United States

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 June
30, 2012



or



| ̈ | 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                                                           | 90-0438712                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)



|No. 18 Zhong Guan Cun Dong St.
Haidian DistrictBeijing, P. R. China | 100083    
|------------------------------------------------------------------- | ----------
|(Address of principal executive offices)                            | (Zip Code)



Issuer’s telephone number: 86-10-82600527



Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
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.

YesxNo  ̈



Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§32.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).

Yes xNo  ̈



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



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





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

Yes   ̈No x



As of June 30, 2012, the Registrant had 31,793,698 shares of
common stock outstanding.



Except as otherwise indicated by the context, references in
this Form 10-Q to:













“SGAS”, the “Company”, “we”,
“our”, or “us” are references to Sino Gas International Holdings, Inc and its subsidiaries, unless the
context indicates otherwise.

“U.S. Dollar”, “$”, and “US$”
mean the legal currency of the United States of America.

“RMB” means Renminbi, the legal currency of China.

“China” or the “PRC” are references
to the People’s Republic of China.

“U.S.” is a reference to the United States of America.

“SEC” is a reference to the Securities & Exchange
Commission of the United States of America.









Sino Gas International Holdings, Inc.



Table of Contents



|         |                                                                                      |  | Page
|-------- | ------------------------------------------------------------------------------------ |  | ----
|PART I   | FINANCIAL INFORMATION                                                                |  |     
|         |                                                                                      |  |     
|Item 1.  | Financial Statements (Unaudited)                                                     |  |     
|         |                                                                                      |  |     
|         | Notes to Financial Statements (Unaudited)                                            |  | 9   
|         |                                                                                      |  |     
|Item 2.  | Management’s Discussion and Analysis of Financial Condition and Results of Operation |  | 34  
|         |                                                                                      |  |     
|Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                           |  | 41  
|         |                                                                                      |  |     
|Item 4.  | Controls and Procedures                                                              |  | 41  
|         |                                                                                      |  |     
|PART II  | OTHER INFORMATION                                                                    |  |     
|         |                                                                                      |  |     
|Item 1.  | Legal Proceedings                                                                    |  | 42  
|         |                                                                                      |  |     
|Item 1A. | Risk Factors                                                                         |  | 42  
|         |                                                                                      |  |     
|Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                          |  | 42  
|         |                                                                                      |  |     
|Item 3.  | Defaults Upon Senior Securities                                                      |  | 42  
|         |                                                                                      |  |     
|Item 4.  | Mining Safety Disclosure                                                             |  | 42  
|         |                                                                                      |  |     
|Item 5.  | Other Information                                                                    |  | 42  
|         |                                                                                      |  |     
|Item 6.  | Exhibits                                                                             |  | 42  











PART I - FINANCIAL INFORMATION



Item 1. Financial Statements (Unaudited)









Sino Gas International Holdings, Inc.



Consolidated Financial Statements



June 30, 2012 and December 31, 2011



(Stated in US Dollars)













Sino Gas International Holdings, Inc.



|Content                                                 | Page  
|------------------------------------------------------- | ------
|                                                        |       
|Report of Independent Registered Public Accounting Firm | 1     
|                                                        |       
|Consolidated Balance Sheets                             | 2 - 3 
|                                                        |       
|Consolidated Statements of Income                       | 4     
|                                                        |       
|Consolidated Statements of Stockholders’ Equity         | 5 - 6 
|                                                        |       
|Consolidated Statements of Cash Flows                   | 8     
|                                                        |       
|Notes to Financial Statements                           | 9 - 33















|To: | The Board of Directors and Stockholders of
|--- | ------------------------------------------
|    | 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 June 30, 2012 and December 31, 2011, and the related consolidated
statements of income, stockholders’ equity, and cash flows for the three months and six months periods ended June 30, 2012
and 2011. These consolidated interim financial statements are the responsibility of the Company’s management.



We conducted our review 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.







|San Mateo, California | WWC, P.C.                   
|--------------------- | ----------------------------
|August 13, 2012       | Certified Public Accountants





1









Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





|ASSETS                               |  |  |        |  | 6/30/2012 |   |             | 12/31/2011 | 
|------------------------------------ |  |  | ------ |  | --------- | - | ----------- | ---------- | 
|Current Assets                       |  |  | Notes  |  |           |   |             |            | 
|Cash & cash equivalents              |  |  | 2(e)   |  |           | $ | 6,403,184   |            | 
|Restricted cash                      |  |  |        |  |           |   | 438,676     |            | 
|Notes receivable                     |  |  |        |  |           |   | 327,191     |            | 
|Accounts receivable                  |  |  | 2(f),3 |  |           |   | 9,979,470   |            | 
|Other receivables                    |  |  | 4      |  |           |   | 3,581,727   |            | 
|Related party receivable             |  |  | 5      |  |           |   | 427,235     |            | 
|Inventory                            |  |  |        |  |           |   | 1,500,356   |            | 
|Advance to suppliers                 |  |  | 2(g)   |  |           |   | 5,771,657   |            | 
|Prepaid expenses and taxes           |  |  |        |  |           |   | 972,418     |            | 
|Total Current Assets                 |  |  |        |  |           |   | 29,401,914  |            | 
|                                     |  |  |        |  |           |   |             |            | 
|Non-Current Assets                   |  |  |        |  |           |   |             |            | 
|Investment                           |  |  | 2(h),6 |  |           |   | 19,853,889  |            | 
|Property, plant & equipment, net     |  |  | 2(j),7 |  |           |   | 52,432,332  |            | 
|Construction in progress             |  |  | 2(m)   |  |           |   | 34,041,446  |            | 
|Intangible assets, net               |  |  | 2(k),9 |  |           |   | 678,687     |            | 
|Goodwill                             |  |  | 2(l),8 |  |           |   | 1,677,975   |            | 
|Deposit                              |  |  |        |  |           |   | 3,056,123   |            | 
|Total Non-current Assets             |  |  |        |  |           |   | 111,740,452 |            | 
|                                     |  |  |        |  |           |   |             |            | 
|Total Assets                         |  |  |        |  |           | $ | 141,142,366 |            | 
|                                     |  |  |        |  |           |   |             |            | 
|LIABILITIES & STOCKHOLDERS’ EQUITY   |  |  |        |  |           |   |             |            | 
|                                     |  |  |        |  |           |   |             |            | 
|LIABILITIES                          |  |  |        |  |           |   |             |            | 
|Current Liabilities                  |  |  |        |  |           |   |             |            | 
|Bank loans                           |  |  | 10     |  |           | $ | 20,833,503  |            | 
|Accounts payable                     |  |  |        |  |           |   | 16,063,737  |            | 
|Other payables - current portion     |  |  | 11(a)  |  |           |   | 9,128,902   |            | 
|Accrued liabilities                  |  |  |        |  |           |   | 19,418      |            | 
|Convertible Bonds                    |  |  | 12     |  |           |   | 6,640,228   |            | 
|Unearned revenue                     |  |  | 2(n)   |  |           |   | 3,158,175   |            | 
|Total Current Liabilities            |  |  |        |  |           |   | 55,843,963  |            | 
|                                     |  |  |        |  |           |   |             |            | 
|Non-current Liabilities              |  |  |        |  |           |   |             |            | 
|Long-term bank loans                 |  |  | 10     |  |           |   | 1,107,648   |            | 
|Other payables - non-current portion |  |  | 11(b)  |  |           |   | 1,945,441   |            | 
|Total Non-current Liabilities        |  |  |        |  |           |   | 3,053,089   |            | 
|                                     |  |  |        |  |           |   |             |            | 
|Total Liabilities                    |  |  |        |  |           |   | 58,897,052  |            | 







See Accompanying Notes to Financial Statements







2















Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



|STOCKHOLDERS’ EQUITY                                                                                                                                 |  |  |       |  | 6/30/2012 |   |             | 12/31/2011 | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- |  | --------- | - | ----------- | ---------- | 
|                                                                                                                                                     |  |  | Notes |  |           |   |             |            | 
|Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,590,094 shares issued and outstanding as of June 30, 2011 and December 31, 2010 |  |  | 13    |  |           | $ | 210         |            | 
|                                                                                                                                                     |  |  |       |  |           |   |             |            | 
|Additional paid in capital - Preferred Stock B                                                                                                       |  |  |       |  |           |   | 243,750     |            | 
|                                                                                                                                                     |  |  |       |  |           |   |             |            | 
|Preferred Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares issued and converted into common share                            |  |  | 13    |  |           |   | -           |            | 
|                                                                                                                                                     |  |  |       |  |           |   |             |            | 
|Common Stock US$0.001 par value; 250,000,000 shares authorized; 31,793,698 shares issued and outstanding as of June 30, 2011 and December 31, 2010   |  |  | 13    |  |           |   | 31,793      |            | 
|                                                                                                                                                     |  |  |       |  |           |   |             |            | 
|Additional paid in capital - Common Stock                                                                                                            |  |  |       |  |           |   | 36,302,875  |            | 
|                                                                                                                                                     |  |  |       |  |           |   |             |            | 
|Additional paid in capital - Convertible Bonds Detachable Warrants                                                                                   |  |  |       |  |           |   | 223,367     |            | 
|Additional paid in capital - Beneficial Conversion Feature                                                                                           |  |  |       |  |           |   | 1,408,648   |            | 
|                                                                                                                                                     |  |  |       |  |           |   |             |            | 
|Statutory reserve                                                                                                                                    |  |  | 2(w)  |  |           |   | 6,052,953   |            | 
|Retained earnings                                                                                                                                    |  |  |       |  |           |   | 26,342,534  |            | 
|Minority Interest                                                                                                                                    |  |  |       |  |           |   | 3,417,052   |            | 
|Accumulated other comprehensive income                                                                                                               |  |  | 2(x)  |  |           |   | 8,222,132   |            | 
|Total Stockholders’ Equity                                                                                                                           |  |  |       |  |           |   | 82,245,314  |            | 
|                                                                                                                                                     |  |  |       |  |           |   |             |            | 
|Total Liabilities & Stockholders’ Equity                                                                                                             |  |  |       |  |           |   | 141,142,366 |            | 





See Accompanying Notes to Financial Statements





3









Sino Gas International Holdings, Inc.

Consolidated Statements of Income

For the three months and six months ended
June 30, 2012 and 2011

(Stated in US Dollars)







|                                                     |  |      |         |  | Three Months Ended |   |            | Six Months Ended | 
|---------------------------------------------------- |  | ---- | ------- |  | ------------------ | - | ---------- | ---------------- | 
|                                                     |  | Note |         |  | 6/30/2012          |   |            | 6/30/2011        | 
|Sales revenue                                        |  |      | 2(p)    |  |                    | $ | 10,819,666 |                  | 
|Cost of revenue                                      |  |      |         |  |                    |   | 6,472,799  |                  | 
|Gross Profit                                         |  |      |         |  |                    |   | 4,346,867  |                  | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Operating Expense                                    |  |      |         |  |                    |   |            |                  | 
|Selling expense                                      |  |      |         |  |                    |   | 749,948    |                  | 
|General and administrative expense                   |  |      |         |  |                    |   | 1,126,767  |                  | 
|Total operating expense                              |  |      |         |  |                    |   | 1,876,715  |                  | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Operating Income                                     |  |      |         |  |                    |   | 2,470,152  |                  | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Other Income/(Expense)                               |  |      |         |  |                    |   |            |                  | 
|Gain on disposal of property and equipment           |  |      |         |  |                    |   | -          |                  | 
|Other income                                         |  |      |         |  |                    |   | 12,362     |                  | 
|Other expense                                        |  |      |         |  |                    |   | (8,352     | )                | 
|Interest income                                      |  |      |         |  |                    |   | 54,647     |                  | 
|Interest expense                                     |  |      |         |  |                    |   | (853,461   | )                | 
|Total other income/(expense)                         |  |      |         |  |                    |   | (794,805   | )                | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Income before tax                                    |  |      |         |  |                    |   | 1,675,348  |                  | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Income tax                                           |  |      | 2(r),12 |  |                    |   | (91,182    | )                | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Gain/(Loss) from discontinued operations, net of tax |  |      |         |  |                    |   | -          |                  | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Net income                                           |  |      |         |  |                    |   | 1,584,166  |                  | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Net income (loss) attributable to:                   |  |      |         |  |                    |   |            |                  | 
|Common stockholders                                  |  |      |         |  |                    | $ | 1,584,292  |                  | 
|Non-controlling interest                             |  |      |         |  |                    | $ | (126       | )                | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Earnings per share                                   |  |      | 2(z),13 |  |                    |   |            |                  | 
|Basic                                                |  |      |         |  |                    | $ | 0.05       |                  | 
|Diluted                                              |  |      |         |  |                    | $ | 0.05       |                  | 
|                                                     |  |      |         |  |                    |   |            |                  | 
|Weighted Average Shares Outstanding                  |  |      |         |  |                    |   |            |                  | 
|Basic                                                |  |      |         |  |                    |   | 31,793,698 |                  | 
|Diluted                                              |  |      |         |  |                    |   | 31,793,698 |                  | 





See Accompanying Notes to Financial Statements





4









Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’
Equity

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





|                                               |                        |                         |                             
|---------------------------------------------- | ---------------------- | ----------------------- | ----------------------------
|                                               | Preferred
    Stock B  | Preferred
    Stock B-1 | Common
    Stock            
|                                               | Shares
    Outstanding | Amount                  | APIC
    - Preferred Stock B
|Balance
    at January 1, 2011                 | 4,590,094              | 4,590                   | 5,335,894                   
|Net
    Income                                 | -                      | -                       | -                           
|Conversion
    of Preferred Stock B            | (4,380,413)            | (4,380)                 | (5,092,144)                 
|Conversion
    of Preferred Stock B-1 to       | -                      | -                       | -                           
|Reversal
    of conversion                     | -                      | -                       | -                           
|Conversion
    of Convertible Bonds            | -                      | -                       | -                           
|Shares
    Based Compensation                  | -                      | -                       | -                           
|Cancellation
    of Common Stock               | -                      | -                       | -                           
|Expiration
    of IR Firm’s Warrants           | -                      | -                       | -                           
|Expiration
    of Warrants F&R                 | -                      | -                       | -                           
|Issuance
    of Subsidiary’s 49% Equity        | -                      | -                       | -                           
|Appropriation
    of Retained Earnings         | -                      | -                       | -                           
|Foreign
    Currency Translation Adjustment    | -                      | -                       | -                           
|Balance
    at December 31, 2011               | 209,681                | 210                     | 243,750                     
|                                               |                        |                         |                             
|Balance
    at January 1, 2012                 | 209,681                | 210                     | 243,750                     
|Net
    Income                                 | -                      | -                       | -                           
|Conversion
    of Convertible Bonds            | -                      | -                       | -                           
|Appropriation
    of loss to minority interest | -                      | -                       | -                           
|Appropriation
    of Retained Earnings         | -                      | -                       | -                           
|Foreign
    Currency Translation Adjustment    | -                      | -                       | -                           
|Balance
    at June 30, 2012                   | 209,681                | 210                     | 243,750                     





See Accompanying Notes to Financial Statements





5







Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’
Equity

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



|                                               | Common
    Stock                      |                                 |                                             |                                                  |                                          |                      
|---------------------------------------------- | ------------------------------------- | ------------------------------- | ------------------------------------------- | ------------------------------------------------ | ---------------------------------------- | ---------------------
|                                               | APIC
    - Warrants Series: A,B,J,C,D | APIC
    - Warrants Series: E,G | APIC
        - Warrants Series:
        F,R | APIC
    - Convertible Bonds Detachable Warrants | APIC
    - Beneficial Conversion Feature | Statutory
    Reserve
|Balance
    at January 1, 2011                 | 311,110                               | 47,946                          | -                                           | 223,367                                          | 8,094,814                                | 4,819,762            
|Net
    Income                                 | -                                     | -                               | -                                           | -                                                | -                                        | -                    
|Conversion
    of Preferred Stock B            | -                                     | -                               | -                                           | -                                                | (6,604,137)                              | -                    
|Conversion of Preferred
        Stock B-1 to   | -                                     | -                               | -                                           | -                                                | (82,029)                                 | -                    
|Conversion
    of Convertible Bonds            | -                                     | -                               | -                                           | -                                                | -                                        | -                    
|Expiration
    of Warrants                     | (311,110)                             | (47,946)                        | -                                           | -                                                | -                                        | -                    
|Issuance
    of Subsidiary’s Common Stock      | -                                     | -                               | -                                           | -                                                | -                                        | -                    
|Appropriation
    of Income to                 | -                                     | -                               | -                                           | -                                                | -                                        | -                    
|Appropriation
    of Retained Earnings         | -                                     | -                               | -                                           | -                                                | -                                        | 1,330,473            
|Foreign
    Currency Translation Adjustment    | -                                     | -                               | -                                           | -                                                | -                                        | -                    
|Balance
    at December 31, 2011               | -                                     | -                               | -                                           | 223,367                                          | 1,408,648                                | 6,150,234            
|                                               |                                       |                                 |                                             |                                                  |                                          |                      
|Balance
    at January 1, 2012                 | -                                     | -                               | -                                           | 223,367                                          | 1,408,648                                | 6,150,234            
|Net
    Income                                 | -                                     | -                               | -                                           | -                                                | -                                        | -                    
|Conversion
    of Convertible Bonds            | -                                     | -                               | -                                           | -                                                | -                                        | -                    
|Appropriation
    of loss to minority interest | -                                     | -                               | -                                           | -                                                | -                                        | -                    
|Appropriation
    of Retained Earnings         | -                                     | -                               | -                                           | -                                                | -                                        | (97,282)             
|Foreign
    Currency Translation Adjustment    | -                                     | -                               | -                                           | -                                                | -                                        | -                    
|Balance
    at June 30, 2012                   | -                                     | -                               | -                                           | 223,367                                          | 1,408,648                                | 6,052,953            





See Accompanying Notes to Financial Statements





6









Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’
Equity

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



|Comprehensive Income                    | 6/30/2012      | 12/31/2011      | Total          
|--------------------------------------- | -------------- | --------------- | ---------------
|Net Income                              | $    1,542,039 | $     8,190,557 | $     9,732,596
|Other Comprehensive Income              |                |                 |                
|Foreign Currency Translation Adjustment | (807)          | 336,547         | 335,740        
|Total                                   | $    1,541,232 | $     8,527,104 | $    10,068,336





See Accompanying Notes to Financial Statements





7









Sino Gas International Holdings, Inc.

Consolidated Statements of Cash Flows

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



|
|



|
|



|                                                                      |  | Three Months Ended |            |   | Six Months Ended |  
|--------------------------------------------------------------------- |  | ------------------ | ---------- | - | ---------------- | -
|Cash Flows from Operating Activities                                  |  | 6/30/2012          |            |   | 6/30/2011        |  
|Net Income                                                            |  | $                  | 1,584,165  |   |                  | $
|Bad debt provision/(Recovery)                                         |  |                    | (24,311    | ) |                  |  
|Depreciation expense                                                  |  |                    | 459,908    |   |                  |  
|Amortization expense of intangible assets                             |  |                    | 5,836      |   |                  |  
|Amortization expense of convertible bonds                             |  |                    | 205,604    |   |                  |  
|Loss/(gain) on disposal of property and equipment                     |  |                    |            |   |                  |  
|Withdraw/(deposit) in restricted time deposits                        |  |                    | 143,102    |   |                  |  
|Decrease/(increase) in accounts and other receivables                 |  |                    | 3,984,538  |   |                  |  
|Decrease/(increase) in inventory                                      |  |                    | 285,643    |   |                  |  
|Decrease/(increase) in prepaid expenses                               |  |                    | (1,243,171 | ) |                  |  
|Decrease/(Increase) in related party receivable                       |  |                    | 508        |   |                  |  
|Increase/(decrease) in accounts and other payables                    |  |                    | 1,291,210  |   |                  |  
|Cash Sourced/(Used) in Operating Activities of Continued Operation    |  |                    | 6,693,032  |   |                  |  
|Cash Sourced/(Used) in Operating Activities of Discontinued Operation |  |                    | -          |   |                  |  
|Cash Sourced/(Used) in Operating Activities                           |  |                    | 6,693,032  |   |                  |  
|                                                                      |  |                    |            |   |                  |  
|Cash Flows from Investing Activities                                  |  |                    |            |   |                  |  
|Decrease/(Increase) in deposit                                        |  |                    | (2,613,479 | ) |                  |  
|Proceeds from disposal of discontinued operation                      |  |                    | -          |   |                  |  
|Increase of investment in equity                                      |  |                    | 13,473     |   |                  |  
|Purchase of property, plant & equipment                               |  |                    | (1,640,425 | ) |                  |  
|Purchase of other intangible assets                                   |  |                    |            |   |                  |  
|Increase in construction in progress                                  |  |                    | (707,318   | ) |                  |  
|Cash Sourced/(Used) in Investing Activities of Continued Operation    |  |                    | (4,947,749 | ) |                  |  
|Cash Sourced/(Used) in Investing Activities of Discontinued Operation |  |                    | -          |   |                  |  
|Cash Sourced/(Used) in Investing Activities                           |  |                    | (4,947,749 | ) |                  |  
|                                                                      |  |                    |            |   |                  |  
|Cash Flows from Financing Activities                                  |  |                    |            |   |                  |  
|Proceeds/(repayment) of bank loans                                    |  |                    | 2,239,385  |   |                  |  
|Cash Sourced/(Used) in Financing Activities                           |  |                    | 2,239,385  |   |                  |  
|                                                                      |  |                    |            |   |                  |  
|Net increase in cash & cash equivalents for the periods               |  |                    | 3,984,668  |   |                  |  
|Effect of currency translation                                        |  |                    | (222,500   | ) |                  |  
|Cash & cash equivalents at the beginning of periods                   |  |                    | 2,641,015  |   |                  |  
|Cash & cash equivalents at the end of periods                         |  | $                  | 6,403,183  |   |                  | $
|                                                                      |  |                    |            |   |                  |  
|Supplementary cash flows information                                  |  |                    |            |   |                  |  
|Interest received                                                     |  | $                  | 155,965    |   |                  | $
|Interest paid                                                         |  |                    | 1,362,603  |   |                  |  
|Income tax paid                                                       |  |                    | 1,416,910  |   |                  |  



8









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)







|1. | ORGANIZATION AND PRINCIPAL ACTIVITIES
|-- | -------------------------------------





Sino Gas International
Holdings, Inc. (the “Company”) was incorporated under the laws of the State of Utah on August 19, 1983 as Evica Resources,
Inc. 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 ultimately 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 Co., Ltd. (“Gas (BVI)”), an International Business Company
incorporated in the British Virgin Islands, and its wholly owned subsidiary Beijing Zhong Ran Weiye
Gas Co., Ltd. (“Beijing Gas”), involving an exchange of shares whereby the Company issued an aggregate of 14,361,646
shares to the shareholders of Gas (BVI) in exchange for all of the issued and outstanding shares of Gas (BVI). 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’s primary
business operations are conducted through Beijing Gas. Beijing Gas is a natural gas services
operator, principally engaging in the investment, operation, and management of city gas pipeline infrastructure, in the distribution
of natural gas to residential and industrial users, in the construction and operation gas stations, and in the development and
application of natural gas related technologies. Beijing Gas develops its operating subsidiaries, known as project companies. Each
project company operates as a local natural gas distributor in a city or county. Pursuant to an exclusive franchise agreement with
the local government or entities responsible for administering and/or regulating gas utilities, each project company is granted
the exclusive right to develop and operate natural gas distribution systems and distribute natural gas at the operational location.



Beijing Gas holds an equity
interest of 85% to 100% on its subsidiaries, and an individual shareholder nominally holds the remainder of the equity interest
in such project company. Each such individual shareholder has relinquished any and all rights, power and interest of Beijing Gas
in the respective project companies under enforceable contracts. This structure was intended to comply with a PRC law that required
a limited liability company to have at least two shareholders.



The Company owns and operates
natural gas distribution systems in 35 small and medium size cities serving approximately 234,749 residential and seven industrial
customers. The Company’s facilities include approximately 1,635 kilometers of pipeline and delivery networks (including delivery
trucks) with a daily capacity of approximately 130,000 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”.





9









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





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 People’s Republic of China (“PRC”) 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.



| | 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.



| | (b) | Use of Estimates
| | --- | ----------------



The preparation of the financial
statements in conformity with generally accepted accounting principles in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management
makes these estimates using the best information available at the time the estimates are made; however, actual results could differ
materially from those estimates.



| | (c) | Economic and Political Risks
| | --- | ----------------------------



The Company’s operations
are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced
by the political, economic, and legal environment in the PRC, and by the general state of the PRC economy.



The Company’s operations
in the PRC are subject to special considerations and significant risks not typically associated with companies in North America
and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and foreign
currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the
PRC, and by changes in governmental policies with respect to law and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other things.



10









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





| | (d) | Principles of Consolidation
| | --- | ---------------------------



The consolidated financial
statements include the accounts of the Company and its subsidiaries (the “Group”). Significant inter-company transactions
have been eliminated in consolidation. Investments in which the Company has a 20 percent to 50 percent voting interest and where
the Company exercises significant influence over the investor are accounted for using the equity method.



The Company owned its subsidiaries
after inception and continued to acquire equity interest throughout the reporting periods. The following table depicts the identities
of the consolidating subsidiaries as of June 30, 2012:



|Name
    of Company                                         |     | Place
    of Incorporation |           | Date
    of Incorporation |     | Beneficial
    Interest % |     | Equity
    Interest % |               | Registered
    Capital                                                                                 
|----------------------------------------------------------- | --- | -------------------------- | --------- | ------------------------- | --- | ------------------------- | --- | --------------------- | ------------- | -------------------------------------------------------------------------------------------------------
|GAS Investment China Co., Ltd.                              |     | The British Virgin Islands |           | 6/19/2003                 |     | 100                       |     | 100                   |               | USD 10,000,000                                                                                         
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Sino Gas Construction, Ltd.                                 |     | The British Virgin Islands |           | 1/9/2007                  |     | 51                        |     | 51                    |               | USD
                                                                                         98,039    
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Sino Gas Investment Development,
    Ltd.                   |     | The British Virgin Islands |           | 1/9/2007                  |     | 100                       |     | 100                   |               | USD
                                                                                         50,000    
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Beijing Zhong Ran Weiye Gas
    Co., Ltd.                   |     | PRC                        |           | 8/29/2001                 |     | 100                       |     | 100                   |               | RMB 206,000,000                                                                                        
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Beijing Chenguang Gas Co., Ltd.                             |     | PRC                        |           | 10/30/2002                |     | 100                       |     | 100                   |               | RMB 35,239,600                                                                                         
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Guannan Weiye Gas Co., Ltd.                                 |     | PRC                        |           | 6/19/2003                 |     | 100                       |     | 100                   |               | RMB 9,510,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Ningjin Weiye Gas Co., Ltd.                                 |     | PRC                        |           | 12/3/2003                 |     | 100                       |     | 95                    |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Yutian Zhongran Weiye Gas Co.,
    Ltd.                     |     | PRC                        |           | 12/19/2003                |     | 100                       |     | 90                    |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Xingtang Weiye Gas Co., Ltd.                                |     | PRC                        |           | 2/18/2004                 |     | 100                       |     | 95                    |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Wuqiao Gas Co., Ltd.                                        |     | PRC                        |           | 6/30/2004                 |     | 100                       |     | 95                    |               | RMB 2,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Sihong Weiye Gas Co., Ltd.                                  |     | PRC                        |           | 12/3/2004                 |     | 100                       |     | 95                    |               | RMB 10,000,000                                                                                         
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Sishui Weiye Gas Co., Ltd.                                  |     | PRC                        |           | 12/22/2004                |     | 100                       |     | 95                    |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Langfang Weiye Dangerous Goods
    Transportation Co., Ltd. | PRC |                            | 3/22/2005 |                           | 100 |                           | 95  |                       | RMB 1,000,000
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Linzhang Weiye Gas Co., Ltd.                                |     | PRC                        |           | 7/6/2005                  |     | 100                       |     | 85                    |               | RMB 1,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Peixian
Weiye Gas Co., Ltd.                                 |     | PRC                        |           | 8/22/2005                 |     | 100                       |     | 90                    |               | RMB 45,694,900                                                                                         
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Zhangjiakou City Xiahuayuan
    Jinli Gas Co., Ltd.         | PRC |                            | 9/30/2005 |                           | 100 |                           | 100 |                       | RMB 2,000,000
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Longyao Zhongran Weiye Gas Co.,
    Ltd.                    |     | PRC                        |           | 10/13/2005                |     | 100                       |     | 95                    |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Yuxian Jinli Gas Co., Ltd.                                  |     | PRC                        |           | 11/8/2005                 |     | 100                       |     | 100                   |               | RMB 9,500,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Hengshui Weiye Gas Co., Ltd.                                |     | PRC                        |           | 12/20/2005                |     | 100                       |     | 100                   |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Changli Weiye Gas Co., Ltd.                                 |     | PRC                        |           | 12/8/2006                 |     | 100                       |     | 100                   |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Chenan Chenguang Gas Co., Ltd.                              |     | PRC                        |           | 1/23/2007                 |     | 100                       |     | 100                   |               | RMB 1,500,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Wuhe Weiye Gas Co., Ltd.                                    |     | PRC                        |           | 1/30/2007                 |     | 100                       |     | 100                   |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Gucheng Weiye Gas Co., Ltd.                                 |     | PRC                        |           | 3/21/2007                 |     | 100                       |     | 100                   |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Luquan Chenguang Gas Co., Ltd.                              |     | PRC                        |           | 4/27/2007                 |     | 100                       |     | 100                   |               | RMB 2,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Shijiazhuang Chenguang Gas Co.,
    Ltd.                    |     | PRC                        |           | 6/14/2007                 |     | 100                       |     | 100                   |               | RMB 2,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Nangong Weiye Gas Co., Ltd.                                 | PRC |                            | 6/25/2007 |                           | 100 |                           | 100 |                       | RMB 3,000,000
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Sixian Weiye Gas Co., Ltd.                                  |     | PRC                        |           | 9/3/2007                  |     | 100                       |     | 100                   |               | RMB 3,000,000                                                                                          
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Baishan Weiye Gas Co., Ltd.                                 |     | PRC                        |           | 7/13/2007                 |     | 100                       |     | 100                   |               | RMB 15,000,000                                                                                         
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Xinhe Weiye Gas Co., Ltd.                                   |     | PRC                        |           | 7/2/2009                  |     | 100                       |     | 100                   |               | RMB
                                                                                         1,000,000 
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Hebei Weiye Gas (Group) Co., Ltd.                           |     | PRC                        |           | 12/18/2009                |     | 100                       |     | 100                   |               | RMB
                                                                                         75,439,270
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Gaocheng Weiye Gas Co., Ltd.                                |     | PRC                        |           | 1/27/2010                 |     | 100                       |     | 100                   |               | RMB 200,000                                                                                            
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Jiangsu Zhong Ran Weiye Energy Investment
    Co., Ltd.     |     | PRC                        |           | 3/10/2011                 |     | 100                       |     | 99                    |               | RMB 200,000,000                                                                                        
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Fusong Weiye Gas Co., Ltd.                                  |     | PRC                        |           | 7/29/2011                 |     | 100                       |     | 90%                   |               | RMB
                                                                                         10,000,000
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        
|Jize Weiye Gas Co., Ltd.                                    |     | PRC                        |           | 9/20/2011                 |     | 100                       |     | 100                   |               | RMB
                                                                                         1,000,000 
|                                                            |     |                            |           |                           |     |                           |     |                       |               |                                                                                                        





11









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



| | (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 Receivable
| | --- | -------------------



Accounts receivable are recorded
at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company
extends unsecured credit to customers in the normal course of business and does not accrue interest on trade accounts receivable.



| | (g) | Advances to Suppliers
| | --- | ---------------------



Advances to suppliers represent
the cash paid in advance for purchasing raw materials. The advances to suppliers are interest free and unsecured.



| | (h) | Investments in Equity Securities
| | --- | --------------------------------



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



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





12









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



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



| | (i) | Accounting for the Impairment of Long-Lived Assets
| | --- | --------------------------------------------------



The Company has adopted Statement
of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), ASC 360-10-35. The Company evaluates its long lived assets for impairment when indicators of impairment are present
or annually, whichever occurs sooner. In the event that there are indications of impairment, the Company will record a loss to
statements of income equal to the difference between the carrying value and the fair value of the long lived asset. The Company
typically, but not exclusively uses the expected future discounted flows method to determine fair value of long lived asset subject
to impairment. The fair value of long lived assets that held for disposition will include the cost of disposal.



The Company’s long-lived
assets are grouped by their presentation on the consolidated balance sheets, and further segregated by their operating and asset
type. Long-lived assets subject to impairment include buildings, equipment, vehicles, accounting software license, franchise and
land use rights. The Company makes its determinations based on various factors that impact those assets.



At December 31, 2011, the Company
assessed its buildings, equipment, vehicles, accounting software licenses, franchise and land use rights for production and has
concluded its long-lived assets have experienced $791,569 impairment losses for the year then ended.



| | (j) | Property, Plant and Equipment
| | --- | -----------------------------



Property, plant and equipment,
other than construction in progress, are stated at cost less accumulated depreciation and impairment loss. Depreciation is provided
over their estimated useful lives, using the straight-line method. Estimated useful lives of the property, plant and equipment
are as follows:



|Assets Class                                  | Estimated Useful Life
|--------------------------------------------- | ---------------------
|Gas Pipelines (Up to December 31, 2007)       | 25 years             
|Gas Pipelines (Starting from January 1, 2008) | 50 years             
|Buildings                                     | 25 years             
|Leasehold Improvements                        | 25 years             
|Machinery & Equipment                         | 20 years             
|Motor Vehicles                                | 10 years             
|Office 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.





13









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



| | (k) | Intangible Assets
| | --- | -----------------



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



|Asset Class         | Estimated Useful Life
|------------------- | ---------------------
|Land use rights     | 20 - 50 years        
|Franchises          | 30 years             
|Accounting software | 3 years              



| | (l) | Goodwill
| | --- | --------



Goodwill impairment tests are
performed annually and more frequently whenever events or changes in circumstances indicate goodwill carrying values exceed estimated
reporting unit fair values. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes
an impairment loss as a charge against current operations.



| | (m) | Construction in Progress
| | --- | ------------------------



Construction in progress represents
the cost of constructing pipelines and is stated at cost. Costs are comprised of 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 networks and branch pipeline networks 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. These projects,
once completed, will significantly increase the gas supply capacity.



| | (n) | 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.



| | (o) | Financial Instruments
| | --- | ---------------------



The Company adopted ASC 820-10,
Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for using fair value to measure assets
and liabilities, and expands disclosures about fair value measurements.



ASC 820-10 includes a fair value
hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The
fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable
or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on
market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing an asset or
liability based upon their own market assumptions. The fair value hierarchy consists of the following three levels:



Level 1 – inputs are
unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the
measurement date.





14







Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



Level 2 – observable
inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.



Level 3 – instrument
valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.



The Company’s financial
instruments consist mainly of cash, bank notes receivable, and debt obligations. Based on the borrowing rates currently available
to the Company for loans and similar terms and average maturities, the fair value of debt obligations also approximates its carrying
value due to the short-term nature of the instruments. While the Company believes its valuation methodologies are appropriate and
consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different estimate of fair value at the reporting date.



The following tables present the
Company’s financial assets and liabilities at fair value in accordance to ASC 820-10:



|At June 30,                 |  | Quoted in      |           |  | Significant |   |   |              |  |   |       | 
|--------------------------- |  | -------------- | --------- |  | ----------- | - | - | ------------ |  | - | ----- | 
|2012:                       |  | Active Markets |           |  | Other       |   |   | Significant  |  |   |       | 
|                            |  | for Identical  |           |  | Observable  |   |   | Unobservable |  |   |       | 
|                            |  | Assets         |           |  | Inputs      |   |   | Inputs       |  |   |       | 
|                            |  | (Level 1)      |           |  | (Level 2)   |   |   | (Level 3)    |  |   | Total | 
|Financial assets:           |  |                |           |  |             |   |   |              |  |   |       | 
|Cash                        |  | $              | 6,403,184 |  |             | $ | - |              |  | $ | -     | 
|Notes receivable            |  |                | 327,191   |  |             |   | - |              |  |   | -     | 
|Total financial assets      |  | $              | 6,730,375 |  |             | $ | - |              |  | $ | -     | 
|                            |  |                |           |  |             |   |   |              |  |   |       | 
|Financial liabilities:      |  |                |           |  |             |   |   |              |  |   |       | 
|Notes payable               |  | $              | -         |  |             | $ | - |              |  | $ | -     | 
|Total financial liabilities |  | $              | -         |  |             | $ | - |              |  | $ | -     | 



|At December 31,             |  | Quoted in      |           |  | Significant |   |   |              |  |   |       | 
|--------------------------- |  | -------------- | --------- |  | ----------- | - | - | ------------ |  | - | ----- | 
|2011:                       |  | Active Markets |           |  | Other       |   |   | Significant  |  |   |       | 
|                            |  | for Identical  |           |  | Observable  |   |   | Unobservable |  |   |       | 
|                            |  | Assets         |           |  | Inputs      |   |   | Inputs       |  |   |       | 
|                            |  | (Level 1)      |           |  | (Level 2)   |   |   | (Level 3)    |  |   | Total | 
|Financial assets:           |  |                |           |  |             |   |   |              |  |   |       | 
|Cash                        |  | $              | 2,874,546 |  |             | $ | - |              |  | $ | -     | 
|Notes receivable            |  |                | 314,233   |  |             |   | - |              |  |   | -     | 
|Total financial assets      |  | $              | 3,188,779 |  |             | $ | - |              |  | $ | -     | 
|                            |  |                |           |  |             |   |   |              |  |   |       | 
|Financial liabilities:      |  |                |           |  |             |   |   |              |  |   |       | 
|Notes payable               |  | $              | -         |  |             | $ | - |              |  | $ | -     | 
|Total financial liabilities |  | $              | -         |  |             | $ | - |              |  | $ | -     | 





15









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



| | (p) | Foreign Currency Translation
| | --- | ----------------------------



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



|                                       |  | 6/30/2012 |        |  | 12/31/2011 | 
|-------------------------------------- |  | --------- | ------ |  | ---------- | 
|Years end RMB : US$ exchange rate      |  |           | 6.3197 |  |            | 
|Average yearly RMB : US$ exchange rate |  |           | 6.3257 |  |            | 



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.



| | (q) | Revenue Recognition
| | --- | -------------------



The Company has two sources
of revenue: (a) sales of natural gas and (b) connection fees for constructing connections of natural gas distribution network.
In accordance to FASB ASC 605-10, the Company recognizes gas distribution revenue when natural gas is rendered to customers, the
price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability
is reasonably assured. Connection fee 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.



Payments received before all
of the relevant criteria for revenue recognition satisfied are recorded as unearned revenue.



| | (r) | Cost of Revenue
| | --- | ---------------



The cost for distribution of natural
gas is comprised of raw materials, delivery cost, and other overhead. The cost of connection fees consists of construction materials,
direct labor wages, and other overhead.



| | (s) | Investment Income
| | --- | -----------------



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



| | (t) | Income Taxes
| | --- | ------------



The Company uses the accrual
method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available. The
Company has implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities
computed according to the United States and People’s Republic of China tax laws are provided for the tax effects of transactions
reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between
the basis of fixed assets and intangible assets for financial and tax reporting.



The deferred tax assets and
liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when
the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available
to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets, whether it is more likely than
not that these items will expire either before the Company is able to realize that tax benefit, or that future realization is uncertain.





16









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



With respect of the Company’s
subsidiaries domiciled and operated in China and British Virgin Islands, the taxation of these entities is summarized below:



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



|Subsidiary                                                            | Country of Domicile | Income Tax Rate
|--------------------------------------------------------------------- | ------------------- | ---------------
|PRC Operating Companies (per Note 2. (d) Principals of Consolidation) | PRC                 | 25.0%          
|Tongyuan International Holding Limited                                | HK                  | 16.5%          
|i.GAS Investment China Co., Ltd.                                      | BVI                 | 0.00%          
|ii.Sino Gas Construction, Ltd.                                        | BVI                 | 0.00%          
|iii.Sino Gas Investment Development, Ltd.                             | BVI                 | 0.00%          



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



| | · | Since Sino Gas International
Holdings, Inc. is primarily a holding company without any business activities in the United States, the Company shall not be subject
to United States income tax for the year ended June 30, 2012.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (u) | Advertising
| | --- | -----------



The Company
expensed all advertising costs as incurred.



| | (v) | Risk
| | --- | ----



| | · | 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.



| | · | Environmental Risks
| | - | -------------------



The Company has procured environmental
licenses required by the PRC government. The Company has both a water treatment facility for water used in its production process
and secure transportation to remove waste off site. In the event of an accident, the Company has purchased insurance to cover potential
harm to employees, equipment, and the local environment.





17









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



| | · | Inflation Risk
| | - | --------------



Management monitors changes
in prices levels. Historically inflation has not materially impacted the Company’s financial statements; however, significant
increases in the price of raw materials and labor that cannot be passed on to the Company’s customers could adversely impact
the Company’s results of operations.



| | · | 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 changes in the political, economic, and legal environments in the PRC.



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.



| | (w) | Statutory Reserves
| | --- | ------------------



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



| | i. | Making up cumulative prior years’ losses, if any;
| | -- | -------------------------------------------------



| | ii. | Allocations to the “Statutory reserve”
of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of
the Company’s registered capital;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | iii. | Allocations to the discretionary surplus reserve,
if approved in the shareholders’ general meeting.
| | ---- | ---------------------------------------------------------------------------------------------------



| | (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
| | --- | --------------------------------



No new pronouncements have
been issued since FASB issued in October 2009 ASU No. 2009-13 “Revenue Recognition (Topic 605)” that management adopted
on January 1, 2011.





18









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)



| | (z) | Earnings per Share
| | --- | ------------------



The Company computes earnings
per share (“EPS”) in accordance with FASB ASC 260 “Earnings per share”. SFAS No. 128 requires companies
with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common
shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but
presents the dilutive effect on a per share basis of potential common shares (e.g., contingent shares, convertible securities,
options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential
common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded
from the calculation of diluted EPS.



| | (aa) | Subsequent Events
| | ---- | -----------------



The Company evaluates subsequent
events that have occurred after the consolidated balance sheet date but before the consolidated financial statements are issued. There
are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions
that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements,
and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of
the balance sheet but arose subsequent to that date. The Company has identified no subsequent events that would require disclosure
to the consolidated financial statements.



| | 3. | ACCOUNTS RECEIVABLE
| | -- | -------------------



For natural gas sales, revenue
is due when the gas is sold. Most residential customers settle their accounts via prepayments with debit cards, while industrial
customers are billed and pay according to the contract terms ranging from 10 days to one month.



For construction projects,
connection fees are generally collected in installments. First deposits of 30% of the total contract sum are received from the
client when the project commences. A second payment of 30% is received at a milestone set out in the contracts. A third payment
of 30% is received after construction is completed. The remaining 10% is typically held back by the client and acts as a warranty
on the quality of the project. The retained money is usually received by the Company after the 1 year warranty period.



The
Company believes it has provided adequate provisions for doubtful accounts. Doubtful allowance accounts at June 30, 2012
and December 31 2011 were approximately 1% of gross account receivables. To collect on doubtful accounts, the Company uses all
of its efforts, such as having internal staff call for payment, filing legal pledges, or even hiring collection agents to collect
the outstanding balance. If the collection is no longer probable, the Company will write off the balance against the allowance
for doubtful accounts.



The Company has not experienced
any material delinquent accounts that were uncollectible and has not written off a material balance against the allowance for doubtful
accounts.



|Accounts Receivable         | 
|--------------------------- | 
|                            | 
|Accounts receivable         | 
|Less:Allowance for bad debt | 
|Accounts receivable, net    | 





19









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





|Allowance for Bad Debt   | 
|------------------------ | 
|                         | 
|Beginning balance        | 
|Allowance provided       | 
|Charge against allowance | 
|Reversals                | 
|Ending balance           | 



|Accounts Receivable Aging Analysis | 
|---------------------------------- | 
|                                   | 
|<30 Days                           | 
|30-60 Days                         | 
|60-90 Days                         | 
|90-180 Days                        | 
|180-360 Days                       | 
|>360 Days                          | 
|Total                              | 



Top ten customers accounted for 52.46% of the total
accounts receivable as of June 30, 2012:-



|Shenghai Real Estate Development Co., Ltd.             |  | $ | 227,321   |  |  |  | 2.26  | %
|------------------------------------------------------ |  | - | --------- |  |  |  | ----- | -
|Hebei Dihua Longzhou New Town Development Co., Ltd.    |  |   | 242,360   |  |  |  | 2.40  | %
|Beijing Yinzuo Hezhi Real Estate Development Co., Ltd. |  |   | 391,347   |  |  |  | 3.88  | %
|Bohai Oil Equipment Manufacturing Co., Ltd.            |  |   | 396,573   |  |  |  | 3.93  | %
|Hebei Dihua Longhai Development Co., Ltd               |  |   | 475,386   |  |  |  | 4.72  | %
|Hebei Zhonggang Steel Co., Ltd.                        |  |   | 534,684   |  |  |  | 5.30  | %
|Lianyun Port Zhaolong Home Development Co., Ltd.       |  |   | 612,371   |  |  |  | 6.07  | %
|Jiangsu Zhonghuang Real Estate Co., Ltd.               |  |   | 623,669   |  |  |  | 6.19  | %
|Hebei Natural Gas Co., Ltd.                            |  |   | 696,470   |  |  |  | 6.91  | %
|Beijing Langfa Oil and Gas Technology Co., Ltd.        |  |   | 1,088,318 |  |  |  | 10.80 | %
|                                                       |  | $ | 5,288,499 |  |  |  | 52.46 | %



| | 4. | OTHER RECEIVABLES
| | -- | -----------------



|                                                      |  | 6/30/2012 |           |  | 12/31/2011 |  
|----------------------------------------------------- |  | --------- | --------- |  | ---------- | -
|Employee travel advance                               |  | $         | 409,772   |  |            | $
|Advance for consultant service                        |  |           | -         |  |            |  
|Short term security deposit for construction pipeline |  |           | 2,797,601 |  |            |  
|Others                                                |  |           | 374,354   |  |            |  
|                                                      |  | $         | 3,581,727 |  |            | $





20









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





| | 5. | RELATED PARTY RECEIVABLE
| | -- | ------------------------



A
related party receivable of $427,235 is due from the Company’s founder and CEO Mr. Liu Yuchuan.The Company
borrowed $3,164,707 (RMB 20,000,000) from China Development Bank. The loan was secured by the CEO’s personal home property,
which carried a $427,235 (RMB 2,700,000) mortgage. Because the Bank required the mortgage loan to be settled before it would collateralize
on it, the Company paid the entire mortgage on behalf of the CEO. This payment was interest free.



| | 6. | INVESTMENT
| | -- | ----------





|Ref. |                                                       | 6/30/2012       |  | 12/31/2011    
|---- | ----------------------------------------------------- | --------------- |  | --------------
|(1)  | Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. | $     7,227,841 |  | $    7,176,738
|(2)  | Qujing City Fuel Gas Co., Ltd.                        | 8,514,368       |  | 8,511,540     
|(3)  | Tongshan Hengxin Jiaye Gas Co., Ltd.                  | 4,080,032       |  | 4,054,013     
|(4)  | China Construction Bank                               | 31,648          |  | 31,424        
|     | Total                                                 | $  19,853,889   |  | $  19,773,715 









| | (1) | The Company through its wholly owned subsidiary
Beijing Gas invested $1,642,152 (RMB 13,465,648) in the acquisition of a 40% equity position in Xiangke Oil Gas.The $7,227,841
investment as of June 30, 2012 consisted of principal and accumulated post-acquisition investment income attributed to Xiangke
Oil Gas’ operation results.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Along with two local partners in Qujing
city, the second largest city in Yunnan province of PRC, Beijing Gas established Qujing City Fuel Gas Co., Ltd. with registered
capital of $4,387,761 (RMB 30,000,000). Beijing Gas’ original investment of $1,746,764 (RMB 11,700,000) presented 39% equity
ownership of Qujing Gas.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On December 17, 2010, the Company,
along with its wholly owned subsidiaries Gas Construction and Beijing Gas, entered into a Subscription Agreement with AMP Capital
Asian Giants Infrastructure Fund (“AGIF”), under the terms of which Gas Construction issued to AGIF 48,039 number of
ordinary shares that represents 49% of the total issued capital of Gas Construction for a consideration of US$2.0 million. In
addition, pursuant to the Subscription Agreement, the equity interest in Qujing Gas held by Beijing Gas was transferred to Gas
Construction so that Gas Construction became the beneficial holder of 39% equity interest in Qujing Gas. After the close of the
equity subscription, shareholders of Qujing Gas amended the Articles of Incorporation to raise the level of registered capital
to $20,425,157 (RMB 130,000,000). The $8,514,368 investment as of June 30, 2012 consisted of principal and accumulated post-acquisition
investment income attributed to Qujin Gas’ operation results.



|Investment                    |  | Xiangke Oil Gas |           |  | Qujing Gas |  
|----------------------------- |  | --------------- | --------- |  | ---------- | -
|Investment Cost               |  | $               | 1,701,843 |  |            | $
|Prior years investment income |  |                 | 4,041,483 |  |            |  
|2010 investment income        |  |                 | 605,639   |  |            |  
|2011 investment income        |  |                 | 887,464   |  |            |  
|                              |  | $               | 7,227,841 |  |            | $





21











Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





| | (3) | On April 23, 2008, Beijing Gas entered into an agreement to acquire a 100% equity interest in Tongshan
Hengxin Jiaye Natural Gas Co., Ltd. (“Tongshan Gas”), for a purchase price of $4,660,000 (RMB 32,600,000). Tongshan
is a regional natural gas distributor and developer of natural gas distribution networks in Jiangsu province of PRC. As of December
31, 2011, the Company has not finished the registration of the equity transfer with the Tongshan City Industrial and Commercial
Administration. Therefore, acquisition payments of $4,080,032for Tongshan Gas were classified
as investment as of that date.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The Company purchased $31,648 (RMB 200,000) long-term fund withBank of Communicationsin the effort to maintain favorable
relationship and enhance further credit facility.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 7. | PROPERTY, PLANT AND EQUIPMENT
| | -- | -----------------------------



Property, Plant, and Equipment
consisted of the following as of June 30, 2012 and December 31, 2011:



|6/30/2012              |  | At Cost |            |  | Accumulated Depreciation |   |           | Net | 
|---------------------- |  | ------- | ---------- |  | ------------------------ | - | --------- | --- | 
|Gas Pipelines          |  | $       | 48,765,495 |  |                          | $ | 3,470,348 |     | 
|Motor Vehicles         |  |         | 6,270,870  |  |                          |   | 2,485,285 |     | 
|Machinery & Equipment  |  |         | 2,092,899  |  |                          |   | 429,879   |     | 
|Buildings              |  |         | 1,847,247  |  |                          |   | 343,473   |     | 
|Leasehold Improvements |  |         | 150,623    |  |                          |   | 98,598    |     | 
|Office Equipment       |  |         | 284,419    |  |                          |   | 151,637   |     | 
|Total                  |  | $       | 59,411,553 |  |                          | $ | 6,979,221 |     | 



|12/31/2011             |  | At Cost |            |  | Accumulated Depreciation |   |           | Net | 
|---------------------- |  | ------- | ---------- |  | ------------------------ | - | --------- | --- | 
|Gas Pipelines          |  | $       | 46,066,763 |  |                          | $ | 3,314,395 |     | 
|Motor Vehicles         |  |         | 6,310,953  |  |                          |   | 2,303,409 |     | 
|Machinery & Equipment  |  |         | 1,509,988  |  |                          |   | 408,500   |     | 
|Buildings              |  |         | 1,411,004  |  |                          |   | 373,292   |     | 
|Leasehold Improvements |  |         | 93,493     |  |                          |   | 70,133    |     | 
|Office Equipment       |  |         | 281,297    |  |                          |   | 143,482   |     | 
|Total                  |  | $       | 55,673,498 |  |                          | $ | 6,613,211 |     | 



Gas pipelines purchased prior
to 2008 were depreciated over their 25 year useful lives. Starting from 2008, the Company purchased a new quality of pipelines
under a 50 year warranty. The new gas pipelines were depreciated over their 50 year useful lives.



Depreciation
expenses included in the consolidated statements of income for the six months ended June 30, 2012 and 2011 were $756,082 and
$707,167, respectively.



| | 8. | GOODWILL
| | -- | --------



Goodwill was related to
the acquisitions of Beijing Chenguang Gas Co., Ltd. (“Chengguang Gas”), Yuxian Weiye Gas Co., Ltd. (“Yuxian Gas”)
and Guannan Weiye Gas Co., Ltd. (“Guannan Gas”). Management annually reviews the carrying value of goodwill using the
sum of the discounted cash flows to determine if an impairment charge is necessary. The Company has determined there were no impairments
to goodwill as of June 30, 2012 and December 31, 2011.





22











Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





|               |  | 6/30/2012 |           |  | 12/31/2011 |  
|-------------- |  | --------- | --------- |  | ---------- | -
|Yuxian Gas     |  | $         | 10,954    |  |            | $
|Guannan Gas    |  |           | 409,963   |  |            |  
|Chengguang Gas |  |           | 1,257,058 |  |            |  
|               |  | $         | 1,677,975 |  |            | $





| | 9. | INTANGIBLE ASSETS
| | -- | -----------------



Intangible assets consisted of
the following as of June 30, 2012 and December 31, 2011:



|6/30/2012           |  | At Cost |           |  | Accumulated Amortization |   |         | Net | 
|------------------- |  | ------- | --------- |  | ------------------------ | - | ------- | --- | 
|Land Use rights     |  | $       | 726,786   |  |                          | $ | 98,751  |     | 
|Franchises          |  |         | 395,588   |  |                          |   | 395,588 |     | 
|Accounting Software |  |         | 105,200   |  |                          |   | 54,547  |     | 
|                    |  | $       | 1,227,574 |  |                          | $ | 548,887 |     | 



|12/31/2011          |  | At Cost |         |  | Accumulated Amortization |   |         | Net | 
|------------------- |  | ------- | ------- |  | ------------------------ | - | ------- | --- | 
|Land Use Rights     |  | $       | 494,346 |  |                          | $ | 88,649  |     | 
|Franchises          |  |         | 392,791 |  |                          |   | 392,791 |     | 
|Accounting Software |  |         | 104,456 |  |                          |   | 49,966  |     | 
|                    |  | $       | 991,593 |  |                          | $ | 531,406 |     | 



Land use rights represent
the right to use and develop land granted by the local PRC government in accordance with zoning laws less accumulated amortization.
Under PRC law, the Company is permitted to sell, transfer, or mortgage its land use rights.



Under exclusive franchises
agreements between the Company and the applicable PRC local government and entities in charge of gas utility, the Company operates
as a local natural gas distributor in a city or county. Amortization expenses included in the consolidated statements of income
for the six months ended June 30, 2012 and 2011 were $17,481 and $42,493, respectively.





23











Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





| | 10. | LOANS
| | --- | -----



a.       SHORT-TERM BANK LOANS



|Name of Bank                                         | Due Date   | Interest Rate | 6/30/2012   |  | 12/31/2011         
|---------------------------------------------------- | ---------- | ------------- | ----------- |  | -------------------
|China Minsheng Banking Corp., Ltd. - Pinganli Branch | 02/28/2013 | 9.512%        | $ 1,107,648 |  | $                 -
|China Minsheng Banking Corp., Ltd. - Pinganli Branch | 11/10/2012 | 7.872%        | 1,582,354   |  | 1,571,166          
|Bank of Dalian - Beijing Branch                      | 12/14/2012 | 8.856%        | 4,747,061   |  | 4,713,498          
|China Merchants Bank - Beijing Shouti Branch         | 06/14/2013 | 7.888%        | 1,582,354   |  | 1,571,166          
|China Construction Bank - Baishan Branch             | 06/19/2012 | 6.650%        | 949,412     |  | 1,414,049          
|Bank of China - Huanghe Dadao Branch                 | 04/17/2012 | 7.872%        | 1,582,354   |  | 1,571,166          
|Peixian Rural Credit Cooperation                     | 07/21/2012 | 10.076%       | 4,747,061   |  | 4,713,498          
|Nanjing Bank                                         | 08/23/2012 | 7.500%        | 1,037,024   |  | -                  
|Nanjing Bank                                         | 01/17/2013 | 7.500%        | 357,423     |  | -                  
|Nanjing Bank                                         | 01/17/2013 | 8.800%        | 798,930     |  | -                  
|China Development Bank – Beijing Branch              | 12/24/2012 | 5.400%        | 1,582,354   |  | 1,571,166          
|Wuhe Yongtai Bank                                    | 06/20/2013 | 9.465%        | 759,530     |  | -                  
|Total                                                |            |               | $20,833,503 |  | $ 17,125,709       



| | 1) | The loan provided by China Minsheng Bank Corp., Ltd. was guaranteed by the CEO Mr. Liu Yuchuan’s
personal credit.
| | -- | -----------------------------------------------------------------------------------------------------------------



| | 2) | The loans provided by Bank of Dalian were secured by the Company’s subsidiary Chengguang
Gas’registered capital, CEO Mr. Liu Yuchuan and COO Mr. Zhou Zhicheng’s personal home properties,
which have been appraised at total fair market value of $933,254 (RMB 6,380,854)
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | The loan provided by Bank of China was guaranteed by Hebei Desheng Guarantee Co., Ltd. (“Hebei
Desheng”). In connection with this collateralization, the Company was required to pay approximately $45,000 (RMB 300,000)
as a financial service fee to Hebei Desheng.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | The loan provided by China Construction Bank was secured by the Company’s real estate and
vehicles.
| | -- | ---------------------------------------------------------------------------------------------------



| | 5) | The loan provided by
China Merchants Bank was guaranteed by the CEO Mr. Liu Yuchuan
with unlimited liability, and the management Mr. Wang Weidong and Ms. Song Erxin with $154,703 (RMB 1,000,000) liabilities each.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6) | The loan provided by Peixian Rural Credit Union was secured by Beijing Zhong Ran Weiye Gas Co.,
Ltd.
| | -- | ----------------------------------------------------------------------------------------------------



| | 7) | The loan provided by Nanjing Bank was secured by Beijing Zhongyou Sanhuan Technology Development
Co., Ltd and CEO Mr. Liu Yuchuan.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



| | 8) | The Company obtained the loans from China Development Bank via a collateralized agent Zhongyuan
Guoxin Credit Guarantee Co., Ltd. (the “Guarantor”). The Guarantor guaranteed to the Banks the entire principal and
accrued interest. The Company pledged all of Beijing Gas’ subsidiaries and deposited $1,028,464
(RMB 6,800,000), which was classified as non-current asset deposits, with the Guarantor, and was required to pay 2% of the outstanding
loans as a financial service fee to the Guarantor per annum.Because the Company lacked the favorable credit history to
directly establish a credit facility with the banks, the credit collateralization from Guarantor was chosen as a financing solution.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



b.     
LONG-TERM BANK LOANS



|Name of Bank                             | Due Date   | Interest Rate | 6/30/2012    |  | 12/31/2011 
|---------------------------------------- | ---------- | ------------- | ------------ |  | -----------
|China Construction Bank - Baishan Branch | 06/24/2015 | 6.650%        | $  1,107,648 |  | $         -
|Total                                    |            |               | $  1,107,648 |  | $         -





24











Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





| | 11. | OTHER PAYABLES
| | --- | --------------



| | a. | Current other payables consisted of the following at June 30, 2012 and December 31, 2011:
| | -- | -----------------------------------------------------------------------------------------





|Ref. |                            | 6/30/2012      |  | 12/31/2011   
|---- | -------------------------- | -------------- |  | -------------
|(1)  | Amount due to Employees    | $    3,686,115 |  | $   1,545,101
|(2)  | Tax Payable                | 30,210         |  | 1,103,796    
|(3)  | Payables to Subcontractors | 4,260,492      |  | 4,971,109    
|(4)  | Others                     | 1,152,085      |  | 266          
|     | Total                      | $    9,128,902 |  | $   7,620,272





| | (1) | Amounts due to employees included accrual payroll, welfare payable, continued education training
program cost and individual travel advance. All of these amounts were unsecured, interest free, and have no fixed repayment terms.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The tax payable consists of value added tax, sales tax, income tax and local tax payables.
| | --- | ------------------------------------------------------------------------------------------



| | (3) | Payables to subcontractors are unbilled liabilities.
| | --- | ----------------------------------------------------



| | b. | Non-current other payables at June 30, 2012 and December 31, 2011:
| | -- | ------------------------------------------------------------------





|Ref. |                                                      | 6/30/2012    |  | 12/31/2011   
|---- | ---------------------------------------------------- | ------------ |  | -------------
|(1)  | Payable for the acquisition of Baishan Gas Co., Ltd. | $  1,945,441 |  | $   1,931,686
|     | Total                                                | $  1,945,441 |  | $   1,931,686



| | (1) | The outstanding payable is related to the acquisition of Baishan Gas Co.,
Ltd.’s assets on July 9, 2007.
| | --- | --------------------------------------------------------------------------------------------------------



| | 12. | CONVERTIBLE BONDS AND BOND WARRANTS
| | --- | -----------------------------------



| | a. | $5,349,982 Convertible Bond with 3,451,601 Detachable Warrants
| | -- | --------------------------------------------------------------



On November 30, 2009, the
Company completed a financing transaction with certain purchasers issuing (i) $5,349,982 of the 8% senior secured convertible notes
(the “Bonds”) with conversion price of $0.62 to purchase an aggregate of 8,629,003 shares of the Company’s common
stock and (ii) 3,451,601 warrants to purchase an aggregate of 3,451,601 shares of the Company’s common stock, which will
expire in November 30, 2012 (both the “Bonds” and “Warrants”).



| | b. | $692,984 Convertible Bond with 447,086 Detachable Warrants
| | -- | ----------------------------------------------------------



On December 23, 2009, the
Company completed a financing transaction with certain purchasers issuing (i) $692,984 of the 8% senior secured convertible notes
(the “Bonds”) with conversion price of $0.62 to purchase an aggregate of 1,117,716 shares of the Company’s common
stock and (ii) 447,086 warrants to purchase an aggregate of 447,086 shares of the Company’s common stock, which will expire
in December 23, 2012 (both the “Bonds” and “Warrants”).





25











Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





Pledge Agreement and Guaranty



The notes are secured by the pledge
of 100% of the shares of the Company’s wholly owned subsidiary Gas Investment China Co., Ltd. and a guaranty from Mr. Liu
Yuchan, the chairman of the board of directors and CEO of the Company.



Event of
Default



Upon an event of default in any
payment of interest or principal of the bonds, the principal, accrued and unpaid interest, and any additional amounts owing in
respect of the bonds, will be due and payable at the option of the bondholders. In addition, the bondholders have the right to
convert these notes and then all accrued and unpaid interest at any time.



Redemption



Bondholders may require the Company
to repurchase the notes in whole or in part at an amount equal to 100% of the aggregate principal amount of the notes plus a premium
such that the total cash yield to maturity of the note is 15% per annum, upon the occurrence of any change of control transaction
or if the Company’s common stock ceases to be quoted for trading or listed for trading on either the OTC Bulletin Board or
a subsequent market and such delisting is not cured within 30 days.



The Company has the right to redeem
either 50% or 100% of the outstanding principal amount of these notes on or after one year from the issuance date.



The convertible bonds payable,
net consisted of the followings:-



|     |                                                                | 6/30/2012    
|---- | -------------------------------------------------------------- | -------------
|Ref. |                                                                | 5.3M Bonds   
|(1)  | Convertible Bonds Payable - principal                          | $  5,349,982 
|(2)  | Less: Interest Discount - Warrants                             | (178,950)    
|(3)  | Less: Interest Discount - Beneficial Conversion Feature        | (869,270)    
|(4)  | Less: Bond Discount - Issuance Cost                            | (503,766)    
|(5)  | Accretion of Interest Discount - Warrants                      | 147,847      
|(6)  | Accretion of Interest Discount - Beneficial Conversion Feature | 869,270      
|(7)  | Accretion of Bond Discount - Issuance Cost                     | 416,207      
|(8)  | Accretion of Interest Discount - Redemption                    | 928,222      
|(9)  | Conversion of Convertible Bonds into Common Stock              | (299,975)    
|     | Convertible Bonds Payable, net                                 | $   5,859,567





26











Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





|     |                                                                | 12/31/2011  
|---- | -------------------------------------------------------------- | ------------
|Ref. |                                                                | 5.3M Bonds  
|(1)  | Convertible Bonds Payable - principal                          | $  5,349,982
|(2)  | Less: Interest Discount - Warrants                             | (178,950)   
|(3)  | Less: Interest Discount - Beneficial Conversion Feature        | (869,270)   
|(4)  | Less: Bond Discount - Issuance Cost                            | (503,766)   
|(5)  | Accretion of Interest Discount - Warrants                      | 113,449     
|(6)  | Accretion of Interest Discount - Beneficial Conversion Feature | 869,270     
|(7)  | Accretion of Bond Discount - Issuance Cost                     | 319,374     
|(8)  | Accretion of Interest Discount - Redemption                    | 712,266     
|(9)  | Conversion of Convertible Bonds into Common Stock              | (299,975)   
|     | Convertible Bonds Payable, net                                 | $  5,512,380



| | (1) | The principal amounts listed above represent the face
amount of the convertible notes.
| | --- | --------------------------------------------------------------------------------------



| | (2) | The proceeds were allocated between the convertible bonds and warrants based on their relative
fair value. See Note 13 Capital Stock for the calculation of fair value of convertible bonds detachable warrants.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Because the conversion price of bonds is $0.62, which is lower than the fair market value of common
stock on the date of issuance, the beneficial conversion feature was applied.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The issuance cost consisted of a commission to the placement agent and legal expenses.
| | --- | --------------------------------------------------------------------------------------



| | (5) | The interest discount of warrants was amortized over the whole period applying the effective annual
interest rate.
| | --- | ------------------------------------------------------------------------------------------------------------------



| | (6) | The bonds were convertible at the option of the holders into shares of common stock. However, because
Rule 144 of the Securities Act of 1933, as amended, requires a minimum holding period of six months before resale, the beneficial
conversion feature was amortized over a six month period.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | The debt issuance cost was amortized over a 36 month period applying the effective annual interest
rate.
| | --- | --------------------------------------------------------------------------------------------------------



| | (8) | Based on a 15% per annum redemption rate, the redemption values were determined to be $1,123,496
and $145,527 for the $5,349,982 and $692,984 convertible bonds, respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | Principal of $299,975 has been converted into 483,831 shares common stock.
| | --- | --------------------------------------------------------------------------



Included in interest expense
of $1,625,765, was $241,781 convertible bonds coupon expense and $401,667 non-cash flow amortization expense of convertible bonds,
and $982,317 of bank loan interest expense.



| | 13. | CAPITAL STOCK
| | --- | -------------



The authorized capital
stock consists of (i) 250,000,000 shares of common stock, par value $0.001 per share, of which 31,793,698 shares are issued and
outstanding, and (ii) 100,000,000 shares of preferred stock, par value $0.001 per share. The preferred stock consists of (a) series
A convertible preferred stock, with 20,000,000 shares authorized of which no shares are issued and outstanding; (b) series B convertible
preferred stock, with 5,000,000 shares authorized of which 209,681 shares are issued and outstanding; and (c) series B-1 convertible
preferred stock, with 3,000,000 shares authorized of which no share are issued and outstanding.



The following table depicts
the Company’s outstanding securities as of June 30, 2012:



|                                |  | Authorized Shares |             |  | Shares issued and outstanding | 
|------------------------------- |  | ----------------- | ----------- |  | ----------------------------- | 
|Common Stock                    |  |                   | 250,000,000 |  |                               | 
|Convertible Preferred Stock A   |  |                   | 20,000,000  |  |                               | 
|Convertible Preferred Stock B   |  |                   | 5,000,000   |  |                               | 
|Convertible Preferred Stock B-1 |  |                   | 3,000,000   |  |                               | 





27











Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





There were 95,418 shares
preferred stock B-1 and 4,380,413 shares preferred stock B converted into common stock in 2011.



|                                            | Strike Price | Contractual
Life | Expiration Date | Shares issued
and outstanding | Weighted
Average
Fair Value
|------------------------------------------- | ------------ | ---------------- | --------------- | ----------------------------- | ---------------------------
|5.3 M Convertible Bonds Detachable Warrants | $0.744       | 36 Months        | 11/30/2012      | 3,451,601                     | $0.05                      
|692K Convertible Bonds Detachable Warrants  | $0.744       | 36 Months        | 12/23/2012      | 447,086                       | $0.11                      



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



|                            | 5.3M CB Warrants | 692K CB Warrants
|--------------------------- | ---------------- | ----------------
|Weighted average fair value | $0.05            | $0.11           
|Strike price                | $0.744           | $0.744          
|Risk-free interest rate     | 1.12%            | 1.51%           
|Expected volatility         | 12.84%           | 12.84%          
|Years to maturity           | 3.00             | 3.00            



Since there is no net cash settlement
arrangement for the warrants, they are classified as an equity instrument in accordance with EITF 00-19. Thus, subsequent changes
in fair value are not recognized.



| | 14. | INCOME TAX
| | --- | ----------



The following tabulation presents
the income tax and deferred tax of the Company and its individual subsidiaries for the six months ended June 30, 2012 and 2011:



|Description                  |  | June 30, 2012 |           |   | June 30, 2011 |  
|---------------------------- |  | ------------- | --------- | - | ------------- | -
|Income (loss) before taxes:- |  |               |           |   |               |  
|US                           |  | $             | (740,518  | ) |               | $
|BVI                          |  |               | (394,731  | ) |               |  
|PRC                          |  |               | 3,006,727 |   |               |  
|Total income before taxes    |  |               | 1,871,478 |   |               |  
|                             |  |               |           |   |               |  
|Provision for taxes:-        |  |               |           |   |               |  
|Current:                     |  |               |           |   |               |  
|US                           |  | $             | -         |   |               | $
|BVI                          |  |               | -         |   |               |  
|PRC                          |  |               | (329,439  | ) |               |  
|                             |  |               | (329,439  | ) |               |  
|Deferred:                    |  |               |           |   |               |  
|US                           |  |               | -         |   |               |  
|BVI                          |  |               | -         |   |               |  
|PRC                          |  |               | -         |   |               |  
|Valuation allowance          |  |               | -         |   |               |  
|                             |  |               |           |   |               |  
|                             |  |               |           |   |               |  
|Total provision for taxes    |  | $             | (329,439  | ) |               | $
|                             |  |               |           |   |               |  
|Effective tax rate           |  |               | 17.60     | % |               |  





28











Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





The differences between the
U.S. federal statutory income tax rates and the Company’s effective tax rate for the six months ended June 30, 2012 and 2011
are shown in the following table:



|                                       |  | June 30, 2012 |       |    | June 30, 2011 | 
|-------------------------------------- |  | ------------- | ----- | -- | ------------- | 
|U.S. federal statutory income tax rate |  |               | 34.00 | %  |               | 
|Lower rates in PRC, net                |  |               | (9.00 | %) |               | 
|Tax holiday                            |  |               | (7.40 | %) |               | 
|Accruals in foreign jurisdictions      |  |               | -     |    |               | 
|Effective tax rate                     |  |               | 17.60 | %  |               | 



| | 15. | SEGMENT INFORMATION
| | --- | -------------------



The Company has contracted
with customers usually in two revenue segments, one is for the construction and installation of gas facilities and the other is
for the subsequent sales of natural gas to the customers through the gas facilities the Company constructs. However, construction
and installation contracts and gas supply contracts have different terms for the basis of revenue recognition and differ from one
another in terms of the relevant cost-and-revenue to be recognized and hence separate calculations and subsequent payments of fees
for each segment occur without any interdependence on one another.



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



|Financial Position Segment Report
|---------------------------------
|As of June 30, 2012              
|                                 
|Assets                           
|Current Assets                   
|Non-Current Assets               
|Total Assets                     
|                                 
|Liabilities                      
|Current Liabilities              
|Non-current Liabilities          
|Total Liabilities                
|                                 
|Net Assets                       
|                                 
|Liabilities & Equities           





29









Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)





|Operation Result Segment Report                    
|---------------------------------------------------
|For the six months ended June 30, 2012             
|                                                   
|                                                   
|Sales Revenue                                      
|Cost of Revenue                                    
|Gross Profit                                       
|                                                   
|Operating Expense                                  
|Operating Income/(Loss)                            
|                                                   
|Other Income/(Loss)                                
|Earnings before tax                                
|                                                   
|Income tax                                         
|Gain/(loss) from discontinued operation, net of tax
|                                                   
|Net Income                                         



|Financial Position Segment Report
|---------------------------------
|As of June 30, 2011              
|                                 
|Assets                           
|Current Assets                   
|Non-Current Assets               
|Total Assets                     
|                                 
|Liabilities                      
|Current Liabilities              
|Non-current Liabilities          
|Total Liabilities                
|                                 
|Net Assets                       
|                                 
|Liabilities & Equities           





30







Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)







|Operation Result Segment Report                    
|---------------------------------------------------
|For the three months ended June 30, 2011           
|                                                   
|                                                   
|Sales Revenue                                      
|Cost of Revenue                                    
|Gross Profit                                       
|                                                   
|Operating Expense                                  
|Operating Income/(Loss)                            
|                                                   
|Other Income/(Loss)                                
|Earnings before tax                                
|                                                   
|Income tax                                         
|Gain/(loss) from discontinued operation, net of tax
|                                                   
|Net Income                                         



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 natural 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 officers.





31







Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)







| | 16. | EARNINGS PER SHARE
| | --- | ------------------



|                                                                |  |     |     |  | Six months Ended |  
|--------------------------------------------------------------- |  | --- | --- |  | ---------------- | -
|                                                                |  | Ref |     |  | 6/30/2012        |  
|Basic Earnings Per Share Numerator:                             |  |     |     |  |                  |  
|Net Income                                                      |  |     |     |  |                  | $
|Less:                                                           |  |     |     |  |                  |  
|Preferred Dividends                                             |  |     |     |  |                  |  
|Constructive Preferred Dividends                                |  |     |     |  |                  |  
|income attributed to non-controlling interest                   |  |     |     |  |                  |  
|Net income available to Common Stockholders                     |  |     |     |  |                  | $
|                                                                |  |     |     |  |                  |  
|Diluted Earnings Per Share Numerator:                           |  |     |     |  |                  |  
|Add:                                                            |  |     |     |  |                  |  
|Interest Expense for Convertible Bonds, net of tax              |  |     |     |  |                  |  
|Net income available to Common Stockholders                     |  |     |     |  |                  | $
|                                                                |  |     |     |  |                  |  
|Original Shares                                                 |  |     |     |  |                  |  
|Addition to Common Stock                                        |  |     |     |  |                  |  
|Basic Weighted Average Shares Outstanding                       |  |     |     |  |                  |  
|                                                                |  |     |     |  |                  |  
|Potentially Dilutive Securities:                                |  |     |     |  |                  |  
|Addition to Common Stock from Conversion of Preferred Stock B   |  |     | (1) |  |                  |  
|Addition to Common Stock from Conversion of Preferred Stock B-1 |  |     | (2) |  |                  |  
|Addition to Common Stock from Conversion of Convertible Bonds   |  |     |     |  |                  |  
|Addition to Common Stock from Exercise of Warrants              |  |     | (3) |  |                  |  
|Diluted Weighted Average Shares Outstanding                     |  |     |     |  |                  |  
|                                                                |  |     |     |  |                  |  
|Earnings Per Share                                              |  |     |     |  |                  |  
|Basic:   Net income                                             |  |     |     |  |                  | $
|Diluted:  Net income                                            |  |     |     |  |                  | $
|                                                                |  |     |     |  |                  |  
|Weighted Average Shares Outstanding                             |  |     |     |  |                  |  
|Basic                                                           |  |     |     |  |                  |  
|Diluted                                                         |  |     |     |  |                  |  



| | (1) | The applications of conversion of preferred stock B into common stock were anti-dilutive for the
six months ended June 30, 2012 and 2011.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The applications of conversion of preferred stock B-1 into common stock were anti-dilutive for
the six months ended June 30, 2012 and 2011.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | The applications of conversion of convertible bonds into common stock were anti-dilutive for the
six months ended June 30, 2012 and 2011.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The exercises of warrants to common stock were anti-dilutive for the six months ended June 30,
2012 and 2011.
| | --- | -------------------------------------------------------------------------------------------------------------



| | 17. | DISCONTINUED OPERATION
| | --- | ----------------------



The Company through its indirectly
wholly owned subsidiary Beijing Gas executed share transfer agreements and other related agreements (the “Agreements”)
with Hebei Natural Gas Co., Ltd. (“Hebei Gas”) to sell assets and ownership of three of its subsidiaries, a) Xinji
Zhongchen Gas Co., Ltd., (“Xinji Gas”) b) Jinzhou Weiye Gas Co., Ltd., (“Jinzhou Gas”) and c) Shenzhou
Weiye Gas Co., Ltd. (“Shenzhou Gas”) for total consideration of RMB 44.8 million (approximately USD $7.04 million).
Upon the completion of registered capital transfer filed with local government’s industrial and commercial administration,
the disposition took effect on June 8, 2011. The Company has accounted for the disposition of the assets of discontinued operation
in accordance with SFAS 144 (“FASB ASC 360”), “Accounting for the Impairment or Disposal of Long-Lived Assets”.
A total gain of $1,128,776 was recorded in the Company’s statement of income for the year ended
December 31, 2011.



| | a. | The following tabulation presents the calculation of gain from the disposal of the three subsidiaries:
| | -- | ------------------------------------------------------------------------------------------------------





32







Sino Gas International Holdings, Inc.

Notes to Financial Statements

As of June 30, 2012 and December 31,
2011

(Stated in US Dollars)







|             |  | Valuation of |           |  | Buyer’s           |   |           |             | 
|------------ |  | ------------ | --------- |  | ----------------- | - | --------- | ----------- | 
|             |  | Disposition  |           |  | Acquisition Price |   |           | Gain/(Loss) | 
|Jinzhou Gas  |  | $            | 3,217,742 |  |                   | $ | 3,043,930 |             | 
|Shenzhou Gas |  |              | 1,357,326 |  |                   |   | 1,312,914 |             | 
|Xinji Gas    |  |              | 1,334,980 |  |                   |   | 2,681,980 |             | 
|             |  | $            | 5,910,048 |  |                   | $ | 7,038,824 |             | 



| | b. | The following tabulation summarizes the operation results of the three disposal subsidiaries for
the period ended June 8, 2011, which was also accounted as income from discontinued operations net of tax in the statement of income.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                        |  | Condensed Income Statements |         |   |              |  
|----------------------- |  | --------------------------- | ------- | - | ------------ | -
|                        |  | Jinzhou Gas                 |         |   | Shenzhou Gas |  
|Revenue                 |  | $                           | 359,787 |   |              | $
|Cost of revenue         |  |                             | 217,313 |   |              |  
|Gross profit            |  |                             | 142,473 |   |              |  
|                        |  |                             |         |   |              |  
|Operating expenses      |  |                             | 18,246  |   |              |  
|Operating income        |  |                             | 124,227 |   |              |  
|Other income/(expenses) |  |                             | (241    | ) |              |  
|Earnings before tax     |  |                             | 123,986 |   |              |  
|                        |  |                             |         |   |              |  
|Income tax              |  |                             | (6,197  | ) |              |  
|                        |  |                             |         |   |              |  
|Net income              |  | $                           | 117,789 |   |              | $





33









Item 2. Management’s Discussion
and Analysis or Plan of Operation



The following is management’s discussion
and analysis of certain significant factors which have affected our financial position and operating results during the periods
included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management.
This report includes forward-looking statements. Generally, the words “believe”, “anticipate”, “may”,
“will”, “should”, “expect”, “intend”, “estimate”, “continue”,
and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents
we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue
reliance should not be place on these forward-looking statements which speak only as of the date hereof. We undertake no obligation
to update these forward-looking statements, except to the extent required by law.



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.



Economic & Industrial Trends



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



Due to the Chinese real estate boom
in recent years, we experienced high growth in our connection activities. However, in 2007, the Chinese government
implemented a series of policies and regulations to curb inflation and to slow the growth of the property market. These
policies, together with the worldwide financial crisis in 2008, resulted in a slowdown of the real estate market in
China and our business, in turn, was affected. In 2008, the Chinese government changed its policies and prioritized
working to boost the economy. In order to address the slowdown in the real estate market, the Chinese government adopted new
policies, such as reducing stamp duties and transactions fees, lowering interest rates, and loosening bank lending policies.
Also, to boost the overall economy, the Chinese government also decided to inject a stimulus package, which allocated funds
for mass housing projects. We saw signs of recovery of the real estate market in China at the beginning of 2009, and we
experienced increased business activities in the third and fourth quarters of 2009.



Starting in April 2010, the Chinese government
issued new policies to curb the rise of housing prices in certain cities. These new initiatives resulted in lower transaction volumes
during the second and third quarters of 2010. However, our transaction volumes started to pick up again in the fourth quarter of
2010. Although in 2011 the overall housing market remained slow and such trend carried into the first quarter of 2012, in
the Tier II and Tier III cities where we operate, housing development was still solid in 2011. As a result, new installations for
residential customers have increased. We experienced strong growth in the second half of 2011. However, we expect the housing market
slow down to affect our expansion in 2012 to 2013 if the current tight control policies continue to spread from major cities to
mid and small sized cities. In the western and northern regions of the country, we captured special development projects in certain
hot spots, such as Baishan ski resort and Qujing Natural Gas Reserve.



Even with the up and down nature of the
Chinese real estate market over the past three years, we believe that the growth trend of the real estate market will continue
because of the ongoing urbanization in China. Moreover, the Chinese government, at both the national and the local levels, continues
to strongly support the use of clean energy, particularly natural gas.



There are three pillars in
the Chinese economy: (i) domestic consumption (both private and public), (ii) net exports, and (iii) domestic
investment. China’s GDP grew 7.6% during the second quarter of 2012 as compared to the same period of 2011. This was
the first time in the past 3 years that the GDP growth rate fell below 8%. Although the growth of nationwide GDP has slowed,
especially in the large eastern cities, in the mid and western regions of China, GDP growth remains strong. The Company has a
presence in four such regions. In Jiangsu province GDP grew 9.9%, in Hebei province GDP grew 9.5%, in Yuannan province GDP
grew 11.7%, and in Jilin province GDP grew 12%.



Our gas users are comprised of both industrial
and residential users. Gas sales to residential users are much less affected by economic and industrial factors and should maintain
stable growth in the future. Gas sales to industrial users, however, are subject to the operating performance of the industrial
user. As we develop into more cities in the coming years, we expect to add more industrial users when the opportunities arise and
we possess the necessary capital requirements.



34







Material Opportunities



The gas distribution market is quite fragmented
in small (population less than 300,000) to medium (population between 300,000 and 1,000,000) sized cities in China and it is primarily
in these markets that we are exploring potential project targets. Many small-sized city markets are still untapped or undeveloped.
The development of these markets is generally considered one of the Company’s major growth opportunities.



The natural gas distribution markets of
most medium-sized or large cities 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 privatization
of these companies. Acquisitions in these markets would have a material impact on the Company, potentially increasing the Company’s
assets and revenues significantly.



Material Challenges



There are many small-to-medium sized cities
whose natural gas infrastructure is still undeveloped or underdeveloped and these markets present growth opportunities for the
Company. However, competition is growing, as many small new players have been attracted by the profitability and growth potential
of the business. In addition, we are also facing competition from stronger competitors, as large city markets are becoming
saturated and our competitors from those markets are beginning to expand into smaller cities.



We face limited opportunities in developing
into first-tier cities in China, as most of those opportunities have already been assumed by other large gas distributors, such
as Xin’ao Gas Co. Ltd. (the largest distributor in China).



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



With respect to purchase price and sale
price of natural gas, China’s energy market is highly regulated by the government. Whenever there is an adjustment to the
purchase price set by the government, gas distributors increase or decrease the sale price accordingly, and such changes in price
are subject to a public hearing and government approval. The natural gas prices in China lag behind those in other international
markets. The Chinese government has seldom adjusted the price of natural gas and we cannot rule out the possibility of an increase
in natural gas prices by the government in the future. Even though we could adjust our sale price accordingly after the increase
in purchase price, thereby passing the increase onto the end users, the fact remains that such price increases would make
natural gas more expensive, as compared to other alternative energies, and in turn could hinder 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 new home
buyers. If the real estate market turns downward, the demand for new homes could decrease, resulting in fewer natural gas connections,
which would negatively impact our business.



To reduce the Company’s dependence
on connection fees, the Company is looking at opportunities to diversify its business by expanding into related industries, such
as pipelines and gas stations. However, we do not expect to develop into those areas in full in the near future.



Liquidity and Capital Resources



Natural gas distribution is a capital-intensive
industry that requires large amounts of capital for the construction of pipelines and gas stations and the purchase of transportation
vehicles. Without the necessary capital, the Company would be constrained by inadequate capital when developing into larger cities
or engaging in merger and acquisition activities, and would require additional fundraising to finance such business activities.



Three and Six Months Ended June 30,
2012 Compared to Three and Six Months Ended June 30, 2011





During the three months ended June 30,
2012, net revenues were $10,819,666, representing an increase of 37.4% from the same period of 2011. Gross profit for the
three months ended June 30, 2012 was $4,346,867, representing an increase of 80.9% from the same period of 2011. Our operating
income for the three months ended June 30, 2012 was $2,470,152, representing an increase of 159.6% from the same period of
2011. Net income for the three months ended June 30, 2012 was $1,584,166, compared to a net income of $1,314,372 during
the same period of 2011.



35









|                 |  | For the three months ended June 30 |            |   |      | 
|---------------- |  | ---------------------------------- | ---------- | - | ---- | 
|                 |  | 2012                               |            |   | 2011 | 
|                 |  | US$                                |            |   | US$  | 
|Net Revenues     |  |                                    | 10,819,666 |   |      | 
|Gross Profit     |  |                                    | 4,346,867  |   |      | 
|Operating Income |  |                                    | 2,470,152  |   |      | 
|Net Income       |  |                                    | 1,584,166  |   |      | 
|Gross Margin     |  |                                    | 40.2       | % |      | 
|Net Margin       |  |                                    | 14.6       | % |      | 



During the six months ended June 30, 2012,
our net revenues were $21,573,269, representing an increase of 36% from the same period of last year, and gross profit was $7,033,439,
representing an increase of 45.8% from the same period of last year. During the six months ended June 30, 2012, our operating
income was $3,433,673, representing an increase of 120.2% from the same period of 2011.



|                 |  | For the six months ended June 30 |            |   |      | 
|---------------- |  | -------------------------------- | ---------- | - | ---- | 
|                 |  | 2012                             |            |   | 2011 | 
|                 |  | US$                              |            |   | US$  | 
|Net Revenues     |  |                                  | 21,573,269 |   |      | 
|Gross Profit     |  |                                  | 7,033,439  |   |      | 
|Operating Income |  |                                  | 3,433,673  |   |      | 
|Net Income       |  |                                  | 1,542,039  |   |      | 
|Gross Margin     |  |                                  | 32.6       | % |      | 
|Net Margin       |  |                                  | 7.1        | % |      | 



The stronger second quarter revenue
and income growth are partially due to the first quarter’s earlier than usual Chinese New year which shifted
the construction season. Our first half results are in line with the Company’s overall growth trend.



Net Revenues



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



Total net revenues for the three
months ended June 30, 2012 were $10,819,666, compared to $7,875,152 for the same period in 2011, representing an increase of
37.4%. The increase was due to increases in both gas sales and connection fees, but primarily due to the significant increase
in connection fees. During this period, we connected 13,162 new residential households to our gas distribution network,
resulting in total connection fees of $5,460,150. In comparison, we connected 9,208 new residential households to our
gas distribution network for the same period of 2011, resulting in total connection fees of $3,242,598. Gas sales during the
three months ended June 30, 2012 were $5,359,516. Gas sales during the same period in 2011 were $4,632,554.



|                 |  | For the three months ended June 30, |      |  |      | 
|---------------- |  | ----------------------------------- | ---- |  | ---- | 
|                 |  | 2012                                |      |  | 2011 | 
|(In US$ million) |  | US$                                 |      |  | %    | 
|Net Revenues     |  |                                     | 10.8 |  |      | 
|Connection Fees  |  |                                     | 5.5  |  |      | 
|Gas Sales        |  |                                     | 5.3  |  |      | 



Total net revenues for the six months
ended June 30, 2012 were $21,573,269, representing an increase of 36% as compared to $15,861,422 for the same period in
2011. The increase was due to the healthy growth in both connection fees and gas sales. During this period, we connected
19,990 new residential households to our gas distribution network, resulting in total connection fees of $8,296,529. Gas
sales during the same period were $13,276,740. In comparison, we connected 16,333 new residential households to our gas
distribution network in the same period of 2011, resulting in total connection fees of $6,040,409. Gas sales during the
period were $9,821,013.



36









|                |  | For the six months ended June 30, |      |  |      | 
|--------------- |  | --------------------------------- | ---- |  | ---- | 
|                |  | 2012                              |      |  | 2011 | 
|(In $ million)  |  | US$                               |      |  | %    | 
|Net Revenues    |  |                                   | 21.6 |  |      | 
|Connection Fees |  |                                   | 8.3  |  |      | 
|Gas Sales       |  |                                   | 13.3 |  |      | 



Our net revenues for the six months ended
June 30, 2012 increased by 36%, resulting from the following two factors:



|1. The increase in connection
        fees from mostly residential customers. There was a 37.4% increase in connection fees during the first half of 2012
        compared to the same period of last year.
        
        2. The increase in gas sales to both
        industrial and residential customers. There was a 35.2% increase in gas sales during the first half of 2012         compared
        to the same         period of last year.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The revenue mix from connection fees and
gas sales is 38.5% and 61.5%, respectively. These results are in line with our historical trend for the same season.



Connection Fees



Connection fees during the three months
ended June 30, 2012 were $5.5 million, representing an increase of 68.4% from $3.2 million during the same period of 2011
and accounting for 50.5% of the total net revenue in the three months ended June 30, 2012 as compared to approximately 41%
of the total net revenue for the same period in 2011. The source of connection fees was mainly from the development of new residential
users.



The earlier than usual arrival of Chinese
New Year had an impact on the new connections made during the first quarter of 2012. Thus, some of the revenue booking deferred
from first quarter was rolled into the second quarter results.



|                  |  | For the three months ended June 30, |      |  |      | 
|----------------- |  | ----------------------------------- | ---- |  | ---- | 
|(in US$)          |  | 2012                                |      |  | 2011 | 
|                  |  | US$                                 |      |  | %    | 
|Connection Fees   |  |                                     | 5.5  |  |      | 
|Residential Users |  |                                     | 5.0  |  |      | 
|Industrial Users  |  |                                     | 0.02 |  |      | 
|Commercial Users  |  |                                     | 0.4  |  |      | 



Connection fees during the six
months ended June 30, 2012 were $8.3 million, representing an increase of 37.4% over the same period of 2011 and
accounting for 38.5% of the total net revenue.With regard to the source of connection fees,
88% of the connection fees came from the development of new residential users in the first half of 2012.



|                  |  | For the six months ended June 30, |           |  |      | 
|----------------- |  | --------------------------------- | --------- |  | ---- | 
|(in US$)          |  | 2012                              |           |  | 2011 | 
|                  |  | US$                               |           |  | %    | 
|Connection Fees   |  |                                   | 8,296,529 |  |      | 
|Residential Users |  |                                   | 7,298,690 |  |      | 
|Industrial Users  |  |                                   | 391,790   |  |      | 
|Commercial Users  |  |                                   | 606,049   |  |      | 



Gas Sales



Gas sales were $5.4 million during
the three months ended June 30, 2012, accounting for 49.5% of total net revenue for the three months ended June 30, 2012 and representing
an increase of 15.7% over the same period of 2011. Gas sales to residential users decreased 21.8% to $2.2 million for the three
months ended June 30, 2012 from $2.8 million in the same period of 2011. Gas sales to industrial users decreased 16.2% to
$1.5 million for the three months ended June 30, 2012 from $1.8 million in the same period of 2011. Gas sales to commercial users
were $1.6 million. There were no sales to commercial users in the second quarter of 2011.



|                  |  | For the three months ended June 30, |     |  |      | 
|----------------- |  | ----------------------------------- | --- |  | ---- | 
|                  |  | 2012                                |     |  | 2011 | 
|(in US$)          |  | US$                                 |     |  | %    | 
|Gas Sales         |  |                                     | 5.4 |  |      | 
|Residential Users |  |                                     | 2.2 |  |      | 
|Industrial Users  |  |                                     | 1.5 |  |      | 
|Commercial Users  |  |                                     | 1.6 |  |      | 



Gas sales were $13.3 million during
the six months ended June 30, 2012, accounting for 61.5% of total net revenue in 2012 and representing an increase
of 35.2% over the same period of last year. During the six months ended June 30, 2012, gas sales to residential users
increased 46.2% from $5.5 million in the same period of 2011 to $8.0 million in 2012. During the six
months ended June 30, 2012, gas sales to industrial users decreased 36.4%, from $4.4 million in the same period of
2011 to $2.8 million in 2012. Gas sales to commercial users were $2.5 million.



37









|                  |  | For the six months ended June 30, |      |  |      | 
|----------------- |  | --------------------------------- | ---- |  | ---- | 
|                  |  | 2012                              |      |  | 2011 | 
|(in US$)          |  | US$                               |      |  | %    | 
|Gas Sales         |  |                                   | 13.3 |  |      | 
|Residential Users |  |                                   | 8.0  |  |      | 
|Industrial  Users |  |                                   | 2.8  |  |      | 
|Commercial Users  |  |                                   | 2.5  |  |      | 



Cost of Revenues



Cost of revenues for the three months ended
June 30, 2012, which includes cost of connections and cost of gas sales, was $6.5 million, representing an increase of 18.3% from
$5.5 million in the same period of 2011.



|                    |  | For the three months ended June 30, |     |  |      | 
|------------------- |  | ----------------------------------- | --- |  | ---- | 
|                    |  | 2012                                |     |  | 2011 | 
|($ million)         |  | US$                                 |     |  | %    | 
|Cost of Revenues    |  |                                     | 6.5 |  |      | 
|Connection Fee Cost |  |                                     | 1.4 |  |      | 
|Gas Cost            |  |                                     | 5.1 |  |      | 



Cost of revenues for the six
months ended June 30, 2012, which includes cost of connections and cost of gas sales, was $14.5 million, representing
an increase of 31.7%, from $11.0 million in the same period of 2011.



|                    |  | For the six months ended June 30, |      |  |      | 
|------------------- |  | --------------------------------- | ---- |  | ---- | 
|                    |  | 2012                              |      |  | 2011 | 
|($ million)         |  | US$                               |      |  | %    | 
|Cost of Revenues    |  |                                   | 14.5 |  |      | 
|Connection Fee Cost |  |                                   | 2.2  |  |      | 
|Gas Cost            |  |                                   | 12.3 |  |      | 



Cost of Connection Fees



The cost of connection fees increased 51.9% to
$1.4 million during the three months ended June 30, 2012 from $0.9 million for the same period in 2011. During the three months
ended June 30, 2012, our revenue increased 68.4% due to the connection fees.



Cost of connections increased 46.3% to $2.2 million during
the six months ended June 30, 2012 from $1.5 million for the same period in 2011. The increase is attributed mainly
to the increase in revenue and year over year increase in raw material and labor costs.



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



Cost of Gas Sales



The cost of gas sales increased 11.6%
to $5.1 million during the three months ended June 30, 2012 from $4.6 million for the same period in 2011. This
increase in cost of gas sales is largely due to the proportionate increase in expenses associated with the increase in gas sales
and also the higher transportation costs during the quarter.



The cost of gas sales increased
29.4% to $12.3 million during the six months ended June 30, 2012 from $9.5 million in the same period in 2011.



The cost of natural gas sales includes
the purchase and transportation of natural gas and depreciation of delivery equipment.



Gross Profit



During the three months ended June 30,
2012, gross profit was $4.3 million, representing an increase of approximately 80.9% from the same period of 2011. Gross profit
from connection fees was $4.1 million for the three months ended June 30, 2012, accounting for 94% of total gross profit. In comparison,
gross profit from connection fees was $2.3 million for the three months ended June 30, 2011, accounting for 97.4% of total
gross profit for the three months ended June 30, 2011. Gross profit from gas sales was $0.3 million for the three months ended
June 30, 2012, accounting for 5.9% of total gross profit, compared to $0.06 million, accounting for 2.6% of total gross profit,
in the same period of 2011.



38







Gross margin during the three months ended
June 30, 2012 was 40.2%, compared to 30.5% during the same period in 2011.



Gross margin for connection fees for
the three months ended June 30, 2012 was 74.9%, compared to 72% in the same period of 2011. The increase in the cost of
connection fees contributed to the lower gross margin. Gross margin for sales of natural gas was 4.8% for the three
months ended June 30, 2012, compared to 1% during the same period of 2011. The increase was primarily due to the increase in
total gas sales and the economies of scale, for this quarter.



|             |  | For the three months ended June 30, |     |  |      | 
|------------ |  | ----------------------------------- | --- |  | ---- | 
|             |  | 2012                                |     |  | 2011 | 
|($ million)  |  | US$                                 |     |  | %    | 
|Gross Profit |  |                                     | 4.3 |  |      | 
|Connection   |  |                                     | 4.1 |  |      | 
|Gas          |  |                                     | 0.3 |  |      | 



Gross margin during six months ended June 30, 2012 was
32.6%, compared to 30.4% during the same period in 2011.



Gross margin for connection fees for the six months ended June
30, 2012 was 73.1%, compared to 75% during the same period of 2011.



Gross margin for sales of natural gas was 7.3% for the six months
ended June 30, 2012, compared to 3% during the same period of 2011.



|             |  | For the six months ended June 30, |     |  |      | 
|------------ |  | --------------------------------- | --- |  | ---- | 
|             |  | 2012                              |     |  | 2011 | 
|($ million)  |  | US$                               |     |  | %    | 
|Gross Profit |  |                                   | 7.0 |  |      | 
|Connection   |  |                                   | 6.1 |  |      | 
|Gas          |  |                                   | 0.9 |  |      | 



Selling, General and Administrative
Expenses



Selling, General and Administrative (“SG&A”)
expenses in the three months ended June 30, 2012 were $1.9 million and approximately 17.3% of net revenues, compared with $1.5 million,
or 18.4%, of net revenues in the same period of 2011.



SG&A in the six months ended June 30, 2012 were $3.6 million,
or approximately 16.7% of our net revenues, compared with $ 3.3 million, or approximately 20.6% of net revenues for the
same period in 2011.



Operating Income



Operating income for the three
months ended June 30, 2012 was $2.5 million, representing an increase of 159.6% as compared to $0.95 million for the
same period of 2011. This increase was due to the increase in gas sales revenue and the higher gross margin for gas
sales during the three months ended June 30, 2012.



The operating income for the six
months ended June 30, 2012 was $3.4 million, representing an increase of 120.2% as compared to the operating income of $1.6
million in 2011.



Other Income (Expense)



Other expense was $0.8 million for the
three months ended June 30, 2012, compared with other income $0.6 million for the same period of 2011.



Other expense was $1.6 million for the
six months ended June 30, 2012, compared with other income of $0.1 million for the same period of 2011. The increase was
mainly due to the increased interest expenses in the first half of 2012.



Income tax



Income tax was $0.1 million for the three
months ended June 30, 2012, compared to $0.3 million for the same period of 2011.



Income tax was $0.33 million for the six
months ended June 30, 2012, compared to $0.35 million in 2011.



39







Net Income



Net income for the three months ended June
30, 2012 was $1.6 million, compared with net income of $1.3 million for the same period of 2011.



Net income for the six months ended
June 30, 2012 was $1.5 million, compared with net income of $1.4 million in the same period in 2011.



Liquidity and Capital Resources



Cash and cash equivalents
were $6.4 million as of June 30, 2012, representing an increase of $3.5 million as compared to $2.9 million as of
December 31, 2011.



Cash sourced from operating activities
for the six months ended June 30, 2012 was $6.6 million, compared to $1.5 million during the same period of 2011.



Cash used in investing activities for the
six months ended June 30, 2012 was $7.7 million, representing an increase of $3.7 million from $4.0 million during
the same period of 2011.



Cash sourced in financing activities
for the three months ended June 30, 2012 was $4.8 million, representing an increase of $0.1 million from $4.7 million during
the same period of 2011.



This increase was mainly due to the increase
in short term and long term bank loans.



In the year 2012, cash management and
financing activities will be the priority of the Company. On one hand, the growth opportunities and the planned
new constructions utilized most of the current working capitals; on the other hand, the upcoming maturity date of
convertible bonds is approaching at the end of November of 2012, the Company needs to secure sufficient fund to repay the
remaining $5.7 million principles of the convertible bonds. The increasing interest expenses in varies financing activities
also introduced additional capital cost.



Accounts Receivable



Accounts receivable as of June 30, 2012
were $10.0 million, representing a decrease of $1.8 million from $11.8 million as of December 31, 2011.



Notes Receivable



Notes receivable as of June 30, 2012 was
0.3 million, almost the same as of December 31, 2011.



Inventory



Inventory was $1.5 million as of June 30,
2012 was comprised of spare parts and natural gas.



Fixed Assets



Fixed Assets as of June 30, 2012 were $59.4 million,
representing an increase of $3.7 million from $55.7 million as of December 31, 2011. The table below is a breakdown of our
fixed assets at cost:



|                              |  | June 30, 2012 |            |   | December 31 2011 |  
|----------------------------- |  | ------------- | ---------- | - | ---------------- | -
|At Cost                       |  |               |            |   |                  |  
|Gas Pipelines                 |  | $             | 48,765,495 |   |                  | $
|Motor Vehicles                |  |               | 6,270,870  |   |                  |  
|Machinery & Equipment         |  |               | 2,092,899  |   |                  |  
|Buildings                     |  |               | 1,847,247  |   |                  |  
|Leasehold Improvements        |  |               | 150,623    |   |                  |  
|Office Equipment              |  |               | 284,419    |   |                  |  
|Less Accumulated depreciation |  |               | (6,979,221 | ) |                  |  
|                              |  | $             | 52,432,332 |   |                  | $

Bank Loans



Short-term bank loans as of June 30, 2012
were $20.8 million, an increase of $3.7 million compared to 17.1 million as of December 31, 2011.



Long-term bank loans as of June 30, 2012
were 1.1 million; there was no long-term bank loan as of December 31, 2011.



In the first half of 2012, the
Company focused its efforts to secure new bank loans and to renew existing bank loans in order to increase cash flow. The new
short-term bank loans include loans from China Minsheng Bank, Nanjing Bank, Bank of China, and Wuhe Yongtai Bank. Renewed
bank loans include loans from China Merchants Bank and Bank of China. For more information concerning our bank loans, please
see the applicable note to our financial statements.



40







Accounts Payable



Accounts payable as of June 30, 2012 was
$16.1 million, representing an increase of $4.7 million compared to December 31, 2011.



Other Payables



Other payables - current as of June 30,
2012 were $9.1 million, representing an increase of $1.5 million compared to December 31, 2011.



Item 3. Quantitative and Qualitative
Disclosures About Market Risk



Not required.



Item 4. Controls and Procedures



Disclosure Controls and Procedures



Disclosure controls and procedures (as
defined in Rules 13a – 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This
information is accumulated and communicated to management, including our Chief Executive Officer and Principal Accounting Officer,
as appropriate, to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation
of our Chief Executive Officer and Principal Accounting Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, our Chief Executive
Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.



It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system
are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future
events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.



Changes in Internal Control over Financial
Reporting



During the quarter ended June 30, 2012,
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.



41







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



None.



Item 3. Defaults Upon Senior Securities



None.



Item 4. Mining Safety Disclosure



Not Applicable.



Item 5. Other Information



None.



Item 6. Exhibits



The following exhibits are hereby filed as part of or furnished
with this Quarterly Report on Form 10-Q.



|Exhibit  Number: |  | Description                                                                                       
|---------------- |  | --------------------------------------------------------------------------------------------------
|31.1*            |  | 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*              |  | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350  
|101.INS†         |  | XBRL Instance Document                                                                            
|101.SCH†         |  | XBRL Taxonomy Extension Schema Document                                                           
|101.CAL†         |  | XBRL Taxonomy Extension Calculation Linkbase Document                                             
|101.DEF†         |  | XBRL Taxonomy Extension Definition Linkbase Document                                              
|101.LAB†         |  | XBRL Taxonomy Extension Label Linkbase Document                                                   
|101.PRE†         |  | XBRL Taxonomy Extension Presentation Linkbase Document                                            



*Filed herewith.



†To be furnished by amendment.









42





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: August 14, 2012 | By:                                   | /s/ Yuchuan Liu                     
|                      |                                       | Yuchuan Liu                         
|                      |                                       | Chairman and Chief Executive Officer
|                      |                                       | (Principal Executive Officer)       





|                      | SINO GAS INTERNATIONAL HOLDINGS, INC. |                               
|--------------------- | ------------------------------------- | ------------------------------
|                      |                                       |                               
|Date: August 14, 2012 | By:                                   | /s/ Baoling Wang              
|                      |                                       | Baoling Wang                  
|                      |                                       | (Principal Accounting Officer)





43