$
                25,314,313
                
                $
                12,626,391**Total
                    Liabilities and Stockholders’ Equity**
                $
                33,882,796
                
                $
                18,316,645
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-3
  **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
  **CONSOLIDATED
        STATEMENTS OF INCOME**
 **FOR
        THE YEAR ENDED DECEMBER 31, 2006 AND 2005**
 **(STATED
        IN US DOLLARS)**
 
 Note
                
                2006
                
                2005Net
                    revenues
                
                
                13
                
                $
                10,870,718
                
                $
                10,907,289Cost
                    of revenues
                
                
                
                
                
                (4,389,142
                )
                
                (4,132,391
                )Gross
                    profit
                
                
                
                
                $
                6,481,576
                
                $
                6,774,898Selling
                    and marketing expenses
                
                
                
                
                
                (95,779
                )
                
                (99,768
                )General
                    and administrative expenses
                
                
                
                
                
                (1,155,849
                )
                
                (874,181
                )Income
                    from continuing operations
                
                
                
                
                $
                5,229,948
                
                $
                5,800,949Interest
                    expense
                
                
                
                
                
                (78,237
                )
                
                (2,486
                )Other
                    income
                
                
                
                
                
                438,186
                
                
                437,750Other
                    expenses
                
                
                
                
                
                (93,324
                )
                
                (1,865
                )Income
                    before taxation
                
                
                
                
                $
                5,496,573
                
                $
                6,234,348Income
                    tax
                
                
                11
                
                
                (423,284
                )
                
                (531,915
                )Net
                    income
                
                
                
                
                $
                5,073,289
                
                $
                5,702,433Construction
                    preferred dividend – Amortization of
                  Beneficial
                    Conversion
                
                
                
                
                
                6,418,864Income
                    available to common stock shareholders
                
                
                
                
                
                (1,345,575
                )
                
                5,702,433Earnings
                    per shareBasic
                
                
                
                
                $
                (0.09
                )
                $
                0.40Diluted
                
                
                
                
                
                (0.09
                )
                
                0.40Weighted
                    average shares outstanding of common stock,Basic
                
                
                
                
                
                14,693,186
                
                
                14,361,646Diluted
                
                
                
                
                
                15,699,003
                
                
                14,361,646EPS
                    excluding effect of Constructive Preferred DividendBasic
                
                
                
                
                $
                0.35
                
                $
                0.40Diluted
                
                
                
                
                
                0.32
                
                
                0.40
  The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-4
  
 **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
  **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **FOR
        THE YEAR ENDED DECEMBER 31, 2006 AND 2005**
 **(STATED
        IN US DOLLARS)**
  Preferred
                  Shares
                
                stock
                  B
                  Amount
                
                Common
                  Shares
                
                stock
                  Amount
                
                Additional
                  paid-in-
                  capital
                
                Statutory
                  reserves
                
                Retained
                  earnings
                
                Accumulated
                  other
                  comprehensive
                  income
                
                TotalBalance,
                    January 1, 2005
                
                
                -
                
                $
                -
                
                
                14,361,646
                
                $
                14,362
                
                
                4,812,650
                
                
                333,010
                
                
                1,496,071
                
                
                251
                
                
                6,656,344Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5,702,433
                
                
                
                
                
                5,702,433Reserves
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                886,710
                
                
                (886,710
                )Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                267,614Balance,
                    December 31, 2005
                
                
                -
                
                $
                -
                
                
                14,361,646
                
                $
                14,362
                
                
                4,812,650
                
                
                1,219,720
                
                
                6,311,794
                
                
                267,865
                
                
                12,626,391Balance,
                    January 1, 2006
                
                
                -
                
                $
                -
                
                
                14,361,646
                
                $
                14,362
                
                
                4,812,650
                
                
                1,219,720
                
                
                6,311,794
                
                
                267,865
                
                
                12,626,391Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                5073289
                
                
                
                
                
                5,165,757Reverse
                    acquisition
                
                
                
                
                
                
                
                
                331,540
                
                
                332
                
                
                
                
                
                
                
                
                (202,678
                )
                
                
                
                
                (202,347
                )Issue
                    of stock and warrant
                
                
                4,023,268
                
                
                4,023
                
                
                
                
                
                
                
                
                7,256,526
                
                
                
                
                
                
                
                
                
                
                
                7,260,549Amortization
                    of Beneficial Conversion Feature
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                6,418,864
                
                
                
                
                
                (6418864
                )Appropriation
                    to retained earings
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                805,302
                
                
                (805,302
                )Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                556,431
                
                
                556,431Balance,
                    December 31, 2006
                
                
                4,023,268
                
                $
                4,023
                
                
                14,693,186
                
                $
                14,694
                
                
                18,488,040
                
                
                2,025,022
                
                
                3,958,239
                
                
                824,296
                
                
                25,314,313
 
 Accumulated
                  Comprehensive Income2006
                
                2005
                
                TotalComprehensive
                    IncomeNet
                    Income
                
                
                
                
                
                5,073,289
                
                
                5,702,433
                
                
                10,775,722Comprehensive
                    Other IncomeForeign
                    Currency Translation Adjustment
                
                
                
                
                
                556,431
                
                
                267,614
                
                
                824,0455,629,720
                
                
                5,970,047
                
                
                11,599,767
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-5
  **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **FOR
        THE YEAR ENDED DECEMBER 31, 2006 AND 2005**
 **(STATED
        IN US DOLLARS)**
 2006
                  
                  2005Cash
                      flows from operating activitiesNet
                      incomes
                  
                  $
                  5,073,289
                  
                  $
                  5,702,433Depreciation
                      and amortization
                  
                  
                  155,374
                  
                  
                  131,865Bad
                      debt expense
                  
                  
                  32,838
                  
                  
                  29,042Invest
                      in restricted time deposit
                  
                  
                  (3,124,541
                  )Equity
                      in investments
                  
                  
                  (495,651
                  )
                  
                  (404,436
                  )Decrease/(increase)
                      in accounts and other receivables
                  
                  
                  73,674
                  
                  
                  (6,618,323
                  )Increase
                      in accounts payables
                  
                  
                  447,784
                  
                  
                  3,564,302Cash
                      sourced/(used) in operating activities
                  
                  $
                  2,162,767
                  
                  $
                  2,854,883Cash
                      flows from investing activitiesPurchase
                      of plant and equipment
                  
                  $
                  (7,563,222
                  )
                  $
                  (1,065,108
                  )Increase
                      in construction in progress
                  
                  
                  (1,556,579
                  )
                  
                  (1,537,774
                  )Purchase
                      of intangible assets
                  
                  
                  (20,565
                  )
                  
                  (365,145
                  )cash
                      sourced/ used in investing activities
                  
                  $
                  (9,140,366
                  )
                  $
                  (2,968,027
                  )Cash
                      flows from financing activitiesIssue
                      of common stock
                  
                  
                  7,430,965
                  
                  
                  -Proceeds
                      from Bank borrowings
                  
                  
                  2,430,445
                  
                  
                  -Cash
                      sourced/(used)provided by financing activities
                  
                  $
                  9,861,410
                  
                  $
                  -Net
                      increase/decrease in cash and cash equivalents
                      sourced/(used)
                  
                  
                  2,883,811
                  
                  
                  (113,144
                  )Effect
                      of foreign currency translation on cash and cash
                      equivalents
                  
                  
                  183,668
                  
                  
                  15,992Cash
                      and cash equivalents-beginning of year
                  
                  
                  571,194
                  
                  
                  668,346Cash
                      and cash equivalents-end of year
                  
                  $
                  3,638,673
                  
                  $
                  571,194Supplementary
                      cash flow information:Interest
                      received
                  
                  $
                  
                  
                  $
                  3,484Interest
                      paid
                  
                  
                  78,237
                  
                  
                  -Income
                      tax paid
                  
                  
                  615,694
                  
                  
                  531,915
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-6
  **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
        IN US DOLLARS)**
  **1.
        ORGANIZATION AND PRINCIPAL ACTIVITIES**
  Sino
        Gas
        International Holdings, Inc. (“the Company”) was incorporated under the laws of
        the State of Utah on August 19, 1983 as Evica Resources, Inc. On April 5,
        1984,
        the Company changed its name to American Arms, Inc. and commenced the
        manufacture and sale of weapons and laser sights. On April 12, 1988, the
        Company
        changed its name to American Industries, Inc., as the Company was no longer
        engaged in the manufacturing and sale of weapons and laser sights. American
        Industries, Inc. was in the business of providing room safes for hotel
        rooms.
 
 On
        February 19, 2002, the Company formed a subsidiary corporation named Pegasus
        Tel, Inc. under the laws of the State of Delaware to enter into the
        telecommunications business. On March 28, 2002, Pegasus Tel, Inc. merged
        with
        Pegasus Communications, Inc., a New York corporation, with Pegasus Tel, Inc.
        as
        the surviving entity. On January 14, 2002, the Company purchased payphone
        assets
        consisting of 29 payphones and associated equipment from the Margaretville
        Telephone Company for $11,600.00. On May 21, 2002, the Company changed its
        name
        to Dolce Ventures, Inc.
 
 On
        September 7, 2006, the Company consummated a share exchange transaction with
        the
        shareholders of Gas Investment China Co., Ltd (“Gas (BVI)”), whereby the Company
        exchanged 14,361,646 shares of its series A convertible preferred stock,
        par
        value $0.001 per share (which have been automatically converted into Common
        Stock on November 17, 2006) for all of the issued and outstanding stock of
        Gas
        (BVI) held by the shareholders of Gas (BVI). As a result of the share exchange
        transaction, Gas (BVI) became the wholly-owned subsidiary of the Company,
        and
        Beijing Zhong Ran Wei Ye Gas Co. Ltd. (“Beijing Gas”), a wholly owned subsidiary
        of Gas (BVI), became a indirectly wholly-owned subsidiary of the Company.
        In
        addition, as a result of the share exchange transaction, the Company ceased
        being a shell company as such term is defined in Rule 12b-2 under the Exchange
        Act and is now engaged in the development of natural gas distribution systems
        and the distribution and supply of natural gas in the PRC.
 
 On
        November 17, 2006, the Company changed its name to Sino Gas International
        Holdings, Inc., announced its new trading symbol, “SGAS,” and effected a
        304.44-for-1 reverse stock split.
 
 The
        Company consummated two private financing transactions on September 7, 2006
        and
        October 20, 2006, respectively, in which it issued an aggregate of 4,023,268
        shares of its series B convertible preferred stock, and warrants to purchase
        an
        aggregate of 13,257,293 shares of its common stock, in exchange for $9,281,600
        gross cash proceeds. The two private financing transactions were consummated
        on
        substantially the same terms and conditions. The share exchange transaction
        and
        the Company’s private financing transactions are collectively referred to
        hereafter as the “reverse merger transaction”.
 
 As
          a
          result of the consummation of the reverse merger transaction, the Company
          is now
          engaged in the development of natural gas distribution systems in small-
          and
          medium-sized cities in the PRC, as well as the distribution of natural
          gas to
          residential, commercial and industrial customers in the PRC, through its
          indirectly-owned subsidiaries in the PRC, Beijing Gas and its
          subsidiaries. The Company still own Pegasus Tel, but plans to spin it off
          in the form of a dividend to its shareholders of record as of August 30,
          2006.
  F-7
  **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
        IN US DOLLARS)**
  **1.
        ORGANIZATION AND PRINCIPAL ACTIVITIES (CONT’D)**
 
 The
        Company owns and operates 23 natural gas distribution systems serving
        approximately 63,000 residential and eight commercial and industrial customers.
        The Company’s facilities include approximately 700 kilometers of pipeline and
        delivery networks with a designed daily capacity of approximately 70,000
        cubic
        meters of natural gas.
 
 *Basis
        of Presentation*
 
 The
        share
        exchange transaction on September 7, 2006 has been accounted for as a
        capital-raising transaction of the Company whereby the historical financial
        statements and operations of GAS(BVI) are consolidated using historical carrying
        amounts. The 331,001 shares of the Company outstanding prior to the stock
        exchange transaction were accounted for at the net book value at the time
        of the
        transaction. The accompanying consolidated financial statements reflect the
        capital-raising transaction of the Company as if the transaction occurred
        as of
        the beginning of the first period presented.
  The
        Company’s consolidated financial statements have been prepared in accordance
        with generally accepted accounting principles in the United States of America
        (“U.S. GAAP”).
  This
        basis of accounting differs in certain material respects from that used for
        the
        preparation of the books of account of the Company’s principal subsidiaries,
        which are prepared in accordance with the accounting principles and the relevant
        financial regulations applicable to enterprises with limited liabilities
        established in the PRC (“PRC GAAP”) or in the accounting standards used in the
        places of their domicile. The accompanying consolidated financial statements
        reflect necessary adjustments not recorded in the books of account of the
        Company’s subsidiaries to present them in conformity with U.S.
        GAAP.
 
 *Recent
        Acquisitions*
 
 On
        December 13, 2006, Beijing Gas entered into a stock transfer agreement with
        the
        shareholders of Zhangjiakou City Xiahuayuan Jinli Gas Ltd. Co., a limited
        liability company organized under the laws of the PRC (“Xiahuayuan Jinli”),
        under which Beijing Gas acquired all the capital stock of Xiahuayuan Jinli
        for a
        purchase price of RMB two million (or approximately $258,000) in cash.
        Xiahuayuan Jinli is now a wholly-owned subsidiary of Beijing Gas. Xiahuayuan
        Jinli is a small regional natural gas distributor in Hebei Province,
        PRC.
 
 Also
        on
        December 13, 2006, Beijing Gas entered into a stock transfer agreement with
        Yuxian Jinli Gas Ltd. Co. (“Yuxian Jinli”), a limited liability company
        organized under the laws of the PRC, under which Beijing Gas acquired all
        the
        capital stock of Yuxian Jinli for a purchase price of RMB9.5 million (or
        approximately $1,227,000) in cash. All the capital stock of Xiahuayuan Jinli
        and
        that of Yuxian Jinli were held by the same shareholders immediately prior
        to the
        signing of these agreements. Yuxian Jinli is now a wholly-owned subsidiary
        of
        Beijing Gas. Yuxian Jinli is a small regional natural gas distributor in
        Hebei
        Province, PRC.
  F-8
  **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
        IN US DOLLARS)**
 
 **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES**
  *(A)
        Method of Accounting*
  The
        Company maintains its general ledger and journals with the accrual method
        accounting for financial reporting purposes. The financial statements and
        note
        are representations of management. Accounting policies adopted by the Company
        conform to generally accepted accounting principles in the United States
        of
        America and have been consistently applied in the presentation of financial
        statements, which are compiled on the accrual basis of accounting.
  *i.* *Use
          of Estimates*
  In
        preparing of the consolidated financial statements in conformity with accounting
        principles generally accepted in the United States of America, management
        makes
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosures of contingent assets and liabilities at the dates
        of
        the consolidated financial statements, as well as the reported amounts of
        revenues and expenses during the reporting year. These accounts and estimates
        include, but are not limited to, the valuation of accounts receivable,
        inventories, deferred income taxes and the estimation on useful lives of
        plant
        and machinery. Actual results could differ from those estimates.
  *ii* *Economic and Political Risks*
  The
        Company’s operations are conducted in the PRC. Accordingly, the Company’s
        business, financial condition and results of operations may be influenced
        by the
        political, economic and legal environment in the PRC, and by the general
        state
        of the PRC economy.
 
 The
        Company’s operations in the PRC are subject to special considerations and
        significant risks not typically associated with companies in North America
        and
        Western Europe. These include risks associated with, among others, the
        political, economic and legal environment and foreign currency exchange.
        The
        Company’s results may be adversely affected by changes in the political and
        social conditions in the PRC, and by changes in governmental policies with
        respect to laws and regulations, anti-inflationary measures, currency
        conversion, remittances abroad, and rates and methods of taxation, among
        other
        things.
  F-9
  **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(STATED
        IN US DOLLARS)**
 
 **2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**
  *iii.* *Principles
          of Consolidation*
  The
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries (“the Group”). Significant inter-company transactions have been
        eliminated in consolidation. Investments in which the company has a 20 percent
        to 50 percent voting interest and where the company exercises significant
        influence over the investor are accounted for using the equity
        method.
 
 As
        of
        December 31, 2006, the particulars of the subsidiaries are as
        follows:
  Name
                  of Company
              
              Place of
                Incorporation
              
              Date of
                Incorporation
              
              Beneficiary
                interest %
              
              Equity
                Interest %
              
              Registered
                CapitalGAS
                  Investment China Co., Ltd.
              
              
              The
                  BritishVirgin
                  Islands
              
              
              6/19/2003
              
              
              100
              
              
              100
              
              
              USD10,000,000Pegasus
                  Tel, Inc.
              
              
              State
                  ofDelaware,USD
              
              
              2/19/2002
              
              
              100
              
              
              100
              
              
              USD
                  1,000Beijing
                  Zhong Ran Wei Ye Gas Co., Ltd
              
              
              PRC
              
              
              8/29/2001
              
              
              100
              
              
              100
              
              
              RMB 94,448,517Ningjin
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              12/3/2003
              
              
              100
              
              
              95
              
              
              RMB
                  3,000,000Jinzhou
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              7/19/2004
              
              
              100
              
              
              95
              
              
              RMB
                  5,000,000Xingtang
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              2/18/2004
              
              
              100
              
              
              95
              
              
              RMB
                  3,000,000Linzhang
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              7/6/2005
              
              
              100
              
              
              85
              
              
              RMB
                  1,000,000Anping
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              8/4/2005
              
              
              100
              
              
              95
              
              
              RMB
                  5,000,000Wuqiao
                  Gas Co., Ltd
              
              
              PRC
              
              
              6/30/2004
              
              
              100
              
              
              95
              
              
              RMB
                  2,000,000Yutian
                  Zhongran Weiye Gas Co.,Ltd
              
              
              PRC
              
              
              12/19/2003
              
              
              100
              
              
              90
              
              
              RMB
                  3,000,000Sihong
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              12/3/2004
              
              
              100
              
              
              95
              
              
              RMB10,000,000Langfang
                  Development Region Weiye
                Dangerous
                  Goods Transportation Co.,
              
              
              PRC
              
              
              3/22/2005
              
              
              100
              
              
              95
              
              
              RMB
                  1,000,000Peixian
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              8/22/2005
              
              
              100
              
              
              90
              
              
              RMB
                  5,000,000Sishui
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              12/22/2004
              
              
              100
              
              
              95
              
              
              RMB
                  3,000,000LongyaoZhongranWeiyeGasCo.,Ltd
              
              
              PRC
              
              
              10/13/2005
              
              
              100
              
              
              95
              
              
              RMB
                  3,000,000Shenzhou
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              12/23/2005
              
              
              100
              
              
              95
              
              
              RMB
                  3,000,000Hengshui
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              12/20/2005
              
              
              100
              
              
              95
              
              
              RMB
                  3,000,000Changli
                  Weiye Gas Co., Ltd
              
              
              PRC
              
              
              12/8/2006
              
              
              100
              
              
              95
              
              
              RMB
                  3,000,000Yuxian
                  Jinli Gas Co., Ltd
              
              
              PRC
              
              
              11/8/2005
              
              
              100
              
              
              100
              
              
              RMB
                  9,500,000Zhangjiakou
                  City Xiahuayuan Jinli Gas Co., Ltd
              
              
              PRC
              
              
              9/30/2005
              
              
              100
              
              
              100
              
              
              RMB
                  2,000,000
  F-10




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**


**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**




*(B)
        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.




*(C)
        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.




*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.




*(D)
        Investments in Equity Securities*




The
      consolidated statement of income includes the Group's share of the
      post-acquisition results of its associate for the year. In the consolidated
      balance sheet, investments in equity securities are stated at the Group's share
      of the net assets of the associates plus the premium paid less any discount
      on
      acquisition, less any identified impairment loss.




*Portion of**Nominal**Name of*
            
            *Place*
            
            *Form of*
            
            
            
            *Value of**Associate*
            
            *of*
            
            *Business*
            
            *Registered*
            
            *Registered*
            
            *Principal**Company*
            
            *Registration*
            
            *Structure*
            
            *Capital*
            
            *Capital*
            
            *Activities*Beijing
                Zhongran Xiangke Oil Gas Technology Co. Ltd
            
            PRC
            
            Sino-foreign
              equity
                joint
              venture
            
            RMB
              20,000,000
            
            40
            
            Trading
                of natural
              gas
                and gas
              pipeline
              construction





Beijing
      Zhongran Xiangke Oil Gas Technology Co. Ltd is the Group's 40% owned joint
      Venture company and is principally engaged in sale of compressed natural gas
      to
      domestic households and industrial around sub-urban areas of Beijing and part
      of
      sub-urban areas in Hebei Province and Tianjin.




F-11




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**


**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**




*(E)
        Accounting for the Impairment of Long-Lived Assets*




The
      long-lived assets held and used by the Company are reviewed for impairment
      whenever events or changes in circumstances indicate that the carrying amount
      of
      assets may not be recoverable. It is reasonably possible that these assets
      could
      become impaired as a result of technology or other industry changes.
      Determination of recoverability of assets to be held and used is by comparing
      the carrying amount of an asset to future net undiscounted cash flows to be
      generated by the assets.





If
      such
      assets are considered to be impaired, the impairment to be recognized is
      measured by the amount by which the carrying amount of the assets exceeds the
      fair value of the assets. Assets to be disposed of are reported at the lower
      of
      the carrying amount or fair value less costs to sell.





During
      the reporting year, there was no impairment loss.




*(F)
        Plant and Equipment*




Plant
      and
      equipment, other than construction in progress, are stated at cost less
      depreciation and amortization and accumulated impairment loss.





Plant
      and
      equipment are carried at cost less accumulated depreciation. Depreciation is
      provided over their estimated useful lives, using the straight-line method.
      Estimated useful lives of the plant and equipment are as follows:





Gas
                Pipelines
            
            
            25
                yearsMotor
                Vehicles
            
            
            10
                yearsMachinery
                & Equipment
            
            
            20
                yearsBuildings
            
            
            25
                yearsLeasehold
                Improvements
            
            
            25
                yearsOffice
                Equipment
            
            
            8
                years





The
      cost
      and related accumulated depreciation of assets sold or otherwise retired are
      eliminated from the accounts and any gain or loss is included in the statement
      of income. The cost of maintenance and repairs is charged to income as incurred,
      whereas significant renewals and betterments are capitalized.




*(G)
        Intangible Assets*




Intangible
      assets, are stated at cost less amortization and accumulated impairment loss.
      Amortization is provided over their estimated useful lives, using the
      straight-line method. Estimated useful lives of the intangibles are as
      follows:





Land
                use rights
            
            
            40
                - 50 yearsFranchises
            
            
            30
                yearsOther
                intangibles
            
            
            3
                years




F-12




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**


**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**




*(H)
        Construction of pipelines in progress*




Construction
      of pipelines in progress represents the cost of constructing pipelines and
      is
      stated at cost. Costs comprise direct and indirect incremental costs of
      acquisition or construction. Completed items are transferred from construction
      in progress to gas pipelines of fixed assets when they are put in service.
      The
      major cost of construction relates to construction materials, direct labor
      wages
      and other overhead. Construction of pipeline, through which to distribute
      natural gas, is one of the Company’s principal businesses. The Company builds
      city main pipeline network and branch pipeline network to make gas connection
      to
      resident users, industrial, and commercial users, with the objective of
      generating revenue on gas connection and gas usage fees revenue from these
      customers. As at December 31, 2006, the pipelines under construction include
      mainly the projects in several cities of Hebei and Jiangsu province, and in
      Beijing. These projects, once completed, will significantly increase the gas
      supply capacity. Capital commitments in respect of these projects amounted
      to
      approximately $5 million at December 31, 2006 *.*




*(I)
        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.




*(J)
        Financial Instruments*




The
      carrying amounts of all financial instruments are equal to the approximate
      fair
      value. The carrying amounts of cash, accounts receivable, accounts payable
      and
      accrued liabilities are approximately equivalent to the fair value of these
      short-term nature of terms. 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.




*(K)
        Foreign Currency Translation*




The
      accompanying consolidated financial statements are presented in United States
      dollars. The functional currency of the Company is the Renminbi (RMB). The
      consolidated financial statements are translated into United States dollars
      from
      RMB at year-end exchange rates as to assets and liabilities and average exchange
      rates as to revenues and expenses. Capital accounts are translated at their
      historical exchange rates when the capital transactions occurred.





**2006**
            
            **2005**Year
                end RMB : US$ exchange rate
            
            
            7.8175
            
            
            8.0734Average
                yearly RMB : US$ exchange rate
            
            
            7.9819
            
            
            8.2033





The
      RMB
      is not freely convertible into foreign currency and all foreign exchange
      transactions must take place through authorized institutions. No representation
      is made that the RMB amounts could have been, or could be, converted into US$
      at
      the rates used in translation.




F-13




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**


**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**




*(L)
        Revenue Recognition*




Revenue
        is recognized when services have been rendered to the customer when a formal
        arrangement exists whereupon, the price is fixed or determinable, and delivery
        is completed, as well as 14ollectability is reasonably assured. Payments
        received before all relevantcriteria are recognized, are recorded as unearned
        revenue. Net sales consist of gas and connection fee revenue, whereas cost
        of
        sales consists of gas and connection cost. Gas connection revenue is recognized
        when the outcome of a contract can be estimated reliably and the stage of
        completion can be measured reliably. Sales of natural gas are recognized
        when
        goods have been delivered and title has passed.




*(M)* *Other Income*




Other
      income represents the Company’s share of post- acquisition results of its
      investment in equity securities for the year.




*(N)* *Income Taxes*




The
      Company uses the accrual method of accounting to determine and report its
      taxable income and uses the flow through method to account for tax credits,
      which are reflected as a reduction of income taxes for the year in which they
      are available. The Company has implemented *Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
      Income Taxes.*





Income
      tax liabilities computed according to the United States and the People’s
      Republic of China (PRC) tax laws are provided for the tax effects of
      transactions reported in the financial statements and consists of taxes
      currently due plus deferred taxes related primarily to differences between
      the
      basis of fixed assets and intangible assets for financial and tax reporting.
      The
      deferred tax assets and liabilities represent the future tax return consequences
      of those differences, which will either be taxable or deductible when the assets
      and liabilities are recovered or settled. Deferred taxes also are recognized
      for
      operating losses that are available to offset future income taxes. A valuation
      allowance is created to evaluate deferred tax assets if it is more likely than
      not that these items will either expire before the Company is able to realize
      that tax benefit, or that future realization is uncertain.





In
      respect of the Company’s subsidiaries domiciled and operated in China, the
      taxation of these entities can be summarized as follows:





Pursuant
      to the tax laws of PRC, general enterprises are subject to income tax at an
      effective rate of 33%. Beijing Gas is in the natural gas industry whose
      development is encouraged by the government. According to the income tax
      regulation, any company engaged in the natural gas industry enjoys a favorable
      tax rate. Also, Beijing Gas is exempt from corporate income tax for its first
      two years and is then entitled to a 50% tax reduction for the succeeding three
      years. The Company’s first profitable tax year was 2003. Accordingly, the
      Company’s income is subject to a reduced tax rate of 7.5%. From 2008 onwards,
      the Company’s income is subject to a reduced tax rate of 9%. Subsidiaries of
      Beijing Gas are subject to the effective rate of 33%.




F-14




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**


**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**




The
      Company is subject to United States Tax according to Internal Revenue Code
      Sections 951 and 957. Corporate income tax is imposed on graduated rates in
      the
      range of:




Taxable
                IncomeRate
            
            Over
            
            But
                not over
            
            Of Amount Over15%
            
            
            0
            
            
            50,000
            
            
            025%
            
            
            50,000
            
            
            75,000
            
            
            50,00034%
            
            
            75,000
            
            
            100,000
            
            
            75,00039%
            
            
            100,000
            
            
            335,000
            
            
            100,00034%
            
            
            335,000
            
            
            10,000,000
            
            
            335,00035%
            
            
            10,000,000
            
            
            15,000,000
            
            
            10,000,00038%
            
            
            15,000,000
            
            
            18,333,333
            
            
            15,000,00035%
            
            
            18,333,333
            
            
            -
            
            
            0





The
      Company, after a reverse-merger on September 7, 2006, revived to be an active
      business enterprise because of the operations of its subsidiaries in China.
      Based on the consolidated net income of 2006, the Company shall be taxed at
      the
      34% tax rate. Please refer to Note 12 for provision of United States and PRC
      Income Taxes.




*(O)* *Advertising*




The
      Company expensed all advertising costs as incurred.




*(P)
        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.




*(Q)
        Retirement Benefits*




Retirement
      benefits in the form of contributions under defined contribution retirement
      plans to the relevant authorities are charged to the statements of income as
      incurred.




F-15




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**


**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**




*(R)
        Statutory Surplus Reserves*




As
      stipulated by the Company Law of the People's Republic of China (PRC) as
      applicable to Chinese companies with foreign ownership, net income after
      taxation can only be distributed as dividends after appropriation has been
      made
      for the following:


i.
              Making
                  up cumulative prior years' losses, if
                  any;
 
 ii.
              Allocations
                  to the "Statutory surplus reserve" of at least 10% of income after
                  tax, as
                  determined under PRC accounting rules and regulations, until the
                  fund
                  amounts to 50% of the Company's registered
                  capital;
 
 iii.
              Allocations
                  of 5-10% of income after tax, as determined under PRC accounting
                  rules and
                  regulations, to the Company's "Statutory common welfare fund",
                  which is
                  established for the purpose of providing employee facilities and
                  other
                  collective benefits to the Company's employees;
                  and
 
 iv.
              Allocations
                  to the discretionary surplus reserve, if approved in the shareholders'
                  general meeting.




The
      Company has appropriated $805,302 as reserve for the statutory surplus reserve
      and welfare fund for the year ended December 31, 2006.





Surplus
      reserves consist of the following as of December 31, 2006





Statutory
                surplus reserve
            
            $
            1,346,053Statutory
                common welfare fund
            
            
            678,969$
            2,025,022




*(S)
        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.




*(T)
        Comprehensive Income*




Comprehensive
      income is defined to include all changes in equity except those resulting from
      investments by owners and distributions to owners. Among other disclosures,
      all
      items that are required to be recognized under current accounting standards
      as
      components of comprehensive income are required to be reported in a financial
      statement that is presented with the same prominence as other consolidated
      financial statements. The Company’s current component of other comprehensive
      income is the foreign currency translation adjustment.




F-16




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**




**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**




*(U)
        Recent Accounting Pronouncements*




In
      July
      2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
      Interpretation of FASB Statement No. 109, which clarifies the accounting for
      uncertainty in tax positions. This Interpretation requires that the Company
      recognizes in its consolidated financial statements the impact of a tax position
      if that position is more likely than not of being sustained on audit, based
      on
      the technical merits of the position. The provisions of FIN 48 are effective
      for
      the Company on January 1, 2007, with the cumulative effect of the change in
      accounting principle, if any, recorded as an adjustment to opening retained
      earnings.





In
      September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
      fair value, establishes a framework for measuring fair value in generally
      accepted accounting principles, and expands disclosures about fair value
      measurements. SFAS 157 applies under other accounting pronouncements that
      require or permit fair value measurements, where fair value is the relevant
      measurement attribute. The standard does not require any new fair value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007, and interim periods within those fiscal
      years.





In
      September 2006, the SEC issued SAB No. 108, which provides guidance on the
      process of quantifying financial statement misstatements. In SAB No. 108, the
      SEC staff establishes an approach that requires quantification of financial
      statement errors, under both the iron-curtain and the roll-over methods, based
      on the effects of the error on each of the Company’s financial statements and
      the related financial statement disclosures. SAB No.108 is generally effective
      for annual financial statements in the first fiscal year ending after November
      15, 2006. The transition provisions of SAB No. 108 permits existing public
      companies to record the cumulative effect in the first year ending after
      November 15, 2006 by recording correcting adjustments to the carrying values
      of
      assets and liabilities as of the beginning of that year with the offsetting
      adjustment recorded to the opening balance of retained earnings.





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




F-17




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**




**PLEDGE
        BANK DEPOSITS**




Pledged
        bank deposits are restricted cash with bank for general banking
        facilities.




**3.
        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.





In
      general for construction projects, deposits of 30% of total contract sum are
      received from client when the project commences. Second payment of 30% is
      received after the construction is completed for around 6 months. The final
      sum
      of the remaining portion normally acts as retention money for quality warrantee
      to the developer. The retention money would be received by the company after
      the
      1 year warrantee period.





The
      phrase "receivables are due within one year of aging" means the receivable
      that
      are within one year of aging.





The
      "amounts are not due within one year" are mostly retention money from
      construction sales that are based on contracts. The continued demand from the
      natural gas sales from them also help assure the amount could be collected.
      No
      experience of wholly-unsettled accounts receivable in the year December 31,
      2005
      and 2004.





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
      historical write-off experience, customer specific facts and economic
      conditions. Bad debt expense is included in the general and administrative
      expenses.





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 the potential for recovery is considered remote. 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, for the residential customer, we collect
      prepayment from customers; for the industrial customers, we settle the payment
      based on the contract terms signed, from 10 days to one month; for the
      construction business, we collect the payment from customer based on the
      percentage of the construction progress. The risk that business faces from
      inability to collect account is Operation risk in industrial
      customers.





based
        on
        the percentage of the construction progress. The risk that business faces
        frominability to collect account is Operation risk in industrial
        customers .




Accounts Receivable2006
              
              2005Gross
                  accounts receivable
              
              
              6,567,678
              
              
              7,799,210Allowance
                  for bad debt
              
              
              (32,838
              )
              
              (29,042
              )Net
                  accounts receivable
              
              
              6,534,740
              
              
              7,770,168




Allowance for Bad Debt2006
              
              2005Beginning
                  balance
              
              
              29,042
              
              
              34,532Addition
              
              
              24,125
              
              
              18,682Less
                  – write off
              
              
              (20,329
              )
              
              (24,172
              )Ending
                  balance
              
              
              32,838
              
              
              29,042




Accounts Receivable Aging Report**2006**
              
              **2005**30
                  Days
              
              $
              5,481,051
              
              $
              6,517,27330-60
                  Days
              
              
              14,672
              
              
              17,44660-90
                  Days
              
              
              333,123
              
              
              396,10290-180 Days —  180-360 Days
              
              
              42,612
              
              
              50,669>360
                  Days
              
              
              663,282
              
              
              788,679Total
              
              $
              6,534,740
              
              $
              7,770,168





The
      followings are the largest ten accounts receivable as at December 31
      2006





Shanghai
                Datun Energy Resources Co., Ltd
            
            $
            1,509,641Jinzhou
                City & Town Development & Construction Co.,Ltd
            
            
            639,591Xuzhou
                Ganglong Real Estate Development Co.,Ltd
            
            
            559,232Kailuan(Group)
                Weizhou Coal Mining Co.,Ltd
            
            
            532,139Hebei
                Zhong Gang Steel Co., Ltd
            
            
            440,5861st
                Machinery Works of North China Petroleum
            
            
            383,754Beijing
                Kailong Real Estate Development Co.,Ltd
            
            
            299,328Beijing
                Xincheng Real Estate Development Co.,Ltd
            
            
            282,604Pei
                Xian Zheng Yuan Construction Engineering Co
            
            
            258,906Beijing
                Hong Ji Co., Ltd
            
            
            227,754$
            5,133,535





All
      of
      the above accounts receivable are due within one year of aging.




**4.
        OTHER RECEIVABLES**




Other
      receivables at December 31, consist of the following:





2006
            
            2005Deposit
                paid
            
            $
            543,013
            
            $
            104,483Amounts
                due from employees
            
            
            86,464
            
            
            188,715Amounts
                due from shareholders
            
            
            -
            
            
            22,004Sundry
                receivables
            
            
            634,323
            
            
            122,720$
            1,263,800
            
            $
            437,922





Amounts
      due from employees are advances for business traveling and purchases of
      consumables. All the amounts due from employees/shareholders are unsecured,
      interest free, and without fixed repayment terms.





Sundry
      receivables is the "the prepayment to customers".




F-18




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**




**5.
        PLANT AND EQUIPMENT, NET**




Plant
      and
      Equipment consist of the following as of December 31:





2006
            
            2005*At
                Cost*Gas
                Pipelines
            
            $
            8,255,231
            
            $
            2,819,341Motor
                Vehicles
            
            
            2,204,621
            
            
            99,376Machinery
                & Equipment
            
            
            273,943
            
            
            253,536Buildings
            
            
            89,799
            
            
            86,952Leasehold
                Improvements
            
            
            47,543
            
            
            46,036Office
                Equipment
            
            
            67,774
            
            
            41,607$
            10,938,911
            
            $
            3,346,848*Less:
                Accumulated depreciation*Gas
                Pipelines
            
            $
            203,005
            
            $
            80,557Motor
                Vehicles
            
            
            48,846
            
            
            21,319Machinery
                & Equipment
            
            
            38,999
            
            
            23,969Buildings
            
            
            6,825
            
            
            3,304Leasehold
                Improvements
            
            
            19,613
            
            
            9,849Office
                Equipment
            
            
            13,093
            
            
            7,168$
            330,381
            
            $
            146,166$
            10,608,530
            
            $
            3,200,682





Depreciation
      and amortization expense is included in the consolidated statements of income
      and comprehensive income for the year December 31, 2006 is as
      follows:





2006
            
            2005Cost
                of revenues
            
            $
            87,155
            
            $
            79,118Selling
                and marketing expenses
            
            
            18,645
            
            
            2,413General
                and administrative expenses
            
            
            49,574
            
            
            50,334$
            155,374
            
            $
            131,865




F-19




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**




**6.
        INTANGIBLE ASSETS**




Intangible
        assets consist of the following as of December 31:





2006
              
              2005Land
                  use rights
              
              $
              112,565
              
              $
              99,881Franchises
              
              
              336,318
              
              
              337,012Other
                  intangibles
              
              
              8,947
              
              
              372Less:
                  Accumulated amortization
              
              
              -
              
              
              -$
              457,830
              
              $
              437,265





The
        Company operates as a local natural gas distributor in a city or county,
        known
        as an operation location, under an exclusive franchise agreement between
        the
        Company and the local government or entities in charge of gas utility.
        Franchises are the rights to develop sites in Anping and Jinzhou in China.
        They
        are stated at cost less accumulated depreciation.





**7.
        SHORT-TERM BANK LOANS**




Short-term
      bank loans are as follows:




2006
            
            2005Loans
                from Shen Zhen Development Bank Co., Ltd,interest
                rate at 5.022% per annumDue
                May 22, 2007
            
            $
            2,430,445
            
            $
            -





Interest
      expense for the short term bank loans was $9,522 for the year ended December
      31,
      2006.




F-20




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**




**8.**  **OTHER
        PAYABLES**





Other
      payables at December 31, 2005 and 2006 consist of the following:





2006
            
            2005Deposit
                received
            
            $
            -
            
            $
            67,934Amounts
                due to employees
            
            
            11,360
            
            
            3,528Employees’
                welfare payables
            
            
            56,584
            
            
            50,207Tax
                payable
            
            
            1,089,804
            
            
            790,057Loan
                from an unrelated company - Qian Shi Li
            
            
            -
            
            
            681,250Loan
                from an unrelated company - Shi Yi Long Da
            
            
            -
            
            
            500,409Sundry
                payables
            
            
            632,752
            
            
            171,580$
            1,790,500
            
            $
            2,264,965





All
      the
      amounts due to employees are unsecured, interest free, and have no fixed
      repayment terms. Loan from Shenzhen Shi Yi Long Da Co., Ltd (Shi Yi Long Da)
      is
      unsecured, interest at 6% per annum and due October 2006. This money has been
      paid on October 2006. Loan from Beijing Qian Shi Li Technology Development
      Co.,Ltd (Qian Shi Li) is unsecured, interest free, and have no fixed repayment
      terms.





9.
        Investment




**Investment
        on Beijing Zhongran Xiangke Oil Gas Technology Co.
        Ltd**





12/31/2006
              
              12/31/2005As
                  of December 31,
              
              $
              2,939,029
              
              $
              2,443,378





The
        following is the Balance Sheets of Beijing Zhongran Xiangke Oil Gas Technology
        Co., Ltd as of December 31, 2006 and 2005, and the related statements of
        Income
        for the year then ended.





Beijing
        Zhongran Xiangke Oil Gas Technology Co., Ltd


Balance
        Sheet


As
        of
        December 31, 2006 and 2005





2006
              
              2005AssetsCurrent
                  Assets
              
              $
              4,583,010
              
              $
              5,165,230Non-Current
                  Assets
              
              
              11,320,804
              
              
              10,255,897Total
                  Assets
              
              
              15,903,814
              
              
              15,421,127LiabilitiesCurrent
                  Liabilities
              
              
              6,852,718
              
              
              6,666,544Non-CurrentLiabilities
                  -Total
                  Liabilities
              
              
              6,852,718
              
              
              6,666,544Net
                  Assets
              
              $
              9,051,096
              
              $
              8,759,583




Beijing
        Zhongran Xiangke Oil Gas Technology Co., Ltd


Statement
        of Income


For
        the
        years ended December 31, 2006 and 2005





2006
              
              2005Sales
                  revenue
              
              $
              6,795,876
              
              $
              7,403,567Cost
                  of revenue
              
              
              3,984,152
              
              
              4,126,281Gross
                  profit
              
              
              2,811,724
              
              
              3,277,286Operating
                  expenses
              
              
              1,518,622
              
              
              1,781,028Other
                  income/(expense)
              
              
              (192,810
              )
              
              (437,437
              )Earnings
                  before taxation
              
              
              1,100,292
              
              
              1,343,591Income
                  tax
              
              
              (82,522
              )
              
              (99,477
              )Net
                  income
              
              $
              1,017,770
              
              $
              1,244,114




**10.**  **CAPITAL
      STOCK**





The
      authorized capital stock consists of (i) 250,000,000 shares of common stock,
      par
      value $0.001 per share, of which there are 14,692,647 shares issued and
      outstanding, and (ii) 100,000,000 shares of preferred stock, par value $0.001
      per share. The preferred stock consists of (i) series A convertible preferred
      stock, of which 20,000,000 shares have been authorized and no shares are issued
      and outstanding; and (ii) series B convertible preferred stock, of which
      5,000,000 shares have been authorized and 4,023,268 shares are issued and
      outstanding.





The
      following is a summary of the material terms of its capital stock. This summary
      is subject to and qualified in its entirety by its Articles of Incorporation,
      as
      amended and corrected, certificates of designations for its series A and series
      B convertible preferred stock, its by-laws and by the applicable provisions
      of
      Utah law.





The
      Company is authorized to issue 250,000,000 shares of common stock, with a par
      value of $0.001. There are 14,692,647 shares of common stock issued and
      outstanding as of December 31, 2006. All shares of common stock have one vote
      per share on all matters including election of directors, without provision
      for
      cumulative voting. The common stock is not redeemable and has no conversion
      or
      preemptive rights. The common stock currently outstanding is validly issued,
      fully paid and non-assessable. In the event of liquidation of the company,
      the
      holders of common stock will share equally in any balance of the company's
      assets available for distribution to them after satisfaction of creditors and
      preferred shareholders, if any. The holders of common stock are entitled to
      equal dividends and distributions per share with respect to the common stock
      when, as and if, declared by the board of directors from funds legally
      available.




F-21




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**





**10.**  **CAPITAL
      STOCK (CONT’D)**





*Preferred
      Stock*





In
      addition to the 250,000,000 shares of common stock, The Company is authorized
      to
      issue 100,000,000 shares of preferred stock, with a par value of $0.001 per
      share. Shares of the preferred stock may be issued from time to time in one
      or
      more classes or series, each of which class or series shall have such
      distinctive designation or title as shall be fixed by the board of directors
      prior to the issuance.





On
      August
      30, 2006, the Company’s board of directors designated 20,000,000 shares of its
      authorized $0.001 par value per share preferred stock as series A convertible
      preferred stock and 5,000,000 shares of its preferred stock as series B
      convertible preferred stock. On August 31, 2006, the Company filed certificates
      of designations for the series A and series B convertible preferred stock with
      the Office of the Secretary of State of Utah. On September 6, 2006, the board
      of
      directors amended the designations of the Series B convertible preferred stock
      and the Company filed an amended certificate of designations for the Series
      B
      convertible preferred stock with the Office of the Secretary of State of Utah.
      The board of directors created the series A convertible preferred stock to
      allow
      the Company to consummate the share exchange transaction with the Gas (BVI)
      Shareholders and the series B convertible preferred stock in connection with
      its
      private financing transactions, although the Company does not have sufficient
      unissued authorized common stock to allow for a complete conversion. Each of
      the
      shares of series A convertible preferred stock was automatically converted
      into
      one share of its common stock upon the effectiveness of its reverse stock-split
      on November 17, 2006. Therefore, as of December 31, 2006, the Company has no
      shares of series A convertible preferred stock issued and
      outstanding.





*Conversion*





The
      Company issued 14,361,646 of its common shares upon the automatic conversion
      of
      its series A convertible preferred shares after the 304.44-for-1 reverse
      stock-split on November 17, 2006. The Company no longer has any series A
      convertible preferred shares outstanding.





Each
      share of the series B convertible preferred stock will become convertible into
      common stock, at the option of its holder after the 304.44-for-1 reverse
      stock-split, based on the then applicable conversion rate, which is initially
      one share of series B convertible preferred stock for one share of common
      stock.





The
        following table depicts an analysis of total capitalization for the issuance
        of
        Preferred Stock B, Common Stock, and the related additional paid in capital
        as
        of December 31, 2006:





**Preferred Stock B**
              
              **Common Stock**
              
              **Additional**
              
              **% of****Number of Shares**
              
              
              
              **Number of Shares**
              
              
              
              **Paid in**
              
              **Equity****Name of Shareholder**
              
              **Outstanding**
              
              **Capital**
              
              **Outstanding**
              
              **Capital**
              
              **Capital**
              
              **Holdings**Investors
                  Private Placement
              
              
              4,023,268
              
              
              4,023
              
              
              
              
              
              
              
              
              7,256,526
              
              
              21.50
              %Management
                  / Insider
              
              
              
              
              
              
              
              
              12,653,660
              
              
              12,654
              
              
              4,252,959
              
              
              67.61
              %Investors
              
              
              
              
              
              
              
              
              2,039,526
              
              
              2,040
              
              
              559,691
              
              
              10.90
              %Beneficial Conversion Feature-
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,418,864
              
              
              -4,023,268
              
              
              4,023
              
              
              14,693,186
              
              
              14,694
              
              
              18,488,040
              
              
              100.00
              %





F-22




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**





**11.**  **INCOME
        TAX**





In
      accordance with the relevant tax laws and regulations of PRC, the corporation
      income tax rate is 33%. However, in accordance with the relevant taxation laws
      in the PRC, the Group is eligible for tax concessions and was exempted from
      part
      of the PRC income taxes for the year.





The
      following table accounts for the differences between the actual tax provision
      and the amounts obtained by applying the applicable PRC corporation income
      tax
      rate of 33% to income before taxes for the years ended December
      31,.




2006
              
              2005Income
                  before taxation
              
              $
              5,496,573
              
              $
              6,234,348Provision
                  for income taxes at PRC income tax rate
              
              
              1,690,409
              
              
              2,057,335Effect
                  of tax exemption granted to the Company
              
              
              (1,267,125
              )
              
              (1,525,420
              )U.S.
                  Income Tax Provision
              
              
              -
              
              
              -Income
                  tax
              
              $
              423,284
              
              $
              531,915




F-23




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**





**12.**  **BUSINESS
        SEGMENT**





The
      Company has contracted with customers usually in two business segments
      altogether, one is for the construction and installation of gas facilities
      and
      another one is the subsequent sales of gas to that customers through the gas
      facilities the Company constructs. However, the respective gas facilities
      contracts and gas supply contracts have separately provided for the basis of
      revenue recognition and distinctive from each other for the relevant
      cost-and-revenue to be incurred and hence separate calculation and subsequent
      payment of fees for respective business without any interdependence on each
      other in this respect.





For
      management purposes, the company is currently organized into two major operating
      divisions - gas pipeline construction (installation of gas facilities) and
      sales
      of piped gas. These principal operating activities are the basis on which the
      Company reports its primary segment information.





**Balance
        Sheet as Segment Reporting**


**As
        of December 31, 2006**





Gas pipelineGas Distribution
              
              Installation
              
              Others
              
              TotalAssetsCurrent
                  Assets
              
              $
              6,236,877
              
              $
              3,795,902
              
              $
              5,216,552
              
              $
              15,249,331Non-Current
                  Assets
              
              
              4,687,342
              
              
              13,946,123
              
              
              -
              
              
              18,633,465Total
                  Assets
              
              
              10,924,219
              
              
              17,742,025
              
              
              5,216,552
              
              
              33,882,796LiabilitiesCurrent
                  Liabilities
              
              
              722,382
              
              
              7,730,484
              
              
              115,617
              
              
              8,568,483Total
                  Liabilities
              
              
              722,382
              
              
              7,730,484
              
              
              115,617
              
              
              8,568,483Net
                  Assets
              
              $
              10,201,837
              
              $
              10,011,541
              
              $
              5,100,935
              
              $
              25,314,313





**Statement
        of Income as Segment Reporting**


**For
        the year ended December 31, 2006**





Gas pipelineGas Distribution
              
              Installation
              
              Others
              
              TotalSales
                  Revenue
              
              $
              3,912,502
              
              $
              6,958,216
              
              
              -
              
              $
              10,870,718Cost
                  of Revenue
              
              
              (2,945,132
              )
              
              (1,444,010
              )
              
              -
              
              $
              (4,389,142
              )Gross
                  Profit
              
              
              967,370
              
              
              5,514,206
              
              
              -
              
              
              6,481,576Operating
                  Expenses
              
              
              (96,534
              )
              
              (1,033,044
              )
              
              (122,050
              )
              
              (1,251,628
              )Other
                  Income
              
              
              7,831
              
              
              83,811
              
              
              174,983
              
              
              266,625Earnings
                  before tax
              
              
              878,667
              
              
              4,564,973
              
              
              52,933
              
              
              5,496,573Income
                  tax
              
              
              (36,250
              )
              
              (387,034
              )
              
              -
              
              
              (423,284
              )Net
                  income
              
              $
              842,417
              
              $
              4,177,939
              
              $
              52,933
              
              $
              5,073,289





**Balance
        Sheet as Segment Reporting**


**As
        of December 31, 2005**





Gas pipelineGas Distribution
              
              Installation
              
              Others
              
              TotalAssetsCurrent
                  Assets
              
              $
              3,747,944
              
              $
              2,281,082
              
              $
              3,134,797
              
              $
              9,163,823Non-Current
                  Assets
              
              
              2,302,438
              
              
              6,850,384
              
              
              -
              
              
              9,152,822Total
                  Assets
              
              
              6,050,382
              
              
              9,131,746
              
              
              3,134,797
              
              
              18,316,645LiabilitiesCurrent
                  Liabilities
              
              
              479,728
              
              
              5,133,746
              
              
              76,780
              
              
              5,690,254Total
                  Liabilities
              
              
              479,728
              
              
              5,133,746
              
              
              76,780
              
              
              5,690,254Net
                  Assets
              
              
              5,570,654
              
              
              3,997,720
              
              
              3,058,017
              
              $
              12,626,391


**Statement
        of Income as Segment Reporting**


**For
        the year ended December 31, 2005**





Gas pipelineGas Distribution
              
              Installation
              
              Others
              
              TotalSales
                  Revenue
              
              
              3,925,664
              
              
              6,981,625
              
              
              -
              
              $
              10,907,289Cost
                  of Revenue
              
              
              (2,772,851
              )
              
              1,359,540
              
              
              -
              
              
              (4,132,391
              )Gross
                  Profit
              
              
              1,152,813
              
              
              5,622,085
              
              
              -
              
              
              6,774,898Operating
                  Expenses
              
              
              (75,118
              )
              
              (803,859
              )
              
              (94,973
              )
              
              (973,949
              )Other
                  Income
              
              
              12,729
              
              
              136,235
              
              
              284,435
              
              
              433,399Earnings
                  before tax
              
              
              1,090,425
              
              
              4,954,460
              
              
              189,462
              
              
              6,234,348Income
                  tax
              
              
              (45,553
              )
              
              (486,362
              )
              
              -
              
              
              (531,915
              )Net
                  income
              
              
              1,044,872
              
              
              4,468,099
              
              
              189,462
              
              $
              5,072,433





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.





**13.**  **COMMITMENTS
        UNDER OPERATING LEASES**





At
      December 31, 2006, the Group had commitment for future minimum lease payments
      under non-cancelable operating leases in respect of office rented premises
      which
      fall due as follows:




2006
            
            2005*Land
                and Buildings*Not
                later than one year
            
            $
            61,401
            
            $
            59,455Later
                than one year and not later than five years
            
            
            245,603
            
            
            237,818After
                five years
            
            
            521,906
            
            
            505,363$
            828,910
            
            $
            802,636




14.Discontinued
        operation




The
        Company executed the disposition agreement with China Zhongshi Co., Ltd of
        selling its subsidiary Anping Weiye Gas Co., Ltd for RMB 3,300,000
        (approximately $433,230) in June 2007. The following is the balance sheet
        and
        statement of income of Anping Weiye Gas Co., Ltd., as of and for the year
        ended
        December 31, 2006




Anping
        Weiye Gas Co., Ltd.




As of and for the year ended December 31, 2006Balance Sheet
                
                Statement of IncomeAssets
                
                
                
                
                
                Sales
                    revenue
                
                $
                -Cost
                    of sales
                
                
                -Current
                    Assets
                
                $
                646,510Non-Current
                    Assets
                
                
                947
                
                
                Gross
                    Profit
                
                
                -Total
                    Assets
                
                
                647,457
                
                
                Operating
                    expense
                
                
                -Liabilities
                
                
                -
                
                
                Other
                    expense
                
                
                (21
                )Current
                    Liabilities
                
                
                7,813
                
                
                Income
                    before tax
                
                
                (21
                )Total
                    Liabilities
                
                
                7,813
                
                
                Income
                    tax
                
                
                -Net
                    Assets
                
                $
                639,644
                
                
                Net
                    Income
                
                $
                (21
                )


15.Earnings
        per share




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





**December 31, 2006**
              ****
              **December 31, 2005**Net
                  Income (A)
              
              $
              5,073,289
              
              $
              5,702,433Constructive
                  Preferred Dividends (B)
              
              
              6,418,864
              
              
              -Income
                  Available to Common Stockholders (C)
              
              $
              (1,345,575
              )
              
              5,702,433Basic
                  Weighted Average Shares Outstanding (D)
              
              
              14,693,186
              
              
              14,361,646Dilutive
                  Shares:-Addition
                  to Common Stock from conversion ofPreferred
                  Stock A
              
              
              -
              
              
              --Addition
                  to Common Stock from conversion ofPreferred
                  Stock B
              
              
              1,005,817
              
              
              --Addition
                  to Common Stock from Exercise ofWarrants
              
              
              -
              
              
              -Diluted
                  Weighted Average Shares Outstanding: (E)
              
              
              15,699,003
              
              
              14,361,646Earnings
                  Per Share-Basic
                  (C)/(D)
              
              $
              (0.09
              )
              $
              0.40-Diluted
                  (C)/(E)
              
              $
              (0.09
              )
              $
              0.40Weighted
                  Average Shares Outstanding-Basic
              
              
              14,693,186
              
              
              14,361,646-Diluted
              
              
              15,699,003
              
              
              14,361,646**Supplemental
                  Data:**Proforma
                  Earnings Per Shares in the Absence of Constructive Preferred
                  Dividend-
                  Basic [(B) + (C)] / (D)
              
              $
              0.35
              
              
              14,361,646-
                  Diluted [(B) + (C)] / (E)
              
              $
              0.32
              
              
              14,361,646Weighted
                  Average Shares Outstanding-Basic
              
              
              14,693,186
              
              
              14,361,646-Diluted
              
              
              15,699,003
              
              
              14,361,646




F-24




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**





**16.**  **RELATED
      PARTIES TRANSACTIONS**





The
      following material transactions with related parties during the years were
      in
      the opinion of the directors, carried out in the ordinary course of business
      and
      on normal commercial terms:





Sales
      to
      Beijing Zhongran Xiangke Oil Gas Technology Co. Ltd (Zhongran Xiangke), an
      investee for which the equity method is used, for the years 2006 and 2005 were
      $334,326 and $1,088,990 respectively. These sales transactions have been
      eliminated upon consolidation. The amounts receivable from Zhongran Xiangke
      for
      the years 2006 and 2005 were nil and $177,401 respectively. Also, included
      in
      the other payables are payables to Zhongran Xiangke for the years 2006 and
      2005
      were $101,592 and $135,792 respectively.





Sales
      to
      Beijing Zhongyou Xiangke Oil Gas Technology Co. Ltd (Zhongyou Xiangke), an
      investee of Zhongran Xiangke, for the years 2006 and 2005 were nil and $64,205
      respectively. These sales transactions have been eliminated upon consolidation.
      The amounts receivable from Zhongyou Xiangke for the years 2006 and 2005 were
      $2,130 and $13,392 respectively.





**17.**  **SUBSEQUENT
      EVENTS**


On
      January 15, 2007, Beijing Gas entered into a stock transfer agreement with
      the
      shareholders of Beijing Chenguang Gas Ltd., Co., a limited liability company
      organized under the laws of the PRC, under which Beijing Gas will acquire all
      the capital stock of Beijing Chenguang for a purchase price of RMB 26 million
      (or approximately $3.35 million) in cash. Upon consummation of the transactions
      contemplated by that agreement, Beijing Chenguang will become a wholly-owned
      subsidiary of Beijing Gas. Beijing Chenguang is primarily engaged in the
      development, transfer and licensing of technologies used in natural gas
      purification, compression and transportation, as well as the installation of
      natural gas equipment and the supply of natural gas.





Under
      the
      Beijing Chenguang agreement, the Company will pay the stock purchase price
      in
      installments. The Company paid the first installment, in the amount of
      10,000,000 RMB, on or about January 22, 2007. The Company will pay the second
      installment, also in the amount of RMB ten million, within 20 business days
      of
      completion by the selling shareholders of all government and legal procedures
      required for the sale. The Company will pay the remaining RMB six million on
      or
      prior to April 30, 2007. The agreement requires that all government and legal
      procedures required for the sale must be completed by the selling shareholders,
      and the title to the shares must be transferred to Beijing Gas, within 20
      business days of the selling shareholders’ receiving the first installment of
      the purchase price.





Pursuant
      to the agreement, Beijing Gas has agreed to acquire 100% of the capital stock
      of
      Beijing Chenguang on or about February 12, 2007. The PRC legal procedures which
      are required to complete the transaction have not been completed, and
      consequently only a portion of the purchase price has been
      paid.


F-25




**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(STATED
      IN US DOLLARS)**





One
      of
      the selling shareholders under the Beijing Chenguang agreement, Mr. Zhou Zhi
      Cheng, has been the Chief Operating Officer of the Company since October 19,
      2006. Mr. Zhou owned 30% of the Beijing Chenguang stock immediately prior to
      the
      signing of the Beijing Chenguang agreement. Mr. Zhou is also a shareholder
      and
      legal representative of another selling shareholder, Beijing Chenguang Weizhong
      Management Technology Consulting Co., Ltd. which owned 10% of the Beijing
      Chenguang stock immediately prior to the signing of the agreement.




F-26




18. **INVESTORS
        RELATIONS STOCK COMPENSATION EXPENSE**





For
        the
        year ended December 31, 2006, the Company recorded $92,468 of stock compensation
        expense for 100,000 stock options granted to the Company’s investor relations
        firm, CCG Elite in 2006. The entire stock option compensation expense was
        recorded under other expense in the Company’s statements of income.The range of
        the exercise prices of the stock options granted are shown in the following table:





**Price Range**
              Number of Shares$0 - $9.99
              100,000 shares$10.00 - $19.99
              0 shares$20.00 - $29.99
              0 shares





The
        Company used the Black-Scholes model to value the options granted. The following
        shows the weighted average fair value of the grants and the assumptions that
        were employed in the model:





Weighted-average
                  fair value of grants:
              
              $
              0.92Risk-free
                  interest rate:
              
              
              4.176
              %Expected
                  volatility:
              
              
              40.00
              %Expected
                  life in months:
              
              
              48 months





19. **ACQUISITIONS**





The
        Company has two acquisitions during the year 2006, the purchase of (1)
        Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd. and (2) Yuxian Jinli Gas
        Co.,
        Ltd .On December 1, 2006 the Company, through its Beijing Gas subsidiary,
        acquired Zhangjiakou City Xiahua yuan Jinli Gas Co., Ltd. (“Xiahuayuan”) for
        $250,567 (RMB 2,000,000), at which point the Xiahuayuan became a wholly owned
        subsidiary of the Company. The acquisition was paid entirely in cash without
        having to pay goodwill. On December 1, 2006 the Company, through its Beijing
        Gas
        subsidiary, acquired Yuxian Jinli Gas Co., Ltd. (“Yuxian”) for $1,190,194 (RMB
        $9,500,000), at which point the Yuxian became a wholly owned subsidiary of
        the
        Company. The acquisition was paid entirely in cash without having to pay
        goodwill.


F-27