**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**




**FORM
        10-Q**
  (Mark
        one)
  x
              Quarterly
                  Report Under Section 13 or 15(d) of the Securities Exchange Act of
                  1934
  For
        the
        Quarterly Period Ended September 30, 2008
  or
  o
              Transition
                  Report Under Section 13 or 15(d) of the Securities Exchange Act of
                  1934
  **Commission
        File Number 000-51364**
  
 **SINO
        GAS INTERNATIONAL HOLDINGS, INC.**
 (Name
        of
        small business issuer in its charter)
  **Utah**
              **32-0028823****(State
                  or other jurisdiction**
                **of
                  incorporation or organization)**
              **(I.R.S.
                  Employer**
                **Identification
                  No.)**
 
 **No.18
                  Zhong Guan Cun Dong St.**
                **Haidian
                  District**
                **Beijing,
                  P. R. China**
              **100083****(Address
                  of principal executive offices)**
              **(Zip
                  Code)**
  **Issuer’s
        telephone number:  86-10-82600527**
 
 
  Check
        whether the issuer (1) has filed all reports required to be filed by
        Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
        such shorter period that the Registrant was required to file such reports),
        and
        (2) has been subject to such filing requirements for the past 90
        days.    Yes x No o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
                  accelerated filero
              Accelerated
                  fileroNon-accelerated
                  filero
                (Do
                  not check if a smaller reporting company)
              Smaller
                  reporting companyx
  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
  As
        of
        November 13, 2008, the Registrant had 25,084,644 shares of common stock
        outstanding.
  
  Sino
        Gas
        International Holdings, Inc.
  Table
        of
        Contents
  PagePART
                  I -
              FINANCIAL
                  INFORMATIONItem
                  1.
              Financial
                  Statements
              1Notes
                  to Financial Statements (Unaudited)
              7Item
                  2.
              Management's
                  Discussion and Analysis or Plan of Operation
              29Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              43Item
                  4.
              Controls
                  and Procedures
              43PART
                  II -
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              44Item
                  1A.
              Risk
                  Factors
              44Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              44Item
                  3.
              Defaults
                  Upon Senior Securities
              44Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders.
              44Item
                  5.
              Other
                  Information
              44Item
                  6.
              Exhibits
              45
   2
 **PART
        I - FINANCIAL INFORMATION**
   **Item
        1. Financial Statement**
 **Sino
          Gas International Holdings, Inc.**
 
 **Reviewed
          Consolidated Financial Statements**
 
 **September
          30, 2008 and December 31, 2007**
 
 **(Stated
          in US Dollars)**
   3
 
 **SINO
          GAS INTERNATIONAL HOLDINGS, INC.**
 
 
 **CONTENTS**
                
                **PAGES**REPORT
                    OF INDEPENDENT REGISTERED PUBLIC ACCOUTANTING FIRM
                
                
                1CONSOLIDATED
                    BALANCE SHEETS3
                
                
                2CONSOLIDATED
                    STATEMENTS OF INCOME
                
                
                3-4CONSOLIDATED
                    STATEMENTS OF STOCKHOLDERS’ EQUITY5
                
                
                5-6CONSOLIDATED
                    STATEMENTS OF CASH FLOWS
                
                
                7NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS7
                    - 10
                
                
                8
                    - 29
   4
  Board
          of
          Directors and Stockholders
 Sino
          Gas
          International Holdings, Inc.
 
 
 **Report
          of Independent Registered Public Accounting Firm**
 
 
 We
          have
          reviewed the accompanying consolidated interim balance sheets of Sino Gas
          International Holdings, Inc. as of September 30, 2008 and December 31,
          2007, and
          the related consolidated statements of income, stockholders’ equity, and cash
          flows for the three-month and nine-month periods ended September 30, 2008
          and
          2007. These consolidated interim financial statements are the responsibility
          of
          the Company's management.
 
 We
          conducted our reviews in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). A review of interim financial
          statements consists principally of applying analytical procedures and making
          inquiries of persons responsible for financial and accounting matters.
          It is
          substantially less in scope than an audit conducted in accordance with
          the
          standards of the Public Company Accounting Oversight Board, the objective
          of
          which is the expression of an opinion regarding the financial statements
          taken
          as a whole. Accordingly, we do not express such an opinion.
 
 Based
          on
          our review, we are not aware of any material modifications that should
          be made
          to the accompanying consolidated interim financial statements for them
          to be in
          conformity with U.S. generally accepted accounting principles.
  
 
 South San Francisco, California
                  October 30, 2008
                Samuel H. Wong & Co., LLP
                  Certified Public
                    Accountants
  5
 
 **Sino
                    Gas International Holdings, Inc.****Consolidated
                    Balance Sheets****As
                    of September 30, 2008 and December 31, 2007****(Stated
                    in US Dollars)**
 
 **ASSETS**
                
                
                
                **September
                    30, 2008**
                
                **December
                    31, 2007****Note**
                
                **Unaudited**
                
                **Audited**Current
                    AssetsCash
                    & cash equivalents
                
                
                2*(e)*
                
                $
                6,545,424
                
                $
                10,915,590Restricted
                    cash
                
                
                3
                
                
                386,155
                
                
                478,920Notes
                    receivable
                
                
                
                
                
                364,692
                
                
                825,119Accounts
                    receivable
                
                
                2*(f),*4
                
                
                6,234,020
                
                
                7,315,253Other
                    receivables
                
                
                5
                
                
                4,283,720
                
                
                3,100,695Inventory
                
                
                
                
                
                264,043
                
                
                207,976Advances
                    to suppliers
                
                
                2*(g)*
                
                
                3,271,841
                
                
                27,372Prepayments
                    and others
                
                
                
                
                
                413,993
                
                
                320,380Total
                    Current Assets
                
                
                
                
                
                21,763,888
                
                
                23,191,305Non-Current
                    AssetsInvestment
                
                
                2*(h)*
                
                
                4,393,194
                
                
                4,007,310Property,
                    plant & equipment,*net*
                
                
                2*(j),*6
                
                
                27,256,377
                
                
                24,572,565Construction
                    in progress
                
                
                2*(l)*
                
                
                16,365,966
                
                
                11,556,820Intangible
                    assets,*net*
                
                
                2*(k),*7
                
                
                2,199,211
                
                
                2,028,250Total
                    non-current assets
                
                
                
                
                
                50,214,748
                
                
                42,164,945**TOTAL
                    ASSETS**
                
                
                
                
                $
                71,978,636
                
                $
                65,356,250**LIABILITIES
                    & STOCKHOLDERS' EQUITY**Current
                    LiabilitiesBank
                    Loans
                
                
                8
                
                $
                4,376,304
                
                $
                2,734,444Accounts
                    payable
                
                
                
                
                
                4,450,222
                
                
                716,707Other
                    payables
                
                
                9
                
                
                7,188,484
                
                
                10,383,657Unearned
                    revenue
                
                
                2*(m)*
                
                
                1,182,990
                
                
                312,573Accrued
                    liabilities
                
                
                
                
                
                10,369
                
                
                362,263Total
                    current liabilities
                
                
                
                
                
                17,208,369
                
                
                14,509,644**TOTAL
                    LIABILITIES**
                
                
                
                
                $
                17,208,369
                
                $
                14,509,644
 
 
 See
          accompanying notes to financial statements and accountant’s report
  6
  **Sino
                    Gas International Holdings, Inc.****Consolidated
                    Balance Sheets****As
                    of September 30, 2008 and December 31, 2007****(Stated
                    in US Dollars)**
 
 **September
                    30, 2008**
                
                **December
                    31, 2007****Note**
                
                **Unaudited**
                
                **Audited****STOCKHOLDERS'
                    EQUITY**Preferred
                    Stock A US $0.001 par value; 20,000,000 shares authorized; 0
                    and 275,111
                    shares issued and outstanding as of September 30, 2008 and December
                    31,
                    2007 respectively
                
                
                10
                
                $
                -
                
                $
                275Preferred
                    Stock B US $0.001 par value; 5,000,000 shares authorized; 4,579,839
                    and
                    4,971,859 shares issued and outstanding as of September 30, 2008
                    and
                    December 31, 2007 respectively
                
                
                10
                
                
                4,580
                
                
                4,972Preferred
                    Stock B-1 US $0.001 par value; 10,000,000 shares authorized;
                    95,418 and 0
                    shares issued and outstanding as of September 30, 2008 and December
                    31,
                    2007 respectively
                
                
                
                
                
                95
                
                
                -Common
                    Stock US $0.001 par value; 250,000,000 shares authorized; 26,769,313
                    and
                    25,282,380 shares issued and outstanding as of September 30,
                    2008 and
                    December 31, 2007 respectively
                
                
                10
                
                
                26,769
                
                
                25,283Additional
                    Paid in Capital
                
                
                
                
                
                34,853,735
                
                
                35,247,303Statutory
                    Reserve
                
                
                
                
                
                3,258,201
                
                
                3,258,201Retained
                    Earnings
                
                
                
                
                
                11,088,461
                
                
                10,432,430Accumulated
                    Other Comprehensive Income
                
                
                
                
                
                5,538,425
                
                
                1,878,142**TOTAL
                    STOCKHOLDERS' EQUITY**
                
                
                
                
                
                54,770,266
                
                
                50,846,606**TOTAL
                    LIABILITIES AND****STOCKHOLDERS'
                    EQUITY**
                
                
                
                
                $
                71,978,636
                
                $
                65,356,250
 
 See
          accompanying notes to financial statements and accountant’s report
 
 7
 
 **Sino
                    Gas International Holdings, Inc.****Consolidated
                    Statements of Income****For
                    the three months and nine months periods ended September 30,
                    2008 and
                    2007****(Stated
                    in US Dollars)**
 
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****Sep
                    30,**
                
                **Sep
                    30,****2008**
                
                **2007**
                
                **2008**
                
                **2007**Sales
                    Revenue
                
                $
                5,440,212
                
                $
                5,652,240
                
                $
                14,903,850
                
                $
                10,886,612Cost
                    of Revenue
                
                
                (3,160,189
                )
                
                (1,965,085
                )
                
                (9,690,253
                )
                
                (5,696,918
                )Gross
                    Profit
                
                
                2,280,022
                
                
                3,687,155
                
                
                5,213,597
                
                
                5,189,694Operating
                    ExpensesSelling
                    and marketing expenses
                
                
                (226,678
                )
                
                (176,739
                )
                
                (594,575
                )
                
                (376,233
                )General
                    & administrative expenses
                
                
                (650,119
                )
                
                (621,952
                )
                
                (2,646,999
                )
                
                (1,310,811
                )Total
                    operating expenses
                
                
                (876,798
                )
                
                (798,691
                )
                
                (3,241,573
                )
                
                (1,687,044
                )Operating
                    Income/(Loss)
                
                
                1,403,225
                
                
                2,888,464
                
                
                1,972,024
                
                
                3,502,650Other
                    Income (Expenses)Other
                    income
                
                
                58,913
                
                
                -
                
                
                673
                
                
                9,046Other
                    expenses
                
                
                (27,541
                )
                
                (25,978
                )
                
                (511,467
                )
                
                (13,197
                )Interest
                    income
                
                
                26,970
                
                
                -
                
                
                72,632
                
                
                11,527Interest
                    expense
                
                
                -
                
                
                -
                
                
                (157,057
                )
                
                -Total
                    other income (expense)
                
                
                58,342
                
                
                (25,978
                )
                
                (595,220
                )
                
                7,376Earnings
                    before tax
                
                
                1,461,567
                
                
                2,862,486
                
                
                1,376,804
                
                
                3,510,026Income
                    tax
                
                
                (417,975
                )
                
                (227,887
                )
                
                (720,773
                )
                
                (255,230
                )Net
                    Income
                
                $
                1,043,591
                
                $
                2,634,599
                
                $
                656,031
                
                $
                3,254,796Earnings
                    per shareBasic
                
                $
                0.039
                
                $
                0.147
                
                $
                0.025
                
                $
                0.206Diluted
                
                $
                0.033
                
                $
                0.121
                
                $
                0.021
                
                $
                0.166Weighted
                    Average Shares OutstandingBasic
                
                
                26,769,291
                
                
                17,889,867
                
                
                26,568,884
                
                
                15,779,750Diluted
                
                
                31,169,437
                
                
                21,856,124
                
                
                31,169,437
                
                
                19,573,911
 
 See
          accompanying notes to financial statements and accountant’s report
 
 8
  **Sino
                    Gas International Holdings, Inc.****Consolidated
                    Statements of Stockholders’ Equity****As
                    of September 30, 2008 and December 31, 2007****(Stated
                    in US Dollars)**
 
 Preferred
                    Stock A
                
                Preferred
                    Stock B
                
                Preferred
                    Stock B-1
                
                Common
                    StockShares
                    Outstanding
                
                Amount
                
                Shares
                    Outstanding
                
                Amount
                
                Shares
                    Outstanding
                
                Amount
                
                Shares
                    Outstanding
                
                Amount
                
                Additional
                    Paid in Capital
                
                Statutory
                    Reserve
                
                Retained
                    Earnings
                
                Accumulated
                    Other Comprehensive Income
                
                TotalBalance,
                    January 1, 2007
                
                
                -
                
                
                -
                
                
                4,023,268
                
                
                4,023
                
                
                -
                
                
                -
                
                
                14,693,186
                
                
                14,694
                
                
                18,488,040
                
                
                2,025,022
                
                
                3,958,239
                
                
                824,296
                
                
                25,314,314Net
                    Income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                7,707,370
                
                
                -
                
                
                7,707,370Issue
                    of stock and warrant
                
                
                275,111
                
                
                275
                
                
                948,591
                
                
                949
                
                
                -
                
                
                -
                
                
                10,589,194
                
                
                10,589
                
                
                16,759,263
                
                
                -
                
                
                -
                
                
                -
                
                
                16,771,076Appropriations
                    of Retained Earnings
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,233,179
                
                
                (1,233,179
                )
                
                -
                
                
                -Foreign
                    Currency Translation Adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,053,846
                
                
                1,053,846Balance,
                    December 31, 2007
                
                
                275,111
                
                
                275
                
                
                4,971,859
                
                
                4,972
                
                
                -
                
                
                -
                
                
                25,282,380
                
                
                25,283
                
                
                35,247,303
                
                
                3,258,201
                
                
                10,432,430
                
                
                1,878,142
                
                
                50,846,606Balance,
                    January 1, 2008
                
                
                275,111
                
                
                275
                
                
                4,971,859
                
                
                4,972
                
                
                -
                
                
                -
                
                
                25,282,380
                
                
                25,283
                
                
                35,247,303
                
                
                3,258,201
                
                
                10,432,430
                
                
                1,878,142
                
                
                50,846,606Net
                    Income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                656,031
                
                
                -
                
                
                656,031Issuance
                    and Conversion of Stock
                
                
                (275,111
                )
                
                (275
                )
                
                (392,020
                )
                
                (392
                )
                
                95,418
                
                
                95
                
                
                1,486,933
                
                
                1,486
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                914Stock
                    Issuance Cost
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (393,568
                )
                
                -
                
                
                -
                
                
                -
                
                
                (393,568
                )Appropriations
                    of Retained Earnings
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Foreign
                    Currency Translation Adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,660,283
                
                
                3,660,283Balance,
                    September 30, 2008
                
                
                -
                
                
                -
                
                
                4,579,839
                
                
                4,580
                
                
                95,418
                
                
                95
                
                
                26,769,313
                
                
                26,769
                
                
                34,853,735
                
                
                3,258,201
                
                
                11,088,461
                
                
                5,538,425
                
                
                54,770,266
 
 See
          accompanying notes to financial statements and accountant’s report
 9
 
 **Sino
                    Gas International Holdings, Inc.****Consolidated
                    Statements of Stockholders’ Equity****As
                    of September 30, 2008 and December 31, 2007****(Stated
                    in US Dollars)**
  **Accumulated
                    Comprehensive Income****12/31/2007**
                
                **9/30/2008**
                
                **Total**Comprehensive
                    IncomeNet
                    Income
                
                $
                7,707,370
                
                $
                656,031
                
                $
                8,363,401Other
                    Comprehensive IncomeForeign
                    Currency Translation Adjustment
                
                
                1,053,846
                
                
                3,660,283
                
                
                4,714,129$
                8,761,216
                
                $
                4,316,314
                
                $
                13,077,530
 
 See
          accompanying notes to financial statements and accountant’s report
  10
  **Sino
                    Gas International Holdings, Inc.****Consolidated
                    Statements of Cash Flows****For
                    the three months and nine months periods ended September 30,
                    2008 and
                    2007****(Stated
                    in US Dollars)**
 
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****Sep
                    30,**
                
                **Sept
                    30,****2008**
                
                **2007**
                
                **2008**
                
                **2007****Cash
                    flow from operating activities**Net
                    Income
                
                $
                1,043,592
                
                $
                2,634,599
                
                $
                656,031
                
                $
                3,254,796Depreciation
                    and Amortization expenses
                
                
                326,246
                
                
                847,152
                
                
                1,228,894
                
                
                1,544,072Withdraw/(invested)
                    in restricted time deposits
                
                
                353,713
                
                
                (172,986
                )
                
                92,765
                
                
                2,951,555Decrease/(increase)
                    in accounts and other receivables
                
                
                1,821,303
                
                
                259,352
                
                
                358,635
                
                
                (371,075
                )Decrease/(increase)
                    in inventory
                
                
                12,209
                
                
                (225,010
                )
                
                (56,066
                )
                
                (282,700
                )Increase
                    in prepaid expenses
                
                
                (319,667
                )
                
                -
                
                
                (3,338,084
                )
                
                -Increase
                    in accounts and other payables
                
                
                326,093
                
                
                1,186,313
                
                
                1,056,866
                
                
                4,140,130Cash
                    sourced/(used) in operating activities
                
                
                3,563,489
                
                
                4,529,420
                
                
                (960
                )
                
                11,302,353**Cash
                    flows from investing activities**Cash
                    (paid)/received for investments
                
                
                (10,776
                )
                
                -
                
                
                (385,884
                )
                
                -(Purchase)/sale
                    of property, plant & equipment
                
                
                (1,131,927
                )
                
                (6,205,268
                )
                
                (3,912,706
                )
                
                (10,938,911
                )(Purchase)/Sale
                    of intangible assets
                
                
                33,956
                
                
                (1,159,406
                )
                
                (170,961
                )
                
                (852,243
                )Acquisition
                    of subsidiaries
                
                
                -
                
                
                (19,126
                )
                
                -
                
                
                (192,293
                )Increase
                    in construction in progress
                
                
                (1,671,961
                )
                
                (1,514,904
                )
                
                (4,809,144
                )
                
                (4,331,340
                )Cash
                    sourced/(used) in investing activities
                
                
                (2,780,708
                )
                
                (8,964,279
                )
                
                (9,278,696
                )
                
                (16,314,787
                )**Cash
                    flows from financing activities**Proceeds/(repayment)
                    of bank borrowings
                
                
                (2,899,810
                )
                
                37,404
                
                
                1,641,859
                
                
                229,979Dividend
                    paid
                
                
                -
                
                
                (521,121
                )
                
                -
                
                
                (521,121
                )Issuance/(conversion)
                    of stock
                
                
                (392,653
                )
                
                14,566,850
                
                
                (392,653
                )
                
                17,154,609Cash
                    sourced/(used) in financing activities
                
                
                (3,292,464
                )
                
                14,083,133
                
                
                1,249,206
                
                
                16,863,467**Net
                    Increase/(Decrease) in Cash & Cash Equivalents for the
                    Year**
                
                
                (2,509,682
                )
                
                9,648,274
                
                
                (8,030,449
                )
                
                11,851,033**Effect
                    of Currency Translation on cash and cash
                    equivalents**
                
                
                902,199
                
                
                172,485
                
                
                3,660,283
                
                
                984,691**Cash
                    & Cash Equivalents - Beginning of Year**
                
                
                8,021,212
                
                
                6,653,639
                
                
                10,915,590
                
                
                3,638,673**Cash
                    & Cash Equivalents - End of Year**
                
                $
                6,545,424
                
                $
                16,474,397
                
                $
                6,545,424
                
                $
                16,474,397*Supplementary
                    cash flow information*Interest
                    received
                
                $
                26,970
                
                $
                -
                
                $
                72,632
                
                $
                11,527Interest
                    paid
                
                
                -
                
                
                -
                
                
                157,057
                
                
                -Income
                    tax paid
                
                
                597,768
                
                
                227,887
                
                
                720,773
                
                
                255,230
 
 See
          accompanying notes to financial statements and accountant’s report
 11
  **Sino
                    Gas International Holdings, Inc.****Notes
                    to Consolidated Financial Statements****For
                    the nine months periods ended September 30, 2008 and
                    2007**
  **1.**  **ORGANIZATION
          AND PRINCIPAL ACTIVITIES**
 
 Sino
          Gas
          International Holdings, Inc. (“the Company”) was incorporated under the laws of
          the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company
          changed its name to American Arms, Inc. on April 5, 1984, and then changed
          its
          name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its
          name to
          Sino Gas International Holdings, Inc. on November 17, 2006.
 
 On
          September 7, 2006, the Company underwent a reverse-merger with Gas Investment
          China Ltd. (“GIC”), an International Business Company incorporated in the
          British Virgin Islands, and its wholly-owned subsidiaries, involving an
          exchange
          of shares whereby the Company issued an aggregate of 14,361,646 shares
          to the
          shareholders of GIC in exchange for all of the issued and outstanding shares
          of
          GIC. For financial reporting purposes, this transaction is classified as
          a
          recapitalization of Sino Gas International Holdings, Inc. (Legal acquirer,
          accounting acquiree) and the historical financial statements of Gas Investment
          China Co. Ltd. (Legal acquiree, accounting acquirer)
 
 The
          Company is a natural gas services operator, principally engaging in the
          investment, operation and management of city gas pipeline infrastructure,
          in the
          distribution of natural gas to residential and industrial users, in the
          construction and operation gas stations, and in the development and application
          of natural gas related technologies. The Company owns and operates 24 natural
          gas distribution systems serving approximately 87,500 residential and five
          commercial and industrial customers. The Company’s facilities include
          approximately 700 kilometers of pipeline and delivery networks (including
          delivery trucks) with a designed daily capacity of approximately 70,000
          cubic
          meters of natural gas.
 
 The
          common stock of the Company is currently quoted on the National Association
          of
          Securities Dealers' Over-the-Counter Bulletin Board under the symbol
“SGAS”.
 
 *Basis
          of Presentation and Organization*
 
 The
          Company’s consolidated financial statements have been prepared in accordance
          with generally accepted accounting principles in the United States of America
          (“US GAAP”).
  This
          basis of accounting differs in certain material respects from that used
          for the
          preparation of the books of account of the Company’s principal subsidiaries,
          which are prepared in accordance with the accounting principles and the
          relevant
          financial regulations applicable to enterprises with limited liabilities
          established in the PRC (“PRC GAAP”) or in the accounting standards used in the
          places of their domicile. The accompanying consolidated financial statements
          reflect necessary adjustments not recorded in the books of account of the
          Company’s subsidiaries to present them in conformity with US GAAP.
 12
  **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 
 **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
          notes
          are representations of management. Accounting policies adopted by the Company
          conform to generally accepted accounting principles in the United States
          of
          America and have been consistently applied in the presentation of financial
          statements, which are compiled on the accrual basis of accounting.
 
 *(b)*
                *Use
                    of estimates*
 
 The
          preparation of the financial statements in conformity with generally accepted
          accounting principles in the United States of America requires management
          to
          make estimates and assumptions that affect the reported amounts of assets
          and
          liabilities and disclosure of contingent assets and liabilities at the
          date of
          the financial statements and the reported amounts of revenues and expenses
          during the reporting periods. Management makes these estimates using the
          best
          information available at the time the estimates are made; however actual
          results
          could differ materially from those estimates.
  
 *(c)*
                *Economic
                    and political risks*
 
 The
          Company’s operations are conducted in the PRC. Accordingly, the Company’s
          business, financial condition and results of operations may be influenced
          by the
          political, economic and legal environment in the PRC, and by the general
          state
          of the PRC economy.
  The
          Company’s operations in the PRC are subject to special considerations and
          significant risks not typically associated with companies in North America
          and
          Western Europe. These include risks associated with, among others, the
          political, economic and legal environment and foreign currency exchange.
          The
          Company’s results may be adversely affected by changes in the political and
          social conditions in the PRC, and by changes in governmental policies with
          respect to laws and regulations, anti-inflationary measures, currency
          conversion, remittances abroad, and rates and methods of taxation, among
          other
          things.
 
 *(d)*
                *Principles
                    of Consolidation*
 
 The
          consolidated financial statements include the accounts of the Company and
          its
          subsidiaries (“the Group”). Significant inter-company transactions have been
          eliminated in consolidation. Investments in which the company has a 20
          percent
          to 50 percent voting interest and where the company exercises significant
          influence over the investor are accounted for using the equity
          method.
  13
  **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 The
          Company owned its subsidiaries soon after its inception and continued to
          acquire
          and own the equity interests throughout the reporting periods. The following
          table depicts the identities of the consolidating subsidiaries as of September
          30, 2008 and December 31, 2007 (whichever applicable 2007).
 ***Name
                      of Company***
                  
                  ***Place
                      of Incorporation***
                  
                  ***Date
                      of Incorporation***
                  
                  ***Beneficiary***
                    ***interest
                      %***
                  
                  ***Equity***
                    ***Interest
                      %***
                  
                  ***Registered***
                    ***Capital***The
                      BritishGAS
                      Investment China Co., Ltd.
                  
                  Virgin
                      Islands
                  
                  6/19/2003
                  
                  100
                  
                  100
                  
                  USD
                      10,000,000The
                      BritishSino
                      Gas Construction Limited
                  
                  Virgin
                      Islands
                  
                  1/9/2007
                  
                  100
                  
                  100
                  
                  USD
                      50,000Beijing
                      Zhong Ran Wei Ye Gas Co., Ltd
                  
                  PRC
                  
                  8/29/2001
                  
                  100
                  
                  100
                  
                  RMB
                      184,916,420Peixian
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  8/22/2005
                  
                  100
                  
                  90
                  
                  RMB
                      5,000,000Sihong
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  12/3/2004
                  
                  100
                  
                  95
                  
                  RMB
                      10,000,000Wuhe
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  1/30/2007
                  
                  100
                  
                  100
                  
                  RMB
                      3,000,000Changli
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  12/8/2006
                  
                  100
                  
                  100
                  
                  RMB
                      3,000,000Yutian
                      Zhongran Weiye Gas Co., Ltd
                  
                  PRC
                  
                  12/19/2003
                  
                  100
                  
                  90
                  
                  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
                      2,000,000Wuqiao
                      Gas Co., Ltd
                  
                  PRC
                  
                  6/30/2004
                  
                  100
                  
                  95
                  
                  RMB
                      2,000,000Jinzhou
                      Weiye Gas Co., Ltd
                  
                  PRC
                  
                  7/19/2004
                  
                  100
                  
                  95
                  
                  RMB
                      5,000,000
  14
  **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 ***Name
                        of Company***
                    
                    ***Place
                        of Incorporation***
                    
                    ***Date
                        of Incorporation***
                    
                    ***Beneficiary***
                      ***interest
                        %***
                    
                    ***Equity***
                      ***Interest
                        %***
                    
                    ***Registered***
                      ***Capital***Shenzhou
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    12/23/2005
                    
                    100
                    
                    95
                    
                    RMB
                        3,000,000Ningjin
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    12/3/2003
                    
                    100
                    
                    95
                    
                    RMB
                        3,000,000Linzhang
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    7/6/2005
                    
                    100
                    
                    85
                    
                    RMB
                        1,000,000Hengshui
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    12/20/2005
                    
                    100
                    
                    100
                    
                    RMB
                        3,000,000Longyao
                        Zhongran Weiye Gas Co., Ltd
                    
                    PRC
                    
                    10/13/2005
                    
                    100
                    
                    95
                    
                    RMB
                        3,000,000Xingtang
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    2/18/2004
                    
                    100
                    
                    95
                    
                    RMB
                        3,000,000Gucheng
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    3/21/2007
                    
                    100
                    
                    100
                    
                    RMB
                        3,000,000Langfang
                        Development Region Weiye dangerous Goods Transportation Co.,
                        Ltd
                    
                    PRC
                    
                    3/22/2005
                    
                    100
                    
                    95
                    
                    RMB
                        1,000,000Beijing
                        Chenguang Gas Ltd.
                    
                    PRC
                    
                    10/30/2002
                    
                    100
                    
                    100
                    
                    RMB
                        20,000,000Xinji
                        Zhongchen Gas Co., Ltd
                    
                    PRC
                    
                    2/7/2007
                    
                    100
                    
                    100
                    
                    RMB
                        3,000,000Shijiazhuang
                        Chenguang Gas Co., Ltd
                    
                    PRC
                    
                    6/14/2007
                    
                    100
                    
                    100
                    
                    RMB
                        2,000,000Luquan
                        Chenguang Gas Co., Ltd
                    
                    PRC
                    
                    4/27/2007
                    
                    100
                    
                    100
                    
                    RMB
                        2,000,000Chenan
                        Chenguang Gas Co., Ltd
                    
                    PRC
                    
                    1/23/2007
                    
                    100
                    
                    100
                    
                    RMB
                        1,500,000Nangong
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    6/25/2007
                    
                    100
                    
                    100
                    
                    RMB
                        3,000,000
 15
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 ***Name
                        of Company***
                    
                    ***Place
                        of Incorporation***
                    
                    ***Date
                        of Incorporation***
                    
                    ***Beneficiary***
                      ***interest
                        %***
                    
                    ***Equity***
                      ***Interest
                        %***
                    
                    ***Registered***
                      ***Capital***Sishui
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    12/22/2004
                    
                    100
                    
                    95
                    
                    RMB
                        3,000,000Guannan
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    6/19/2003
                    
                    100
                    
                    100
                    
                    RMB
                        9,510,000Sixian
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    9/3/2007
                    
                    100
                    
                    100
                    
                    RMB
                        3,000,000Baishan
                        Weiye Gas Co., Ltd
                    
                    PRC
                    
                    7/13/1007
                    
                    100
                    
                    100
                    
                    RMB
                        15,000,000
 
 *(e)*
                *Cash
                    and Cash Equivalents*
 
 The
          Company considers all cash and other highly liquid investments with initial
          maturities of three months or less to be cash equivalents.
 
 
 *(f)*
                *Accounts
                    and Other Receivable*
 
 Accounts
          and other receivable are recorded at net realizable value consisting of
          the
          carrying amount less an allowance for uncollectible accounts, as needed.
          The
          Company extends unsecured credit to customers in the normal course of business
          and does not accrue interest on trade accounts receivable.
 
 
 *(g)*
                *Advances
                    to Suppliers*
 
 Advances
          to suppliers represent the cash paid in advance for purchasing raw materials.
          The advances to suppliers are interest free and unsecured.
 
 
 *(h)*
                *Investments
                    in Equity Securities*
 
 The
          equity method of accounting was used to account for the Company’s investment in
          equity securities for which the Company did not have controlling equity
          interest. Non controlling equity interest for the Company is typically
          a
          position of less than 50% beneficial ownership.
  16
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 The
          consolidated statement of income includes the Company's share of the
          post-acquisition results of the investment’s performance for the year. In the
          consolidated balance sheet, investments in equity securities are stated
          at the
          Company's share of the net assets of the investments plus any potential
          premium,
          or less discounts paid at the time of acquisition, and less any identified
          impairment loss.
 
 Beijing
          Zhongran Xiangke Oil Gas Technology Co. Ltd is the Company’s 40% owned
          investment and is principally engaged in sale of compressed natural gas
          to
          domestic households and industrial firms around the suburbs of Beijing
          as well
          as the suburban areas of the Hebei Province and Tianjin.
 
 ***Name
                    of Associate Company***
                
                ***Place
                    of Registration***
                
                ***Form
                    of Business Structure***
                
                ***Registered
                    Capital***
                
                ***Nominal
                    Value of Registered Capital***
                
                ***Principal
                    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
 
 The
          Company did not record any goodwill when it acquired its equity position
          in
          Xiangke. Accordingly, in accordance with SFAS 142, the Company has not
          taken an
          amortization expense of goodwill during the time it has carried a 40% stake
          in
          Xiangke.
 
 
 *(i)*
                *Accounting
                    for the Impairment of Long-Lived
                    Assets*
 
 The
          long-lived assets held and used by the Company are reviewed for impairment
          whenever events or changes in circumstances indicate that the carrying
          amount of
          assets may not be recoverable. It is reasonably possible that these assets
          could
          become impaired as a result of technology or other industry changes.
          Determination of recoverability of assets to be held and used is by comparing
          the carrying amount of an asset to future net undiscounted cash flows to
          be
          generated by the assets.
 
 If
          such
          assets are considered to be impaired, the impairment to be recognized is
          measured by the amount by which the carrying amount of the assets exceeds
          the
          fair value of the assets. Assets to be disposed of are reported at the
          lower of
          the carrying amount or fair value less costs to sell.
 
 During
          the reporting periods, there was no impairment loss.
  17
  **Sino
                    Gas International Holdings, Inc.****Notes
                    to Consolidated Financial Statements****For
                    the nine months periods ended September 30, 2008 and
                    2007**
  *(j)*
                *Plant
                    and Equipment*
 
 Plant
          and
          equipment, other than construction in progress, are stated at cost less
          depreciation and amortization and accumulated impairment loss.
 
 Plant
          and
          equipment are carried at cost less accumulated depreciation. Depreciation
          is
          provided over their estimated useful lives, using the straight-line method.
          Estimated useful lives of the plant and equipment are as follows:
 
 Gas
                    Pipelines (Up to December 31, 2007)
                25
                    yearsGas
                    Pipelines (Starting from January 1, 2008)
                50
                    yearsMotor
                    Vehicles
                10
                    yearsMachinery
                    & Equipment
                20
                    yearsBuildings
                25
                    yearsLeasehold
                    Improvements
                25
                    yearsOffice
                    Equipment
                8
                    years
 
 The
          cost
          and related accumulated depreciation of assets sold or otherwise retired
          are
          eliminated from the accounts and any gain or loss is included in the statement
          of income. The cost of maintenance and repairs is charged to income as
          incurred,
          whereas significant renewals and betterments are capitalized.
  *(k)*
                *Intangible
                    Assets*
 
 Intangible
          assets, are stated at cost less amortization and accumulated impairment
          loss.
          Amortization is provided over their estimated useful lives, using the
          straight-line method. Estimated useful lives of the intangibles are as
          follows:
 
 Land
                    use rights
                40
                    - 50 yearsFranchises
                30
                    yearsOther
                    intangibles
                3
                    years
 
 *(l)*
                *Construction
                    in Progress*
 
 Construction
          in progress represents the cost of constructing pipelines and is stated
          at cost.
          Costs comprise direct and indirect incremental costs of acquisition or
          construction. Completed items are transferred from construction in progress
          to
          the gas pipelines of fixed assets when they are ready for their intended
          use.
          The major cost of construction relates to construction materials, direct
          labor
          wages and other overhead. Construction of pipeline, through which to distribute
          natural gas, is one of the Group’s principal businesses. The Group builds city
          main pipeline network and branch pipeline network to make gas connection
          to
          resident users, industrial, and commercial users, with the objective of
          generating revenue on gas connection and gas usage fees collected from
          these
          customers. As of September 30, 2008, the pipelines under construction include
          mainly the projects in Beijing. These projects, once completed, will
          significantly increase the gas supply capacity.
  18
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 *(m)*
                *Unearned
                    Revenue*
 
 Unearned
          revenue represents prepayments by customers for gas purchases and advance
          payments on construction and installation of pipeline contracts. The Company
          records such prepayment as unearned revenue when the payments are
          received.
 
 *(n)*
                *Financial
                    Instruments*
 
 The
          carrying amounts of all financial instruments approximate fair value. The
          carrying amounts of cash, accounts receivable, accounts payable and accrued
          liabilities approximate fair value due to the short-term nature of these
          items.
          The carrying amounts of borrowings approximate the fair value based on
          the
          Company’s expected borrowing rate for debt with similar remaining maturities and
          comparable risk.
 
 
 *(o)*
                *Foreign
                    Currency Translation*
 
 The
          accompanying consolidated financial statements are presented in United
          States
          dollars. The functional currency of the Company is the Renminbi (RMB).
          The
          consolidated financial statements are translated into United States dollars
          from
          RMB at September 30, 2008 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.
  **Exchange
                    Rates**
                
                **9/30/2008**
                
                **6/30/2008**
                
                **3/31/2008**
                
                **12/31/2007**Year
                    end RMB : US$ exchange rate
                
                
                6.8551
                
                
                6.8718
                
                
                7.0222
                
                
                7.3141Average
                    yearly RMB : US$ exchange rate
                
                
                6.99886
                
                
                7.07263
                
                
                7.1757
                
                
                7.6172
 
 
 The
          RMB
          is not freely convertible into foreign currency and all foreign exchange
          transactions must take place through authorized institutions. No representation
          is made that the RMB amounts could have been, or could be, converted into
          US$ at
          the rates used in translation.
 
  *(p)*
                *Revenue
                    Recognition*
 
 Revenue
          is recognized when services are rendered to customers when a formal arrangement
          exists, the price is fixed or determinable, the delivery is completed,
          no other
          significant obligations of the Company exist and collectability is reasonably
          assured. Payments received before all of the relevant criteria for revenue
          recognition are satisfied are recorded as unearned revenue.
 
 Net
          sales
          consist of gas and connection fee revenue. Cost of sales include gas and
          connection cost.
 Gas
          connection revenue is recognized when the outcome of a contract can be
          estimated
          reliably and the stage of completion at the balance sheet date can be measured
          reliably.
 
 19
 
 **Sino
                        Gas International Holdings, Inc.****Notes
                        to Consolidated Financial Statements****For
                        the nine months periods ended September 30, 2008 and
                        2007**
 Sales
          of
          natural gas are recognized when goods are delivered and title has
          passed.
 
 
 *(q)*
                *Investment
                    Income*
 
 Investment
          income represents the Group’s share of post-acquisition results of its
          investment in equity securities for the year.
 
 
 *(r)*
                *Income
                    Taxes*
 
 Deferred
          income taxes are recognized for the tax consequences in future years of
          differences between the tax bases of assets and liabilities and their financial
          reporting amounts at each period end based on enacted tax laws and statutory
          tax
          rates applicable to the periods in which the differences are expected to
          affect
          taxable income. Valuation allowances are established when necessary to
          reduce
          deferred tax assets to the amount expected to be realized. As of September
          30,
          2008, there was no significant book to tax differences.
 
 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 25%.
 
 
 *(s)*
                *Advertising*
 
 The
          Group
          expensed all advertising costs as incurred
 
 
 *(t)*
                *Concentration
                    of Credit Risk*
 
 Concentration
          of credit risk is limited to accounts receivable and is subject to the
          financial
          conditions of major customers. The Company does not require collateral
          or other
          security to support accounts receivable. The Company conducts periodic
          reviews
          of its clients’ financial condition and customers’ payment practices to minimize
          collection risk on accounts receivable.
 
 
 *(u)*
                *Retirement
                    Benefits*
 
 Retirement
          benefits in the form of contributions under defined contribution retirement
          plans to the relevant authorities are charged to the statements of income
          as
          incurred.
 
 20
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 *(v)*
                *Statutory
                    Reserves*
 
 As
          stipulated by the Company Law of the People's Republic of China (PRC) as
          applicable to Chinese companies with foreign ownership, net income after
          taxation can only be distributed as dividends after appropriation has been
          made
          for the following:
 
 i.
                Making
                    up cumulative prior years' losses, if any;ii.
                Allocations
                    to the "Statutory 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
                    to the discretionary surplus reserve, if approved in the shareholders'
                    general meeting.
 
 
 *(w)*
                *Statement
                    of Cash Flows*
 
 In
          accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from
          the Company’s operations is calculated based upon the local currencies. As a
          result, amounts related to assets and liabilities reported on the statement
          of
          cash flows will not necessarily agree with changes in the corresponding
          balances
          on the balance sheet.
  
 *(x)*
                *Comprehensive
                    Income*
 
 Comprehensive
          income is defined to include all changes in equity except those resulting
          from
          investments by owners and distributions to owners. Among other disclosures,
          all
          items that are required to be recognized under current accounting standards
          as
          components of comprehensive income are required to be reported in a financial
          statement that is presented with the same prominence as other consolidated
          financial statements. The Company’s current component of other comprehensive
          income is the foreign currency translation adjustment.
 
 
 *(y)*
                *Recent
                    Accounting Pronouncements*
  In
          December 2007, the Financial Accounting Standards Board issued FASB Statement
          No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R
          provides additional guidance on improving the relevance, representational
          faithfulness, and comparability of the financial information that a reporting
          entity provides in its financial reports about a business combination and
          its
          effects. This Statement applies prospectively to business combinations for
          which the acquisition date is on or after the beginning of the first annual
          reporting period beginning on or after December 15, 2008. The Company
          believes there will be no material impact on its financial statements upon
          adoption of this standard.
 
 In
          December 2007, the Financial Accounting Standards Board issued FASB Statement
          No. 160, *Noncontrolling
          Interests in Consolidated Financial Statements—an amendment of ARB No. 51* (“SFAS
          160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting
          standards for the noncontrolling interest in a subsidiary and for the
          deconsolidation of a subsidiary. This Statement is effective for fiscal
          years and interim periods within those fiscal years, beginning on or after
          December 15, 2008. The Company believes there will be no material impact on
          its financial statements upon adoption of this standard.
 
 21
 
 **Sino
                        Gas International Holdings, Inc.****Notes
                        to Consolidated Financial Statements****For
                        the nine months periods ended September 30, 2008 and
                        2007**
 In
          December 2007, the FASB issued SFAS 141 (revised 2007), *Business
          Combinations* ,
          (‘‘SFAS
          141(R)’’). SFAS 141(R) retains the fundamental requirements of the original
          pronouncement requiring that the purchase method be used for all business
          combinations, but also provides revised guidance for recognizing and measuring
          identifiable assets and goodwill acquired and liabilities assumed arising
          from
          contingencies, the capitalization of in-process research and development
          at fair
          value, and the expensing of acquisition-related costs as incurred. SFAS
          141(R)
          is effective for fiscal years beginning after December 15, 2008. In the
          event
          that the Company completes acquisitions subsequent to its adoption of SFAS
          141
          (R), the application of its provisions will likely have a material impact
          on the
          Company’s results of operations, although the Company is not currently able to
          estimate that impact.
 
 In
          December 2007, the FASB issued SFAS 160, *Noncontrolling
          Interests in Consolidated Financial Statements − an amendment of ARB No.
          51* .
          SFAS
          160 requires that ownership interests in subsidiaries held by parties other
          than
          the parent (previously referred to as minority interests), and the amount
          of
          consolidated net income, be clearly identified, labeled and presented in
          the
          consolidated financial statements. It also requires once a subsidiary is
          deconsolidated, any retained noncontrolling equity investment in the former
          subsidiary be initially measured at fair value. Sufficient disclosures
          are
          required to clearly identify and distinguish between the interests of the
          parent
          and the interests of the noncontrolling owners as components of equity.
          It is
          effective for fiscal years beginning after December 15, 2008, and requires
          retroactive adoption of the presentation and disclosure requirements for
          existing minority interests. All other requirements are applied prospectively.
          The Company does not expect the adoption of SFAS 160 to have a material
          impact
          on its financial condition or results of operations.
  The
          Company does not anticipate that the adoption of the above standards will
          have a
          material impact on these consolidated financial statements.
  *(Z)*
                *Earnings
                    Per Share*
 
 Basic
          earnings per share is computed on the basis of the weighted average number
          of
          shares of common stock outstanding during the period. Diluted earnings
          per share
          is computed on the basis of the weighted average number of shares of common
          stock plus the effect of dilutive potential common shares outstanding during
          the
          period using the treasury stock method for warrants and the as-if method
          for
          convertible securities. Dilutive potential common shares include outstanding
          warrants, and convertible preferred stock.
 
 
 **3.**
                **RESTRICTED
                    CASH**
 
 Restricted
          Cash represents compensating balances held at banks to partially secure
          banking
          facilities in the form of loans and notes payable. The imposed restrictions
          dictate that funds cannot be withdrawn when there are outstanding loans
          and
          notes payable, and the funds are only allowed to be used to settle bank
          indebtedness. The funds deposited as compensating balances are interest
          bearing.
          The amount of restricted cash varies based on the Bank’s credit policy at the
          time that the Company requests for increase or extension of credit
          facilities.
 
 22
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 **4.**
                **ACCOUNTS
                    RECEIVABLE**
  For
          natural gas sales, it is due when the gas is sold. Normally, most of them
          are
          settled by prepayments from the customers.
 
 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 warranty
          to the developer. The retention money would be received by the company
          after the
          1 year warranty 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 September
          30,
          2008 and December 31, 2007
 
 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.
 
 23
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 *Accounts
                    Receivable**9/30/2008*
                
                *12/31/2007*Gross
                    accounts receivable
                
                $
                6,264,245
                
                $
                7,352,013Allowance
                    for bad debt
                
                
                (30,225
                )
                
                (36,760
                )Net
                    accounts receivable
                
                $
                6,234,020
                
                $
                7,315,253
 
 *Allowance
                    for Bad Debt**9/30/2008*
                
                *12/31/2007*Beginning
                    balance
                
                $
                36,760
                
                $
                32,838Addition
                
                
                19,197
                
                
                26,909Less
                    - write off
                
                
                (25,732
                )
                
                (22,987
                )Ending
                    balance
                
                $
                30,225
                
                $
                36,760
 
 *Accounts
                    Receivable Aging Report**9/30/2008*
                
                *12/31/2007*30
                    Days
                
                $
                4,413,506
                
                $
                5,557,17230-60
                    Days
                
                
                1,149,535
                
                
                1,212,41360-90
                    Days
                
                
                857,245
                
                
                8,74790-180
                    Days
                
                
                397,833
                
                
                -180-360
                    Days
                
                
                446,051
                
                
                27,489>360
                    Days
                
                
                119,386
                
                
                509,433Total
                
                $
                6,234,020
                
                $
                7,315,254
 
 The
          followings are the largest ten accounts receivable as of September 30,
          2008:
          -
  Shuqian
                    Mingwei Zhiye, Ltd.
                
                $
                258,202Baishan
                    Zhongfang Construction, Ltd.
                
                
                258,931Tonghua
                    Tongsheng Real Estate, Ltd.
                
                
                271,611Peixuan
                    Jiannan Development, Ltd.
                
                
                283,001Beijing
                    Yincheng Construction, Ltd.
                
                
                287,698Sihong
                    Jinwan Development, Ltd.
                
                
                318,887Guannan
                    Fangwu Construction, Ltd.
                
                
                368,485Lianyun
                    Port Development, Ltd.
                
                
                381,614Xuzhou
                    Shenyuan Real Estate, Ltd.
                
                
                415,578Hebei
                    Zhonggang Steel, Ltd.
                
                
                708,201Total
                
                $
                3,552,208
  24
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 **5.
          OTHER RECEIVABLES**
 
 The
          followings are the ten largest other receivables as of September 30, 2008:
          -
 
 9/30/2008Hebei
                    Wentan Development Co.,
                
                $
                14,588Beijing
                    Guizhong Material, Ltd.
                
                
                15,810Shahe
                    Greatwall, Ltd.
                
                
                22,632Shenzhen
                    Shenqi Investment, Ltd.
                
                
                24,310Peixian
                    Development, Ltd.
                
                
                29,175Beijing
                    Zhongshi Investment, Ltd.
                
                
                43,763Tongshan
                    Jiaxing Gas, Ltd.
                
                
                70,891Tianjin
                    Feite Consultant, Ltd.
                
                
                437,630Hebei
                    Xili Medicine, Ltd.
                
                
                954,486Shanhou
                    Consultant Ltd.
                
                
                1,906,562Total
                
                $
                3,519,849
 
 25
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 
 **6.**  **PROPERTY,
          PLANT AND EQUIPMENT**
 
 Property,
          Plant and Equipment consist of the following as of September 30, 2008 and
          December 31, 2007: -
 
 9/30/08
                
                12/31/07***At
                    Cost***Gas
                    Pipelines
                
                $
                21,945,187
                
                $
                18,885,734Motor
                    Vehicles
                
                
                5,428,697
                
                
                4,874,685Machinery
                    & Equipment
                
                
                808,209
                
                
                885,997Buildings
                
                
                1,688,096
                
                
                1,405,638Leasehold
                    Improvements
                
                
                73,804
                
                
                68,942Office
                    Equipment
                
                
                195,049
                
                
                105,336Total
                
                $
                30,139,042
                
                $
                26,226,336*Less**:
                    Accumulated Depreciation*
                
                
                (2,882,664
                )
                
                (1,653,771
                )Property,
                    Plant and Equipment, net
                
                $
                27,256,377
                
                $
                24,572,565
 
 9/30/08
                
                12/31/07***Accumulated
                    Depreciation***Gas
                    Pipelines
                
                $
                1,357,838
                
                $
                591,419Motor
                    Vehicles
                
                
                1,036,268
                
                
                687,354Machinery
                    & Equipment
                
                
                189,113
                
                
                161,703Buildings
                
                
                192,901
                
                
                128,514Leasehold
                    Improvements
                
                
                45,191
                
                
                34,070Office
                    Equipment
                
                
                61,354
                
                
                50,711Total
                
                $
                2,882,664
                
                $
                1,653,771
 
 
 Depreciation
          expense included in the consolidated statements of income for the period
          ended
          September 30, 2008 was $1,228,893.
  26
  **Sino
                    Gas International Holdings, Inc.****Notes
                    to Consolidated Financial Statements****For
                    the nine months periods ended September 30, 2008 and
                    2007**
   **7.**  **INTANGIBLE
          ASSETS**
 
 Intangible
          assets consist of the following as of September 30, 2008 and December 31,
          2007:
          -
 
 9/30/08
                
                12/31/07***At
                    Cost***Land
                    use rights
                
                $
                510,840
                
                $
                452,345Franchises
                
                
                401,161
                
                
                359,464Goodwill
                
                
                1,677,755
                
                
                1,562,202Other
                
                
                17520
                
                
                9,563Total
                
                $
                2,607,276
                
                $
                2,383,574*Less:**Accumulated
                    Amortization*
                
                
                (408,065
                )
                
                (355,324
                )Intangible
                    Assets, net
                
                $
                2,199,211
                
                $
                2,028,250
 
 
 The
          Group
          operates as a local natural gas distributor in a city or county, known
          as an
          operation location, under an exclusive franchise agreement between the
          Group and
          the local government or entities in charge of gas utility. Franchises are
          the
          rights to develop sites in Anping and Jinzhou in China. They are stated
          at cost
          less accumulated amortization.
 
 
 **8.**
                **SHORT-TERM
                    BANK LOANS**
 
 Short-term
          bank loans are as follows:
 
 *Name
                    of Bank*
                *Due
                    Date*
                *Interest
                    Rate*
                *Amount**9/30/2008*
                *12/31/2007*China
                    Renmin Bank
                7/1/2008
                7.22%
                    plus 10% fluctuation market rate
                $
                    -
                $
                    2,734,444Huashang
                    Bank
                10/30/2008
                9.00%
                $
                    4,376,304
                $
                    -
 
  **9.** **** **OTHER
          PAYABLES**
 
 Other
          payables at September 30, 2008 and December 31, 2007 consist of the following:
          -
 
 *9/30/2008*
                
                *12/31/2007*Employees’
                    welfare payables
                
                $
                145,208
                
                $
                176,236Amount
                    due to employees
                
                
                23,266
                
                
                150,711Tax
                    payable
                
                
                513,001
                
                
                922,620Other
                    Payable
                
                
                6,507,009
                
                
                9,134,091Total
                
                $
                7,188,484
                
                $
                10,383,657
 
 27
 
 **Sino
                        Gas International Holdings, Inc.****Notes
                        to Consolidated Financial Statements****For
                        the nine months periods ended September 30, 2008 and
                        2007**
 All
          the
          amounts due to employees are unsecured, interest free, and have no fixed
          repayment terms.
 
 
 The
          followings are the ten largest other payables as of September 30, 2008:
          -
 
 *9/30/2008*Baishan
                    Zhongfan Real Estate, Ltd.
                
                $
                14,588Baishan
                    Natural Gas Company
                
                
                14,588Educational
                    Development, Ltd.
                
                
                42,251He
                    Shunchun
                
                
                72,938Social
                    Benefit Management Group
                
                
                75,239Social
                    Insurance Management Team
                
                
                124,220Shenzhen
                    Bolian, Ltd.
                
                
                204,228Beijing
                    Qianshi Technology Development, Ltd.
                
                
                242,442Chenguang
                    Weizhong Consultant, Ltd.
                
                
                437,630Baishan
                    City Gas, Ltd.
                
                
                3,996,332Total
                
                $
                5,224,456
 
 
 **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 26,769,313 shares issued and
          outstanding, and (ii) 100,000,000 shares of preferred stock, par value
          $0.001
          per share. The preferred stock consists of (a) series A convertible preferred
          stock, of which 20,000,000 shares have been authorized and 275,111 shares
          are
          issued and outstanding; and (b) series B convertible preferred stock, of
          which
          5,000,000 shares have been authorized and 4,764,486 shares are issued and
          outstanding. (c) series B-1 convertible preferred stock, of which 10,000,000
          shares have been authorized and 95,418 shares are issued and
          outstanding.
 
 The
          following is a summary of the material terms of its capital stock. This
          summary
          is subject to and qualified in its entirety by its Articles of Incorporation,
          as
          amended and corrected, certificates of designations for its series A, series
          B,
          and series B-1 convertible preferred stock, its by-laws and by the applicable
          provisions of Utah law.
 
 28
 
 **Sino
                        Gas International Holdings, Inc.****Notes
                        to Consolidated Financial Statements****For
                        the nine months periods ended September 30, 2008 and
                        2007**
 *Common
          Stock*
 
 The
          Company is authorized to issue 250,000,000 shares of common stock, with
          a par
          value of $0.001. There are 26,769,313 shares of common stock issued and
          outstanding as of September 30, 2008. All shares of common stock have one
          vote
          per share on all matters including election of directors, without provision
          for
          cumulative voting. The common stock is not redeemable and has no conversion
          or
          preemptive rights. The common stock currently outstanding is validly issued,
          fully paid and non-assessable. In the event of liquidation of the company,
          the
          holders of common stock will share equally in any balance of the company's
          assets available for distribution to them after satisfaction of creditors
          and
          preferred shareholders, if any. The holders of common stock are entitled
          to
          equal dividends and distributions per share with respect to the common
          stock
          when, as and if, declared by the board of directors from funds legally
          available.
 
 *Preferred
          Stock*
 
 In
          addition to the 250,000,000 shares of common stock, The Company is authorized
          to
          issue 100,000,000 shares of preferred stock, with a par value of $0.001
          per
          share. Shares of the preferred stock may be issued from time to time in
          one or
          more classes or series, each of which class or series shall have such
          distinctive designation or title as shall be fixed by the board of directors
          prior to the issuance.
 
 On
          August
          30, 2006, the Company’s board of directors designated 20,000,000 shares of its
          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.
 
 29
 
 **Sino
                        Gas International Holdings, Inc.****Notes
                        to Consolidated Financial Statements****For
                        the nine months periods ended September 30, 2008 and
                        2007**
 As
          a
          result of miscommunication between the Stock Transfer Agent and management
          of
          the Company, certain discrepancies in the Company’s capitalization were
          discovered between the company record and stock transfer agent record.
          These
          discrepancies had since been reconciled and corrected in this quarter,
          as
          highlighted below: -
 
 *i.*
              *Preferred
                  Stock A* 
 275,111
          shares of Preferred Stock A issued upon reverse-merger on or about September
          7,
          2006 had actually been converted by the Sino-Gas (BVI) shareholders into
          shares
          of common stock on November 17, 2006.
 
 *ii.*
              *Preferred
                  Stock B* 
 392,020
          shares of Preferred Stock B originally issued to the private investors
          have been
          converted into common stock between 3/27/2008 and 6/23/2008.
 
 *iii.*
              *Common
                  Stock* 
 As
          of
          September 30, 2008, the number of shares issued and outstanding has been
          revised
          to 26,769,313 shares from 25,282,380 shares at December 31, 2007, reporting
          a
          discrepancy of 1,486,933 shares attributable to: -
 
 *Description*
                *Shares*i.
                Vision
                    Opportunity Master Fund, Inc. exercised on May 15, 2007, 1,094,891
                    Series
                    J Warrants converted into common stock.
                1,094,891ii.
                Preferred
                    Stock B issued to private investors converted into common stock
                    between
                    3/27/2008 and 6/23/2008.
                393,020Subtotal
                1,486,911Discrepancy
                    Stock Cancelled
                22Total
                1,486,933
 
 
 30
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
 
 **Total
          Capitalization**
 
 The
          Following table depicts an analysis of total capitalization for the issuance
          of
          Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional
          Paid in Capital as of September 30, 2008:
  **Preferred
                    Stock B**
                
                **Preferred
                    Stock B-1**
                
                **Common
                    Stock****Name
                    of Shareholders**
                
                Number
                    of Shares outstanding
                
                Capital
                
                Number
                    of Shares outstanding
                
                Capital
                
                Number
                    of Shares outstanding
                
                Capital
                
                Additional
                    Paid in Capital
                
                %
                    of
                    Equity HoldingsManager
                    / Insider
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                12,653,661
                
                
                12,654
                
                
                4,144,333
                
                
                47
                %Minority
                    Investors
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,428,551
                
                
                3,429
                
                
                667,986
                
                
                13
                %Private
                    Placement Investors
                
                
                4,579,839
                
                
                4,580
                
                
                95,418
                
                
                95
                
                
                10,687,100
                
                
                10,687
                
                
                23,622,552
                
                
                40
                %Beneficial
                    Conversion Feature
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                6,418,864
                
                
                -4,579,839
                
                
                4,580
                
                
                95,418
                
                
                95
                
                
                26,769,313
                
                
                26,769
                
                
                34,853,735
                
                
                100
                %
 31
 **Sino
                        Gas International Holdings, Inc.****Notes
                        to Consolidated Financial Statements****For
                        the nine months periods ended September 30, 2008 and
                        2007**
 
 **11.**  **SEGMENT
          INFORMATION**
 
 The
          Company has contracted with customers usually in two revenue segments
          altogether, one is for the construction and installation of gas facilities
          and
          another one is the subsequent sales of gas to 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 Segment Report****As
                    of September 30, 2008**
  Gas
                    Distribution
                
                Gas
                    pipeline Installation
                
                Others
                
                TotalAssetsCurrent
                    Assets
                
                $
                15,241,752
                
                $
                5,051,443
                
                $
                1,470,693
                
                $
                21,763,888Non-Current
                    Assets
                
                
                12,631,771
                
                
                37,582,977
                
                
                -
                
                
                50,214,748Total
                    Assets
                
                $
                27,873,523
                
                $
                42,634,420
                
                $
                1,470,693
                
                $
                71,978,636LiabilitiesCurrent
                    Liabilities
                
                $
                1,470,627
                
                $
                15,737,742
                
                $
                -
                
                $
                17,208,369Total
                    Liabilities
                
                $
                1,470,627
                
                $
                15,737,742
                
                $
                -
                
                $
                17,208,369Net
                    Assets
                
                $
                26,402,895
                
                $
                26,896,679
                
                $
                1,470,693
                
                $
                54,770,266
 32
 **Sino
                        Gas International Holdings, Inc.****Notes
                        to Consolidated Financial Statements****For
                        the nine months periods ended September 30, 2008 and
                        2007**
 
 **Income
                    Statement Segment Report****For
                    the nine months ended September 30,
                    2008**
  Gas
                    Distribution
                
                Gas
                    pipeline Installation
                
                Others
                
                TotalSales
                    Revenue
                
                $
                8,593,097
                
                $
                6,310,753
                
                $
                -
                
                $
                14,903,850Cost
                    of Revenue
                
                
                (7,708,001
                )
                
                (1,982,252
                )
                
                -
                
                
                (9,690,253
                )Gross
                    Profit
                
                
                885,096
                
                
                4,328,501
                
                
                -
                
                
                5,213,597Operating
                    Expense
                
                
                (422,520
                )
                
                (2,066,304
                )
                
                (752,749
                )
                
                (3,241,573
                )Other
                    Income / Expense
                
                
                (19,254
                )
                
                (94,161
                )
                
                (481,805
                )
                
                (595,220
                )Earnings
                    before tax
                
                
                443,322
                
                
                2,168,036
                
                
                (1,234,554
                )
                
                1,376,804Income
                    tax
                
                
                (122,363
                )
                
                (598,410
                )
                
                -
                
                
                (720,773
                )Net
                    Income
                
                $
                320,959
                
                $
                1,569,626
                
                $
                (1,234,554
                )
                $
                656,031
 
 **Balance
                    Sheet Segment Report****As
                    of December 31, 2007**
  Gas
                    Distribution
                
                Gas
                    pipeline Installation
                
                Others
                
                TotalAssetsCurrent
                    Assets
                
                $
                11,509,765
                
                $
                3,814,583
                
                $
                7,866,957
                
                $
                23,191,305Non-Current
                    Assets
                
                
                10,606,803
                
                
                31,558,142
                
                
                -
                
                
                42,164,945Total
                    Assets
                
                $
                22,116,568
                
                $
                35,372,725
                
                $
                7,866,957
                
                $
                65,356,250LiabilitiesCurrent
                    Liabilities
                
                $
                1,228,727
                
                $
                13,149,074
                
                $
                131,843
                
                $
                14,509,644Total
                    Liabilities
                
                $
                1,228,727
                
                $
                13,149,074
                
                $
                131,843
                
                $
                14,509,644Net
                    Assets
                
                $
                20,887,841
                
                $
                22,223,651
                
                $
                7,735,114
                
                $
                50,846,606
 
 33
 **Sino
                      Gas International Holdings, Inc.****Notes
                      to Consolidated Financial Statements****For
                      the nine months periods ended September 30, 2008 and
                      2007**
  
 **Income
                    Statement Segment Report****For
                    the nine months ended September 30,
                    2007**
  Gas
                    Distribution
                
                Gas
                    pipeline Installation
                
                Others
                
                TotalSales
                    Revenue
                
                $
                4,888,896
                
                $
                5,997,716
                
                $
                -
                
                $
                10,886,612Cost
                    of Revenue
                
                
                (4,348,660
                )
                
                (1,348,258
                )
                
                -
                
                
                (5,696,918
                )Gross
                    Profit
                
                
                540,236
                
                
                4,649,458
                
                
                -
                
                
                5,189,694Operating
                    Expense
                
                
                (175,618
                )
                
                (1,511,426
                )
                
                -
                
                
                (1,687,044
                )Other
                    Income
                
                
                768
                
                
                6,608
                
                
                -
                
                
                7,376Earnings
                    before tax
                
                
                365,386
                
                
                3,144,640
                
                
                -
                
                
                3,510,026Income
                    tax
                
                
                (4,922
                )
                
                (250,308
                )
                
                -
                
                
                (255,230
                )Net
                    Income
                
                $
                360,464
                
                $
                2,894,332
                
                $
                -
                
                $
                3,254,796
 
 
 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.
  No
          other
          measures of segment profit or loss and assets have been provided or reviewed
          by
          the company's chief operating decision maker.
 
 
 **12.
          Liquidated Damages**
 
 The
          Company entered into a registration rights agreement related to a private
          placement financing transaction with accredited investors on September
          13, 2007.
          Pursuant to the agreement, the Company had to (1) file the registration
          statement within 45 days of the execution, and (2) declare the effectiveness
          within 150 days of filing the registration statement. However, the Company
          did
          not meet the aforementioned requirements under the registration rights
          agreement, and was subjected to liquidated damages. The Company, which
          has paid
          $481,805 in liquidated damages to investors in 2008, was reported as other
          expense in the statements of income.
 
 34
 
 **Item
        2.****Management’s
        Discussion and Analysis**
 The
          following discussion of our financial condition and results of operations
          should
          be read in conjunction with our consolidated financial statements and the
          notes
          to those financial statements appearing elsewhere in this Form 10-Q. This
          discussion contains forward-looking statements that involve significant
          risks
          and uncertainties. As a result of many factors, such as those set forth
          elsewhere in this Form 10-Q, our actual results may differ materially from
          those
          anticipated in these forward-looking statements.
 
 **Economic
          & Industrial Trend**
 
 We
          generate revenue from two sources: connection fees for constructing connections
          to our natural gas distribution network, and sales of natural gas. Our
          connection activities are closely related to the development of real estate
          industry in our targeting cities in China, given the fact that almost all
          of our
          connection fees are from new residential apartments. Natural gas facilities
          in
          new apartments are often required by local governments, who aim to promote
          the
          use of natural gas to improve local residents’ life quality.
 
 We
          have
          experienced high growth of our connection activities since inception of
          our
          business, thanks to Chinese real estate boom in the past five years. We
          see no
          major factors that will change the trend of real estate industry in the
          coming
          year. Therefore we expect to continue to see growth of household connections,
          especially in small-to-medium sized cities where the real estate market
          is at an
          early developing stage.
 
 If
          Chinese real estate market does slow down in the future, our connection
          business
          would be negatively affected as a result of fewer new household
          connections.
 
 Our
          gas
          users are composed of industrial and residential users. Gas sales from
          residential users are much less affected by economic and industrial factors
          and
          would maintain stable growth in the future, due to the increasing pool
          of our
          residential customers. Gas sales from industrial users is subject to the
          operating performance of the end industrial user and development of new
          users.
          Gas sales to our industrial users have increased 89% during the first half
          of
          2008, as our existing users have expanded their production capacity. As
          we
          develop into more cities, we expect to add one to two industrial users
          in the
          coming year.
 
 **Material
          Opportunities**
 
 The
          gas
          distribution market is quite fragmented in the small (population less than
          100,000)-to-medium (population between 100,000 to 300,000) sized cities.
          We have
          been in active talks with potential project targets. The size of the projects
          varies from small cities, like the ones we have, to medium-sized cities.
          For
          small city markets, many of them are still untapped or undeveloped. The
          development of these markets is generally considered major growth components
          of
          the company.
 
 Regarding
          medium-sized or large cities, most of them have already been developed
          by large
          distributors or are still operated by state-owned companies. Acquisition
          opportunities exist for those still run by state-owned companies, as the
          central
          government encourages suppliers to turn them into privately-owned companies.
          The
          acquisition of these markets would have material impact on the company,
          increasing the company’s assets and revenues significantly. The company has
          finalized one acquisition, and needs to raise money to fund another
          acquisition.
 
 **Material
          Challenges**
 
 There
          are
          vast number of small-to-medium sized cities left undeveloped, but the
          competition is intense, as there are many small new players in the market
          attracted by the profitability and growth potential of the business. Meanwhile,
          from time to time, we are also facing competitions from stronger competitors,
          as
          large city markets are getting saturated and our competitors are beginning
          to
          expand into smaller cities.
  35
  We
          are
          facing limited opportunities in developing into first-tier cities in China,
          as
          most of them have already been taken by other large gas distributors, such
          as
          Xin’ao Gas Co. Ltd (largest in China) in the past decade.
 
 Still,
          potential users in small and medium-sized cities need to be educated by
          the
          benefits of natural gas. It takes some time for them to get to know how
          natural
          gas can improve the quality of life. This is especially true for new markets,
          where there is no use of natural gas. Small cities tend to be more reluctant
          for
          use of new energies than large cities where residents depend more on coal,
          rather than natural gas.
 
 China’s
          energy market is highly regulated by the government, with regard to purchase
          price and sale price of natural gas. Whenever there is an adjustment to
          purchase
          price by the government, gas distributors would increase the sale price
          correspondingly, subject to a public hearing and government approval. The
          increase of natural gas price in China is lagging behind that in the
          international markets, which has soared in the past year. The Chinese government
          has seldom adjusted natural gas and we can not rule out the possibilities
          of
          increase of natural gas price by the government in the future. Even though
          we
          can adjust the sale price accordingly after the increase of purchase price,
          passing the increase to end users. However, it would make natural gas more
          expensive, as compared to other alternative energies. Thus this increase
          of
          price will deter our business development.
 
 **Risks
          in Short-Term and Long-Term**
 
 In
          each
          of the cities we are developing and aiming to develop, the real estate
          market is
          the major factor that impacts us. Most of our residential customers are
          the new
          home buyers. If the real estate market turns downward, the demands for
          new homes
          would decrease, resulting in fewer natural gas connections, and thus negatively
          impacting our business.
 
 To
          reduce
          the company’s heavy dependence on connection fees, the company is looking at
          opportunities to diversify its business by expanding into related areas,
          such as
          pipeline and gas station business. However, we do not expect to develop
          into
          those areas in large scale any time soon and it may take some time for
          those
          business to become our major business.
 
 **Liquidity
          and Capital Resources**
 
 Natural
          gas distribution is a typical capital-intensive industry, which requires
          a large
          amount of capital for the construction of pipelines and gas stations, purchase
          of transportation vehicles etc. while the investment would be paid back
          in the
          following year with increasing new household connections. Under the organic
          growth model (growth by the Company without outside funding), the Company
          can
          develop new city projects by using the money generated from existing cities.
          The
          Company would be constrained by inadequate capital when developing into
          bigger
          cities or making Merger &Acquisition activities, under which situation the
          company needs to raise money to finance its business
          expansion.
 
 **For
          the three months ended September 30, 2008**
 
 **Overview**
 
 As
          measured by net revenue, net income, and the other categories of performance
          set
          forth below, our business enjoyed significant growth during the three-
          and
          nine-month periods ended September 30, 2008. The third quarter is traditionally
          a strong season for the company, as the company begins to earn most of
          its
          connection fees of the year through the year end with the completion of
          gas
          pipeline construction.
 
 Construction
          of pipelines and gas stations usually begins in the late first quarter
          and early
          second quarter, after being largely inactive in the first quarter due to
          the
          cold weather in the north of China, where most of our operations are located.
          The bulk of the revenue from these operations, however, is not generated
          until
          late in the year, when further stages of the construction process have
          been
          completed.
 
 For
          the
          three months ended September 30, 2008, net sales slightly decreased 3.75%
          to
          $5,440,212 compared to the same period of last year. Net profit decreased
          60.39%
          to $1,043,591 during the same three months ended September 30, 2008 compare
          to
          the same period of last year.
 
 For
          the
          first nine months of the year, net sales increased36.9% to $14,903,850
          compared
          to the same period of last year. Net profit decreased nearly 79.84% to
          $656,031
          during the same nine months ended September 30, 2008 compared to the same
          period
          of last year.
 
 The
          strong performance was mainly due to the significant increase of gas sale
          from
          industrial users and residential users. Sino Gas added two industrial users
          in
          the second half of 2007, which contributes to $ 0.79 million Gas Sales
          in the
          first nine months of 2008. The increase of number of connected household
          has
          also resulted in an increase of residential gas usage. As of Sep 30, 2008,
          our
          distribution network included 112,251 connected households, compared to
          69,890
          connected users one year earlier. During the nine months ended Sep 30,
          2008, we
          constructed natural gas pipelines connected to 18,543 residential households,
          as
          compared to 21,629 new household connections during the same period in
          2007.
 
 36
 **RESULTS
          OF OPERATIONS**
 ***Three
          Months Ended Sep 30, 2008 Compared to Three Months Ended Sep 30,
          2007***
 
 **Net
          Revenues**
 We
          generate revenue from two sources: connection fees for constructing connections
          to our natural gas distribution network, and sales of natural gas. Total
          net
          revenue for the three months ended September 30, 2008 was$5,440,212, compared
          to
          $5,652,240 for the same period in 2007, representing a slight decrease
          of 3.75%.
          The decrease was due to increase of average selling price of natural gas,
          and
          partially offset by decrease of new customers connecting to our gas distribution
          network. During this period, we connected 6,857 new residential households
          to
          our gas distribution network, resulting in total connection fees of $3,401,014.
          Gas sales during the period amounted to5.91 million cubic meters, or $2.04
          million.
 
 In
          comparison, during the same period one year ago, we connected 15,043 new
          residential households to our gas distribution network, resulting in total
          connection fees of $4,011,844. Gas sales during the period amounted to6.45
          million cubic meters, or $1.64 million.
  The
          following table summarizes our net revenue during the periods
          indicated:
  For
                    the three months ended Sep
                    302008
                
                2007
                
                Change(
                  $
                  thousand)
                
                US$
                
                %
                
                US$
                
                %
                
                %Total
                    Revenue
                
                
                5,440.2
                
                
                100
                %
                
                5,652.2
                
                
                100
                %
                
                -3.75
                %Connection
                    Fees
                
                
                3401.0
                
                
                63
                %
                
                4011.8
                
                
                71
                %
                
                -15.23
                %Gas
                    Sales
                
                
                2,039.2
                
                
                37
                %
                
                1640.4
                
                
                29
                %
                
                24.31
                %
  37
 
 ***Connection
          fees***
  Connection
          fees during three months ended Sep 30, 2008 were $3,401,014, representing
          a
          decrease of 15.23% from $4,011,844 for the same period last year. Connection
          fees accounted for approximately 63% of total revenue during the period,
          compared with approximately71% for the same period in 2007.
 
 We
          had
          connected a total of 6,857 new residential households during the three
          months
          ended September 30, 2008 in the twenty-eight  cities
          where we have developed or acquired gas distribution network.
 
 
 ***Gas
          sales***
 
 We
          sold
          approximately 5.91 million cubic meters of natural gas to our customers
          during
          the three months ended September 30, 2008, accounting for roughly $2.04
          million,
          or37.5% of total net revenue. In comparison, gas sold in the three months
          ended
          September 30, 2007 totaled6.45 million cubic meters, accounting for $1.64
          million, or 29%, of net revenue. Gas sales increased $0.40 million, or
          24.31%,
          from the same period one year ago.
 
 Among
          the
          total gas sales, industrial users accounted for $1.27 million, residential
          users
          accounted for $0.45 million. The others are accounted for $0.32 million.
          In
          comparison, during the three months ended September 30, 2007, industrial
          users
          accounted for $0.83 million gas sales, residential users accounted for
          $0.39
          million and others accounted for $0.43 million.
 
 **Cost
          of Revenue**
  Our
          cost
          of revenue, which includes cost of connections and cost of natural gas
          sales,
          was $3,160,189for the three months ended September 30, 2008.
 
 The
          table
          below sets forth our cost of revenues for the periods indicated:
 
 For
                    the three months ended September 30,2008
                
                2007($
                    thousands)
                
                US$
                
                %
                
                US$
                
                %Cost
                    of Revenue
                
                
                3,160.2
                
                
                100
                %
                
                1,965.1
                
                
                100
                %Connection
                    Cost
                
                
                1,161.4
                
                
                37
                %
                
                707.7
                
                
                36
                %Gas
                    Cost
                
                
                1,998.9
                
                
                63
                %
                
                1257.4
                
                
                64
                %
  38
 
 *Cost
          of Connections*
  Our
          cost
          of connections during the three months ended September 30, 2008 was $1.16
          million, or 37% of total cost of revenue. By comparison, the cost of connections
          during the three months of 2007 was $0.7 million, or 36% of total cost
          of
          revenue.
 
 Cost
          of
          connection increased around 64.11% from the same period one year ago, due
          to
          both the expansion of our operations and the increased cost of gas station
          maintenance resulting from the development of our gas stations.
 
 Cost
          of
          connection fees includes depreciation of major pipelines, the cost of courtyard
          pipelines, valves, gas meters, and installation and maintenance
          fees.
 
 *Cost
          of Natural Gas Sales*
  The
          cost
          of natural gas sales increased 58.96% to $2.00 million during the three
          months
          ended September 30, 2008 from the same period in 2007, when it was $1.26
          million
          and 64% of total cost of revenue. This increase, which outpaced the 24.31%
          increase in sales of natural gas during the same interval,
          is largely due to the
          increase of rental expenses on gas delivery trucks, and under provision
          of
          natural gas cost for the second quarter, which was recorded in the third
          quarters. When we
          look at the gross margin of natural gas sales on year to date basis, the
          gross
          margin is consistent with the same period of last year.
 
 The
          cost
          of natural gas sales includes the purchase and transportation of natural
          gas and
          depreciation of delivery trucks. The purchase price that gas distributors
          pay
          for natural gas, which is set by the PRC government, is approximately RMB
          1.6 to
          1.9 ($0.21 to $0.25) per cubic meter. Langfang Development Zone Wei Ye
          Hazardous
          Goods Transportation Co. Ltd, one of our subsidiaries, is responsible for
          our
          gas transportation, and transportation cost per cubic meter is relatively
          stable
          at RMB 0.55 ($0.072) per cubic meter. Management believes that this
          transportation cost per cubic meter is likely to remain constant in spite
          of the
          increased depreciation costs from the newly purchased vehicles described
          above,
          because the vehicles will allow delivery of additional natural gas to customers
          in sufficient numbers to offset those costs
 
 **Gross
          Profit**
 
 For
                    the three months ended September 30,2008
                
                2007($
                    thousand)
                
                US$
                
                %
                
                US$
                
                %Gross
                    Profit
                
                
                2,280
                
                
                100
                %
                
                3,687
                
                
                100
                %Connection
                
                
                2,240
                
                
                98.23
                %
                
                3304
                
                
                89.61
                %Gas
                
                
                40.4
                
                
                1.77
                %
                
                383
                
                
                10.39
                %
  39
 
 During
          the three months ended Sep 30, 2008, gross profit was $2.28 million, an
          decrease
          of approximately38.16% from the same period of 2007. Gross profit from
          connection fees is $2.24 million for the three months ended September 30,
          2008,
          accounting for98.23% of total gross profit. In comparison, gross profit
          from
          connection fees was $3.30 million for the three months ended September
          30, 2007,
          accounting for89.61% of total gross profit. Gross profit from gas sales
          was
          $0.04 million, compared to $0.38 million in the same period of
          2007.
 
 Gross
          margin during the three months ended September 30, 2008 is 41.91%, compared
          to65.23% during the three months ended September 30, 2007. Gross margin
          for
          connection fees for the third quarter of 2008 was 65.85%, as compared to82.36%
          for the same quarter of 2007.
 
 The
          decrease of connection gross margin are because we built gas distribution
          infrastructure which can be used for 25-30 years by the total potential
          residential households in our operating cities and now only a small proportion
          of residential households have been connected. As a result, the depreciation
          under the cost of connection is relatively higher. Meanwhile, the raw material
          cost pertains to connection has also increased this year. During this period,
          we
          connected 6,857 new residential households to our gas distribution network,
          in
          comparison, during the same period one year ago, we connected 15,043 new
          residential households to our gas distribution network.
 
 Gross
          margin for sales of natural gas was 1.98% during the same period, compared
          with
          23.35% in the same period of 2007. The decrease was due to increase of
          rental
          expenses on gas delivery trucks, and under provision of natural gas cost
          for the
          second quarter, which was recorded in the third quarters. .
 
 **Sale
          and marketing expenses**
 
 Our
          sale
          and marketing expenses in the three months ended September 30, 2008 were
          $226,678 and approximately 4.17% of our net sales, compared with $176,739,
          or
          3.13% of net sales in the same period of 2007. This increase of sale and
          marketing expenses was principally due to increases in marketing-related
          fees,
          including travel and communications resulting from expansion of our
          business.
  40
  **General
          and administrative expenses**
 
 General
          and administrative expenses were $0.65 million for the three months ended
          September 30, 2008, which was 4.53% higher than $0.62 million for the same
          period last year. The increase was largely due to the increase in the number
          of
          operating subsidiaries we own, from 26 to 27, which led to increases in
          salary,
          social insurance, traveling expenses and other expenses.
 
 General
          and administrative expenses equaled 12% of our net sales in the three months
          ended September 30, 2008, compared with 11% in the same period one year
          ago.
 
 **Income
          Tax**
 
 For
          2008,
          the income tax rate applicable to Beijing Gas, the main subsidiary of Sino
          Gas
          in China, is currently 25%.
 The
          income tax rate of our subsidiaries is 25%, except for Beijing Chenguang
          and
          Beijing Gas, because Beijing Chenguang has also been classified as a foreign
          high-tech enterprise and is subject to a favorable income tax rate of 7.5%
          from
          2006 to 2008.
  **Net
          Income**
 
 Net
          income in the three months ended September 30, 2008 was $1.04 million,
          representing a decrease of 60.39% from $2.63 million in the same period
          in
          2007. This is
          mainly due to the significant decrease of connection fee compared with
          the same
          period of last year. During
          this period, we connected 6,857 new residential households to our gas
          distribution network, in comparison, during the same period one year ago,
          we
          connected 15,043 new residential households to our gas distribution network.
          Two
          years ago, Chinese government implemented a series of policy and regulations
          to
          curb inflation and property market. This has resulted in slow down of real
          estate market in China. This has affected Real Estate developer, our customer,
          to grant contract to us to perform new connection service.
  Net
          profit margin is 19%, compared with 47% for the same period one year
          ago.
 
 ***Nine
          Months Ended Sep 30, 2008 Compared to Nine Months Ended Sep 30,
          2007***
 
 **Net
          Revenue**
 
 W e
          generate revenue from two sources: connection fees for constructing connections
          to our natural gas distribution network, and sales of natural gas. Total
          net
          revenue for the nine months ended Sep 30, 2008 was $14,903,850, compared
          to
          $10,886,612 for the same period in 2007, representing an increase of 37
          %. The
          increase was due to new customers connecting to our gas distribution network
          and
          new customers purchasing our natural gas. During this period, we connected
          18,543 new residential households to our gas distribution network, resulting
          in
          total connection fees of $6,310,753. Gas sales during the same period amounted
          to25.9 million cubic meters, or $8,593,097. In comparison, during the same
          period one year ago, we connected 21,629 new residential households to
          our gas
          distribution network, resulting in total connection fees of $5,997,716.
          Gas
          sales during the period amounted to 18.18 million cubic meters, or
          $4,888,896.
  41
 The
          following table summarizes our net revenue during the periods
          indicated:
  For
                    the nine months ended Sep
                    302008
                
                2007
                
                Change(
                      $
                      thousand)
                
                US$
                
                %
                
                US$
                
                %
                
                %Total
                    Revenue
                
                
                14,903.9
                
                
                100
                %
                
                10,886.6
                
                
                100
                %
                
                36.9
                %Connection
                    Fees
                
                
                6,310.8
                
                
                42
                %
                
                5,977.7
                
                
                55
                %
                
                5.22
                %Gas
                    Sales
                
                
                8,593.1
                
                
                58
                %
                
                4,888.9
                
                
                45
                %
                
                75.77
                %
 
 ****** ***Connection
          fees***
  Connection
          fees during nine months ended Sep 30, 2008 were $6,310,753, representing
          an
          increase of about 5% from $5,997,716 for the same period last year. Connection
          fees accounted for approximately 42% of total revenue during the period,
          compared with approximately 55% for the same period in 2007.
 
 We
          had
          connected a total of18,543 new residential households during the first
          nine
          months of the year in the twenty-four cities where we have developed or
          acquired
          gas distribution network.
 42
  ***Gas
          sales***
 
 We
          sold
          approximately 25.9 million cubic meters of natural gas to our customers
          during
          the nine months ended September 30, 2008, accounting for roughly $8.6 million,
          or58% of total net revenue. In comparison, gas sold in the first nine months
          of
          2007 totaled18.2 million cubic meters, accounting for $4.9 million, or
          45%, of
          net revenue. Gas sales increased $3.7 million, or 75.77%, from the same
          period
          one year ago.
 
 Among
          the
          total gas sales, industrial users accounted for $3.45 million, residential
          users
          accounted for $2.07 million. The rest, most of which was sold through other
          gas
          distributors, accounted for $3.07 million.
 
 In
          comparison, during the nine months ended September 30, 2007, industrial
          users
          accounted for $1.98million gas sales, residential users accounted for $1.19
          million and others accounted for $1.72millon.
 
 Gas
          sales
          from industrial users increased 74.5%. We added two industrial users at
          the end
          of 2007. That contributes the significant increase of Gas Sales from industrial
          users..
 The
          following table summarizes our gas sales during the periods
          indicated:
  For
                    the Nine months ended September
                    302008
                
                2007($
                    thousand)
                
                US$
                
                %
                
                US$
                
                %Gas
                    SalesIndustrial
                    users
                
                
                3,448.9
                
                
                40
                %
                
                1,975.9
                
                
                40
                %Residential
                    users
                
                
                2,071.4
                
                
                24
                %
                
                1,189.1
                
                
                25
                %Others
                
                
                3,072.9
                
                
                36
                %
                
                1,723.9
                
                
                35
                %Total
                
                
                8,593.1
                
                
                100
                %
                
                4888.9
                
                
                100
                %
 
 The
          five
          industrial users account for 40% of our total gas sales. The daily gas
          consumption of industrial users is far higher than that of the residential
          households, as the gas is heavily used for industrial production.
 
 The
          table
          below provides information about our industrial users for natural
          gas:
  **Industrial
                    Projects**
                
                **Gas Sales**
                  **(1000
                    M3)**
                
                **Gas Sales**
                  **($1,000)**Hebei
                    Zhonggang
                
                
                6,752
                
                
                2,324.1Hebei
                    Tangshan Changsheng
                
                
                681.3
                
                
                226.9North
                    China Petro First Machinery
                
                
                1,176.8
                
                
                394.8Langfang
                    Elite
                
                
                247.5
                
                
                76.9Hebei
                    Jihengyuan Group
                
                
                867.4
                
                
                390.2
  43
 
 **Cost
          of Revenue**
  Our
          cost
          of revenue, which includes cost of connection and cost of natural gas sales,
          was
          $9,690,253 for the nine months ended September 30, 2008.
 
 The
          table
          below sets forth our cost of revenues for the periods indicated:
 
 For
                    the Nine months ended September 30,2008
                
                2007($
                    thousands)
                
                US$
                
                %
                
                US$
                
                %Cost
                    of Revenue
                
                
                9,690.3
                
                
                100
                %
                
                5,697.0
                
                
                100
                %Connection
                    Cost
                
                
                1,982.3
                
                
                20
                %
                
                1,348.3
                
                
                24
                %Gas
                    Cost
                
                
                7,708.0
                
                
                80
                %
                
                4,348.7
                
                
                76
                %
  *Cost
          of Connections*
  Our
          cost
          of connection during the nine months ended September 30, 2008 was $1.98
          million,
          or20% of total cost of revenue. By comparison, the cost of connection during
          the
          nine months of 2007 was $1.35 million, or 24% of total cost of
          revenue.
 
 Cost
          of
          connection increased around 47% from the same period one year ago, because
          we
          built gas distribution infrastructure which can be used for 25-30 years
          by the
          total potential residential households in our operating cities and now
          only a
          small proportion of residential households have been connected. As a result,
          the
          depreciation under the cost of connection is relatively higher. Meanwhile,
          the
          raw material cost pertains to connection has also increased this
          year.
 
 Cost
          of
          connection fees includes depreciation of major pipelines, the cost of courtyard
          pipelines, valves, gas meters, and installation and maintenance
          fees.
 
 *Cost
          of Natural Gas Sales*
  The
          cost
          of natural gas sales increased 77% from the nine months ended September
          30,
          2007, when it was $4.35 million and 76% of total cost of revenue. It is
          consistent on year to year basis.
 
 The
          cost
          of natural gas sales includes the purchase and transportation of natural
          gas and
          depreciation of delivery trucks. The purchase price that gas distributors
          pay
          for natural gas, which is set by the PRC government, is approximately RMB
          1.6 to
          1.9 ($0.21 to $0.25) per cubic meter. Langfang Development Zone Wei Ye
          Hazardous
          Goods Transportation Co. Ltd, one of our subsidiaries, is responsible for
          our
          gas transportation, and transportation cost per cubic meter is relatively
          stable
          at RMB 0.55 ($0.072) per cubic meter. Management believes that this
          transportation cost per cubic meter is likely to remain stable in spite
          of the
          increased depreciation costs from the newly purchased vehicles described
          above,
          because the vehicles will allow delivery of additional natural gas to new
          customers in sufficient numbers to offset those costs
  44
 
 We
          signed
          a ten-year gas supply agreement in 2003. At the beginning of each year
          in the
          ten-year contract period, we negotiate with Petro China on the price and
          supply
          amount according to market conditions. In 2007, Petro China supplied a
          total of
          10 million cubic meters of natural gas at RMB 1.55 ($0.204) per cubic meter
          between April 1 and October 31 and RMB 1.65 ($0.217) per cubic meter during
          the
          r est
          of
          the year.
 
 **Gross
          Profit**
 
 For
                    the nine months ended September 30,2008
                
                2007($
                    thousand)
                
                US$
                
                %
                
                US$
                
                %Gross
                    Profit
                
                
                5,214
                
                
                100
                %
                
                5,190
                
                
                100
                %Connection
                
                
                4,329
                
                
                83
                %
                
                4,650
                
                
                90
                %Gas
                
                
                885
                
                
                17
                %
                
                540
                
                
                10
                %
 
 During
          the nine months ended Sep 30, 2008, gross profit was $5.21 million, an
          increase
          of approximately 0.46% from the same period of 2007. Gross profit from
          connection fees is $4.33million for the first nine months of 2008, accounting
          for83% of total gross profit. In comparison, gross profit from connection
          fees
          was $4.65 million for the first nine months of 2007, accounting for 90%
          of total
          gross profit. Gross profit from gas sales was $0.89 million, compared to
          $0.54
          million in the same period of 2007.
 
 Gross
          margin during the nine months ended September 30, 2008 is 34.98%, compared
          to
          47.7% during the nine months ended September 30, 2007. Gross margin for
          connection fees for the first nine months of 2008 was 68.59%, compared
          to77.52%
          for the first nine months of 2007.
 
 The
          decrease of connection gross margin are mainly because we built gas distribution
          infrastructure which can be used for 25-30 years by the total potential
          residential households in our operating cities and now only a small proportion
          of residential households have been connected. As a result, the depreciation
          under the cost of connection is relatively higher. Meanwhile,
          the raw material cost pertains to connection has also increased this
          year.
 
 Gross
          margin for sales of natural gas was 10.3% during the same period, compared
          with
          11.05% during the same period of 2007, due to the relatively higher
          transportation expense incurred this year.
 
 Sale
          and
          marketing expenses
 
 Our
          sale
          and marketing expenses in the nine m onths
          ended September 30, 2008 were $594.6 thousand and approximately 3.99% of
          our net
          sales, compared with $376,233 and less than 3.46% of net sales during the
          same
          period of 2007. This increase of sale and marketing expenses was principally
          due
          to increases in marketing-related fees, including travel and communications
          resulted from expansion of our business.
  45
  **General
          and administrative expenses**
 
 General
          and administrative expenses w ere
          $2.65
          million for the nine months ended September 30, 2008, which was 102% higher
          than
          $1.31million for the same period la st
          year.
          The increase was largely due to the contingent expenses of 1.2 million,
          including the penalties and interests of late registration and late
          effectiveness of 481,800 USD, the fee of legal counsel induced by then
          pending
          registration and financial consultant of 344,565 USD, the escrow account
          expenses of 246,186, and the Oxley-Sarbanes costs about 140,000 USD for
          consultation, which was disclosed in the second quarter. And it also include
          the
          increase in the number of operating subsidiaries we o wn,
          from
          26 to 28, w hich
          led
          to increases in salary, social insurance, traveling expenses and other
          expenses
          as normal. The increase was also due in part to increased depreciation
          relating
          to new assets described above.
 
 **Income
          Tax**
 
 For
          2008,
          the income tax rate applicable to Beijing Gas, the main subsidiary of Sino
          Gas
          in China, is currently 25%.
 The
          income tax rate of our subsidiaries is 25%, except for Beijing Chenguang
          and
          Beijing Gas, because Beijing Chenguang has also been classified as a foreign
          high-tech enterprise and is subject to a favorable income tax rate of 7.5%
          from
          2006 to 2008.
  **Net
          Income**
 
 Net
          income in the nine months ended September 30, 2008 was $0.66 million, representing an decrease of 79.84%
          from
          $3.25 million in the same period in 2007. This is
          due to
          the significant decrease of connection fee compared with the same period
          of last
          year and the increase of SG&A expense. During
          this period, we connected 18,543 new residential households to our gas
          distribution network, in comparison, during the same period one year ago;
          we
          connected 21,629 new residential households to our gas distribution network.
          Two
          years ago, Chinese government implemented a series of policy and regulations
          to
          curb inflation and property market. This has resulted in slow down of real
          estate market in China. This has affected Real Estate developer, our customer,
          to grant contract to us to perform new connection service. And the boost
          general
          and administrative expenses mentioned above also negatively influenced
          our
          performance.
  Net
          profit margin is 4.4%, compared with 29.9%for the same period last
          year.
 
 **Liquidity
          and Capital Resources**
 
 As
          of
          September 30, 2008, cash and cash equivalents were $6.5 million, a decrease
          of
          $4.4 million from $10.9 million as of December 31, 2007 which was due to
          the
          increase in cash flow from operating, partly offset by our investment activities
          and financing activities.
  46
  Cash
          flow
          from operating activities during the nine months ended September 30, 2008
          is
          $3.56 million, an increase of $4.52 million from the end of 2007.
 
 **Accounts
          Receivable**
 
 Accounts
          receivable as of September 30, 2008 were $6.23 million, representing a
          decrease
          of $1.1 million from $7.32 million as of December 31, 2007. This decrease
          is
          primarily due to our seasonal business cycle, in which many accounts receivable
          are recorded upon completion of construction projects in the fourth quarter,
          and
          are collected in the second quarter of the following year. The term of
          most of
          our accounts receivable is one year. As of the end of the second quarter,
          accounts receivable dated from 2007 had been mostly collected, and the
          remainder
          were primarily warranty payments. A warranty payment is the final payment
          that a
          customer makes for a construction project. It consists of the final 10%
          of the
          total project cost, and it becomes payable one year after construction
          has been
          completed, provided that no significant problems with the construction
          have
          arisen during the year.
 As
          we
          expect to see a relative large number of connections completed during the
          fourth
          quarter, account receivable is expected to rise sharply during the fourth
          quarter.
 
 Notes
          Receivable
 Notes
          receivable of $0.36 million as of September 30, 2008 is the Note issued
          by Hebei
          Zhonggang for its use of gas. The Note will be duly honored by
          bank.
  **Other
          Payables**
 
 Other
          payables as of September 30, 2008 were $7.19 million, a decrease of $3.2
          million
          from the end of 2007.
  ***Off-Balance
        Sheet Arrangements***
 
 We
        do not
        have any off-balance sheet arrangements.
  47
 **Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
 
 Not
        required.
  **Item
        4. Controls and Procedures**
 
 **Evaluation
        of disclosure controls and procedures.**
  Under
        the
        supervision and with the participation of our management, including the Chief
        Executive Officer and Chief Financial Officer, we have evaluated the
        effectiveness of our disclosure controls and procedures (as defined in Exchange
        Act Rule 13a-15(e) or 15d-15(e) ) as required by Exchange Act Rule 13a-15(b)
        or
        15d-15(b) as of the end of the third quarter of 2008. Based on that evaluation,
        the Chief Executive Officer and Chief Financial Officer have concluded that
        these disclosure controls and procedures are not effective due to the material
        weaknesses described below.
 
 **Evaluation
        of****Internal Control over Financial Reporting**
 
 Our
        management is responsible for establishing and maintaining adequate internal
        control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
        of
        the Exchange Act and have designed internal control over financial reporting
        or
        caused internal control over financial reporting to be designed under its
        supervision in order to provide reasonable assurance regarding the reliability
        of financial reporting and the preparation of financial statements for external
        purposes in accordance with generally accepted accounting principles, as
        applicable. Due to its inherent limitations, internal control over financial
        reporting may not prevent or detect material misstatements. In addition,
        projections of any evaluation of effectiveness to future periods are subject
        to
        the risk that controls may become inadequate because of changes in conditions,
        or that the degree of compliance with the policies or procedures may
        deteriorate.
 
 Under
        the
        supervision of and with the participation of our Chief Executive Officer
        and our
        Chief Financial Officer, our management conducted its evaluation of the
        effectiveness of our Company’s internal control over financial reporting as of
        September 30, 2008, using the criteria in the *Internal
        Control-Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        Based on that evaluation, our management concluded that, as of September
        30,
        2008, our Company’s internal control over financial reporting was not effective
        due to the material weaknesses described below.
 
 (1)
        The
        Company has not yet established a comprehensive Code of Conduct and Ethics
        (the
“Code”) which is applicable to all Company directors, officers and
        employees.
 
 (2)
        Our
        Internal Audit Department has not taken an active role in the conduct of
        its
        activities due to insufficient resources. The annual plan, budget, and specific
        procedures to perform the internal audit function has not been developed,
        and
        the anti-fraud audit plan has not been developed either.
 
 (3)
        Our
        Audit Committee was not comprised of sufficient independent directors who
        are
        "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under
        the
        Exchange Act. Our Audit Committee did not appoint a member who qualifies
        as an
        "audit committee financial expert" as defined in Item 401(e) of Regulation
        S-B.
        Our written Audit Committee Charter was not submitted to the Boards for
        approval.
 
 (4)
        Our
        Company did not formulate a Related Party Transactions Policy and develop
        a
        master list of all Related Parties.
 
 **Management’s
        Plan for Remediation of Material Weaknesses**
 
 In
        light
        of the conclusion that our Company’s internal control over financial reporting
        was not effective, our management has worked, and will continue to work,
        to
        address these weaknesses in our internal control over financial reporting.
        Implementations of certain remedial measures include the following:
  (1)
        We
        are going to issue the Code, and arrange respective training to all the
        employees in the near future. Training which includes the content of the
        Code
        will be provided to new employees at the time of hiring. All the employees
        will
        be required to sign an affidavit acknowledging that the employee has read
        and
        will intend to comply with the Code;
 
 (2)
        The
        management is committed to develop a comprehensive and risk-based internal
        audit
        function within the Company. With the limited human capital supplies in the
        market, we have engaged a third party professional to assist the management
        in
        establishing the internal control system. At the same time, we have enhanced
        our
        efforts of recruitment and interviews are undergoing. We expect that an internal
        audit department will be set up in the near future. With the continuous
        assistance from the third party professional, the roles and responsibilities
        of
        the internal audit department will be formulated and a risk-based internal
        audit
        plan will be developed and approved by the Audit Committee within a month
        after
        the set up.
 
 (3)
        The
        Board of Directors has appointed Mr. Zhang Xin Min on March 10, 2008, Mr.
        Zhang
        serves as a financial expert of Audit Committee and will provide
        oversight/monitoring over our financial reporting mechanism.
 
 **Changes
        in Internal Control over Financial Reporting**
  During
        the period ended September 30, 2008, there was no change in our internal
        controls over financial reporting that has materially affected, or that is
        reasonably likely to materially affect, our internal control over financial
        reporting.
 
 48
 **PART
        II - OTHER INFORMATION**
 **Item
        1. Legal Proceedings**
 
 None
 
 **Item
        1A. Risk Factors**
 
 Not
        required.
 
 **Item
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds**
 
 On
        August
        18, 2008, Sino Gas consummated a spin-off of Pegasus Tel, Inc. (“Pegasus”), a
        Delaware corporation and a wholly-owned subsidiary of Sino Gas, to Sino Gas’
stockholders of record as of August 15, 2008 (“Spin-off”).  The Ratio
        of Distribution of the Spin-off was one (1) share of common stock of Pegasus
        for
        every twelve (12) shares of  common stock of Sino Gas
        (1:12).  Fractional shares were rounded up to the nearest
        whole-number.  An aggregate of 2,215,136 shares of Pegasus common
        stock were issued pursuant to the Spin-off to an aggregate of 167 Sino Gas
        stockholders. The Pegasus common stock issued in the Spin-off are “restricted
        securities” (as defined in Rule 144 of the Securities Act of 1933, as amended
        (the “Securities Act”)), and were issued pursuant to Section 4(2) of the
        Securities Act due to the fact that the distribution did not involve a public
        offering. There is no public market for the spin-off Pegasus shares. There
        was
        no consideration for the spun-off shares. The spin-off was pro rata. Sino
        Gas
        provided adequate information because it is a reporting company and has been
        for
        more than 90 days, and Sino Gas spun-off restricted shares of
        Pegasus.
 
 **Item
        3. Defaults Upon Senior Securities**
 
 None
 
 **Item
        4. Submission of Matters to a Vote of Security
        Holders.**
 
 None
 
 **Item
        5. Other Information**
 
 None
 
 **Item
        6.  Exhibits**
  The
        following exhibits are hereby filed as part of this Quarterly Report on Form
        10-Q.
  Exhibit
                Number:
              
              Description31.1
              
              Certification
                  of Chief Executive Officer under Section 302 of the Sarbanes-Oxley
                  Act of
                  2002.31.2
              
              Certification
                  of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley
                  Act of 2002.32.1
              
              Certifications
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
                  Section 1350
  49
 **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant certifies that it has duly caused this Quarterly Report
        on
        Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
        authorized, in Beijing.
  **SINO
                  GAS INTERNATIONAL HOLDINGS, INC.**Date:
                  November 14, 2008
              By:
              /s/ Yuchuan
                  LiuYuchuan
                  LiuChairman
                  and Chief Executive Officer
  **SINO
                  GAS INTERNATIONAL HOLDINGS, INC.**Date:
                  November 14, 2008
              By:
              /s/ Yugang
                  ZhangYugang
                  ZhangChief
                  Financial Officer
  50