**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-Q**




(Mark
      one)




x
            Quarterly
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934




For
      the
      Quarterly Period Ended June 30, 2008




or




o
            Transition
                Report Under Section 13 or 15(d) of the Securities Exchange Act of
                1934




**Commission
      File Number 000-51364**









**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**


(Name
      of
      small business issuer in its charter)




**Utah**
            **32-0028823****(State
                or other jurisdiction**
              **of
                incorporation or organization)**
            **(I.R.S.
                Employer**
              **Identification
                No.)**





**No.18
                Zhong Guan Cun Dong St.**
              **Haidian
                District**
              **Beijing,
                P. R. China**
            **100083****(Address
                of principal executive offices)**
            **(Zip
                Code)**




**Issuer’s
      telephone number:  86-10-82600527**










Check
      whether the issuer (1) has filed all reports required to be filed by
      Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
      such shorter period that the Registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90
      days.    Yes x No o




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





Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filero
              (Do
                not check if a smaller reporting company)
            Smaller
                reporting companyx




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act)    Yes o No x




As
      of
      August 13, 2008, the Registrant had 25,084,644 shares of common stock
      outstanding.









Sino
      Gas
      International Holdings, Inc.




Table
      of
      Contents




PagePART
                I -
            FINANCIAL
                INFORMATIONItem
                1.
            Financial
                Statements
            1Notes
                to Financial Statements (Unaudited)
            7Item
                2.
            Management's
                Discussion and Analysis or Plan of Operation
            29Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            43Item
                4.
            Controls
                and Procedures
            43PART
                II -
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            44Item
                1A.
            Risk
                Factors
            44Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            44Item
                3.
            Defaults
                Upon Senior Securities
            44Item
                4.
            Submission
                of Matters to a Vote of Security Holders.
            44Item
                5.
            Other
                Information
            44Item
                6.
            Exhibits
            45









**PART
      I - FINANCIAL INFORMATION**








**Sino
      Gas International Holdings, Inc.**





**Reviewed
      Financial Statements**





**June
      30, 2008 and December 31, 2007**





**(Stated
      in US Dollars)**









**SINO
      GAS INTERNATIONAL HOLDINGS, INC.**




**CONTENTS**
            
            
            **PAGES**INDEPENDENT
                AUDITOR’S REPORT
            
            
            1CONSOLIDATED
                BALANCE SHEETS
            
            
            2
                - 3CONSOLIDATED
                STATEMENTS OF INCOME
            
            
            4CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS’ EQUITY
            
            
            5CONSOLIDATED
                STATEMENTS OF CASH FLOWS
            
            
            6NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            
            
            7
                - 28










Board
      of
      Directors and Stockholders


Sino
      Gas
      International Holdings, Inc.





**Report
      of Independent Registered Public Accounting Firm**




We
      have
      reviewed the accompanying consolidated interim balance sheets of Sino Gas
      International Holdings, Inc. as of June 30, 2008 and December 31, 2007, and
      the
      related consolidated statements of income, stockholders’ equity, and cash flows
      for the three-month and six-month periods ended June 30, 2008 and 2007. These
      consolidated interim financial statements are the responsibility of the
      Company's management.





We
      conducted our reviews in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). A review of interim financial
      statements consists principally of applying analytical procedures and making
      inquiries of persons responsible for financial and accounting matters. It is
      substantially less in scope than an audit conducted in accordance with the
      standards of the Public Company Accounting Oversight Board, the objective of
      which is the expression of an opinion regarding the financial statements taken
      as a whole. Accordingly, we do not express such an opinion.





Based
      on
      our review, we are not aware of any material modifications that should be made
      to the accompanying consolidated interim financial statements for them to be
      in
      conformity with U.S. generally accepted accounting principles.








South San Francisco, California
            
            Samuel
                H. Wong & Co., LLPJuly 30, 2008
            
            Certified
                Public
                Accountants




1




**Sino
                Gas International Holdings, Inc.****Consolidated
                Balance Sheets****As
                of June 30, 2008 and December 31, 2007****(Stated
                in US Dollars)**




**ASSETS**
            
            
            
            **June
                30, 2008**
            
            **December
                31, 2007****Note**
            
            **Unaudited**
            
            **Audited**Current
                AssetsCash
                & cash equivalents
            
            
            2*(e)*
            
            $
            8,152,907
            
            $
            10,915,590Restricted
                cash
            
            
            3
            
            
            739,868
            
            
            478,920Notes
                receivable
            
            
            
            
            
            283,768
            
            
            825,119Accounts
                receivable
            
            
            2*(f),*4
            
            
            5,933,183
            
            
            7,315,253Inventory
            
            
            
            
            
            276,252
            
            
            207,976Advances
                to suppliers
            
            
            2*(g)*
            
            
            2,892,084
            
            
            27,372Prepayments
                and others
            
            
            
            
            
            474,083
            
            
            320,380Other
                receivables
            
            
            5
            
            
            6,486,784
            
            
            3,100,695Total
                Current Assets
            
            
            
            
            
            25,238,929
            
            
            23,191,305Non-Current
                AssetsInvestment
            
            
            2*(h)*
            
            
            4,382,417
            
            
            4,007,310Property,
                plant & equipment,*net*
            
            
            2*(j),*6
            
            
            26,494,692
            
            
            24,572,565Construction
                in progress
            
            
            2*(l)*
            
            
            14,694,005
            
            
            11,556,820Intangible
                assets,*net*
            
            
            2*(k),*7
            
            
            2,189,172
            
            
            2,028,250Total
                non-current assets
            
            
            
            
            
            47,760,286
            
            
            42,164,945**TOTAL
                ASSETS**
            
            
            
            
            $
            72,999,215
            
            $
            65,356,250**LIABILITIES
                & STOCKHOLDERS' EQUITY**Current
                LiabilitiesBank
                Loans
            
            
            8
            
            $
            7,276,114
            
            $
            2,734,444Accounts
                payable
            
            
            
            
            
            5,147,415
            
            
            716,707Other
                payables
            
            
            9
            
            
            6,597,092
            
            
            10,383,657Unearned
                revenue
            
            
            2*(m)*
            
            
            757,261
            
            
            312,573Accrued
                liabilities
            
            
            
            
            
            4,204
            
            
            362,263Total
                current liabilities
            
            
            
            
            
            19,782,086
            
            
            14,509,644**TOTAL
                LIABILITIES**
            
            
            
            
            $
            19,782,086
            
            $
            14,509,644




See
      accompanying notes to financial statements and accountant’s report




2




**Sino
                Gas International Holdings, Inc.****Consolidated
                Balance Sheets****As
                of June 30, 2008 and December 31, 2007****(Stated
                in US Dollars)**




**STOCKHOLDERS'
                EQUITY**Preferred
                Stock A US $0.001 par value; 20,000,000 shares authorized; 275,111
                shares
                issued and outstanding as of June 30, 2008 and December 31,
                2007
            
            
            10
            
            $
            275
            
            $
            275Preferred
                Stock B US $0.001 par value; 5,000,000 shares authorized; 4,764,486
                and
                4,971,859 shares issued and outstanding as of June 30, 2008 and December
                31, 2007
            
            
            10
            
            
            4,765
            
            
            4,972Common
                Stock US $0.001 par value; 250,000,000 shares authorized; 25,489,753
                and
                25,282,380 shares issued and outstanding as of June 30, 2008 and
                December
                31, 2007
            
            
            10
            
            
            25,490
            
            
            25,283Additional
                Paid in Capital
            
            
            
            
            
            35,247,303
            
            
            35,247,303Statutory
                Reserve
            
            
            
            
            
            3,258,201
            
            
            3,258,201Retained
                Earnings
            
            
            
            
            
            10,044,869
            
            
            10,432,430Accumulated
                Other Comprehensive Income
            
            
            
            
            
            4,636,225
            
            
            1,878,142**TOTAL
                STOCKHOLDERS' EQUITY**
            
            
            
            
            
            53,217,129
            
            
            50,846,606**TOTAL
                LIABILITIES AND****STOCKHOLDERS'
                EQUITY**
            
            
            
            
            $
            72,999,215
            
            $
            65,356,250




See
      accompanying notes to financial statements
      and accountant’s report




3




**Sino
                Gas International Holdings, Inc.****Consolidated
                Statements of Income****For
                the three months and six months periods ended June 30, 2008 and
                2007****(Stated
                in US Dollars)**




Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,Notes
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**Revenues
            
            
            
            
            $
            5,121,521
            
            $
            2,796,145
            
            $
            9,463,638
            
            $
            5,234,372Cost
                of revenues
            
            
            
            
            
            (3,554,592
            )
            
            (1,894,203
            )
            
            (6,530,063
            )
            
            (3,731,833
            )Gross
                Profit
            
            
            
            
            
            1,566,930
            
            
            901,942
            
            
            2,933,575
            
            
            1,502,539Operating
                ExpensesSelling
                and marketing expenses
            
            
            
            
            
            (186,193
            )
            
            (143,296
            )
            
            (367,896
            )
            
            (199,494
            )General
                & administrative expenses
            
            
            
            
            
            (1,163,429
            )
            
            (247,485
            )
            
            (1,996,879
            )
            
            (688,859
            )Total
                operating expenses
            
            
            
            
            
            (1,349,621
            )
            
            (390,781
            )
            
            (2,364,776
            )
            
            (888,353
            )Operating
                Income/(Loss)
            
            
            
            
            
            217,308
            
            
            511,161
            
            
            568,799
            
            
            614,186Other
                income
            
            
            
            
            
            1,269
            
            
            
            
            
            1,269
            
            
            11,781Other
                expenses
            
            
            
            
            
            (26,330
            )
            
            (34,789
            )
            
            (27,176
            )
            
            (11,977
            )Interest
                income
            
            
            
            
            
            12,496
            
            
            38,920
            
            
            45,662
            
            
            33,550Interest
                expense
            
            
            
            
            
            (156,100
            )
            
            
            
            
            (216,567
            )
            
            -Total
                other income (expense)
            
            
            
            
            
            (168,665
            )
            
            4,131
            
            
            (196,811
            )
            
            33,354Earnings
                before tax
            
            
            
            
            
            48,643
            
            
            515,292
            
            
            371,988
            
            
            647,540Income
                tax
            
            
            
            
            
            (128,781
            )
            
            (10,478
            )
            
            (302,798
            )
            
            (27,343
            )Income
                from continuing operation
            
            
            
            
            
            (80,137
            )
            
            504,814
            
            
            69,190
            
            
            620,197Extraordinary
                loss, net
            
            
            12
            
            
            (456,751
            )
            
            -
            
            
            (456,751
            )
            
            -Net
                Income
            
            
            
            
            $
            (536,888
            )
            $
            504,814
            
            $
            (387,561
            )
            $
            620,197Earnings
                per shareBasic
            
            
            
            
            $
            (0.02
            )
            $
            0.03
            
            $
            (0.02
            )
            $
            0.04Diluted
            
            
            
            
            
            (0.02
            )
            
            0.03
            
            
            (0.01
            )
            
            0.03Weighted
                Average Shares OutstandingBasic
            
            
            
            
            
            25,312,896
            
            
            15,273,626
            
            
            25,297,638
            
            
            15,216,279Diluted
            
            
            
            
            
            30,529,350
            
            
            19,360,386
            
            
            30,529,350
            
            
            19,486,791




See
      accompanying notes to financial statements and accountant’s report




4




**Sino
                Gas International Holdings, Inc.****Consolidated
                Statements of Stockholders’ Equity****As
                of June 30, 2008 and December 31, 2007****(Stated
                in US Dollars)**




**Preferred
                  Stock A**
              
              **Preferred
                  Stock B**
              
              **Common
                  Stock****Shares
                  Outstanding**
              
              **Amount**
              
              **Shares
                  Outstanding**
              
              **Amount**
              
              **Shares
                  Outstanding**
              
              **Amount**
              
              **Common
                  Stock Additional Paid in Capital**
              
              **Statutory
                  Reserve**
              
              **Retained
                  Earnings**
              
              **Accumulated
                  Other Comprehensive Income**
              
              **Total**Balance,
                  January 1, 2007
              
              
              -
              
              
              -
              
              
              4,023,268
              
              
              4,023
              
              
              14,693,186
              
              
              14,694
              
              
              18,488,040
              
              
              2,025,022
              
              
              3,958,239
              
              
              824,296
              
              
              25,314,314Net
                  Income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,707,370
              
              
              -
              
              
              7,707,370Issue
                  of stock and warrant
              
              
              275,111
              
              
              275
              
              
              948,591
              
              
              949
              
              
              10,589,194
              
              
              10,589
              
              
              16,759,263
              
              
              -
              
              
              -
              
              
              -
              
              
              16,771,076Appropriations
                  of Retained Earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,233,179
              
              
              (1,233,179
              )
              
              -
              
              
              -Foreign
                  Currency Translation Adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,053,846
              
              
              1,053,846Balance,
                  December 31, 2007
              
              
              275,111
              
              
              275
              
              
              4,971,859
              
              
              4,972
              
              
              25,282,380
              
              
              25,283
              
              
              35,247,303
              
              
              3,258,201
              
              
              10,432,430
              
              
              1,878,142
              
              
              50,846,606Balance,
                  January 1, 2008
              
              
              275,111
              
              
              275
              
              
              4,971,859
              
              
              4,972
              
              
              25,282,380
              
              
              25,283
              
              
              35,247,303
              
              
              3,258,201
              
              
              10,432,430
              
              
              1,878,142
              
              
              50,846,606Net
                  Income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (387,561
              )
              
              -
              
              
              (387,561
              )Conversion
                  of Stock
              
              
              -
              
              
              -
              
              
              (207,373
              )
              
              (207
              )
              
              207,373
              
              
              207
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Appropriations
                  of Retained Earnings
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Foreign
                  Currency Translation Adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,758,083
              
              
              2,758,083Balance,
                  June 30, 2008
              
              
              275,111
              
              
              275
              
              
              4,764,486
              
              
              4,765
              
              
              25,489,753
              
              
              25,490
              
              
              35,247,303
              
              
              3,258,201
              
              
              10,044,869
              
              
              4,636,225
              
              
              53,217,129**Accumulated
                  Comprehensive Income****12/31/2007**
              
              
              
              
              **6/30/2008**
              
              
              
              
              **Total**Comprehensive
                  IncomeNet
                  Income
              
              
              7,707,370
              
              
              
              
              
              (387,561
              )
              
              
              
              
              7,319,809Other
                  Comprehensive IncomeForeign
                  Currency Translation Adjustment
              
              
              1,053,846
              
              
              
              
              
              2,758,083
              
              
              
              
              
              3,811,9298,761,216
              
              
              
              
              
              2,370,522
              
              
              
              
              
              11,131,738




See
      accompanying notes to financial statements and accountant’s report




5




**Sino
                Gas International Holdings, Inc.****Consolidated
                Statements of Cash Flows****For
                the three months and six months periods ended June 30, 2008 and
                2007****(Stated
                in US Dollars)**





Three
                Months Ended
            
            Six
                Months EndedJune
                30,
            
            June
                30,**2008**
            
            **2007**
            
            **2008**
            
            **2007****Cash
                flow from operating activities**Net
                Income
            
            
            (536,888
            )
            
            504,814
            
            
            (387,561
            )
            
            620,197Depreciation
                expense
            
            
            218,405
            
            
            657,609
            
            
            858,653
            
            
            696,453Amortization
                expense
            
            
            14,463
            
            
            467
            
            
            43,995
            
            
            467Invested
                in restricted time deposits
            
            
            (75,807
            )
            
            -
            
            
            (260,948
            )
            
            3,124,541Decrease/(increase)
                in accounts and other receivables
            
            
            3,894,981
            
            
            (940,846
            )
            
            (1,462,668
            )
            
            (630,427
            )Increase
                in inventory
            
            
            (29,360
            )
            
            (57,690
            )
            
            (68,276
            )
            
            (57,690
            )Increase
                in prepaid expenses
            
            
            (2,186,986
            )
            
            -
            
            
            (3,018,416
            )
            
            -Increase
                in accounts and other payables
            
            
            1,018,505
            
            
            (3,903
            )
            
            730,773
            
            
            3,019,392Cash
                sourced/(used) in operating activities
            
            
            2,317,312
            
            
            160,451
            
            
            (3,564,449
            )
            
            6,772,933**Cash
                flows from investing activities**Cash
                received/paid for investment proceeds
            
            
            (1,679,262
            )
            
            930,801
            
            
            (375,108
            )
            
            **-**(Purchase)/disposal
                of property, plant & equipment
            
            
            139,869
            
            
            (1,412,955
            )
            
            (2,780,780
            )
            
            (4,733,643
            )(Purchase)/disposal
                of intangible assets
            
            
            (91,297
            )
            
            479,373
            
            
            (204,917
            )
            
            307,163Acquisition
                of subsidiaries
            
            
            -
            
            
            (173,167
            )
            
            -
            
            
            (173,167
            )Increase
                in minority interest
            
            
            -
            
            
            65,575
            
            
            -
            
            
            65,575Increase
                in construction in progress
            
            
            (1,863,062
            )
            
            (1,471,000
            )
            
            (3,137,183
            )
            
            (2,816,436
            )Cash
                sourced/(used) in investing activities
            
            
            (3,493,752
            )
            
            (1,581,373
            )
            
            (6,497,988
            )
            
            (7,350,508
            )**Cash
                flows from financing activities**Proceeds
                from bank borrowings
            
            
            155,838
            
            
            2,623,020
            
            
            4,541,670
            
            
            192,575Issue
                of share capital
            
            
            -
            
            
            2,587,759
            
            
            -
            
            
            2,587,759Cash
                sourced/(used) in financing activities
            
            
            155,838
            
            
            5,210,779
            
            
            4,541,670
            
            
            2,780,334Net
                increase/(decrease) in cash & cash equivalents for the
                year
            
            
            (1,020,603
            )
            
            3,789,858
            
            
            (5,520,767
            )
            
            2,202,760Effect
                of Currency Translation on cash and cash equivalents
            
            
            1,152,297
            
            
            518,617
            
            
            2,758,083
            
            
            812,206Cash
                & Cash Equivalents - Beginning of Year
            
            
            8,021,212
            
            
            2,345,164
            
            
            10,915,590
            
            
            3,638,673**Cash
                & Cash Equivalents - End of Year**
            
            
            8,152,907
            
            
            6,653,639
            
            
            8,152,907
            
            
            6,653,639Supplementary
                cash flow informationInterest
                received
            
            $
            12,496
            
            $
            3,931
            
            $
            45,662
            
            $
            98,584Interest
                paid
            
            
            156,900
            
            
            10,993
            
            
            217,367
            
            
            54,610Income
                tax paid
            
            
            123,005
            
            
            10,478
            
            
            123,005
            
            
            27,343




See
      accompanying notes to financial statements and accountant’s report




6




**Sino
                Gas International Holdings, Inc.****Notes
                to Consolidated Financial Statements****For
                the three months and six months periods ended June 30, 2008 and
                2007**








**1.**  **ORGANIZATION
      AND PRINCIPAL ACTIVITIES**





Sino
      Gas
      International Holdings, Inc. (“the Company”) was incorporated under the laws of
      the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company
      changed its name to American Arms, Inc. on April 5, 1984, and then changed
      its
      name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name
      to
      Sino Gas International Holdings, Inc. on November 17, 2006.





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





The
      Company is a natural gas services operator, principally engaging in the
      investment, operation and management of city gas pipeline infrastructure, in
      the
      distribution of natural gas to residential and industrial users, in the
      construction and operation gas stations, and in the development and application
      of natural gas related technologies. The Company owns and operates 24 natural
      gas distribution systems serving approximately 87,500 residential and five
      commercial and industrial customers. The Company’s facilities include
      approximately 700 kilometers of pipeline and delivery networks (including
      delivery trucks) with a designed daily capacity of approximately 70,000 cubic
      meters of natural gas.





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





*Basis
      of Presentation and Organization*





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




This
      basis of accounting differs in certain material respects from that used for
      the
      preparation of the books of account of the Company’s principal subsidiaries,
      which are prepared in accordance with the accounting principles and the relevant
      financial regulations applicable to enterprises with limited liabilities
      established in the PRC (“PRC GAAP”) or in the accounting standards used in the
      places of their domicile. The accompanying consolidated financial statements
      reflect necessary adjustments not recorded in the books of account of the
      Company’s subsidiaries to present them in conformity with US GAAP.





7




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





*(a)*
            *Method
                of Accounting*





The
      Company maintains its general ledger and journals with the accrual method
      accounting for financial reporting purposes. The financial statements and notes
      are representations of management. Accounting policies adopted by the Company
      conform to generally accepted accounting principles in the United States of
      America and have been consistently applied in the presentation of financial
      statements, which are compiled on the accrual basis of accounting.





*(b)*
            *Use
                of estimates*





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




*(c)*
            *Economic
                and political risks*





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




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




*(d)*
            *Principles
                of Consolidation*





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





8




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




Name
                  of Company
              
              Place
                  of Incorporation
              
              Date
                  of Incorporation
              
              Beneficiary
                interest
                  %
              
              Equity
                Interest
                  %
              
              Registered
                CapitalGAS
                  Investment China Co., Ltd.
              
              The
                  British
                Virgin
                  Islands
              
              6/19/2003
              
              100
              
              100
              
              USD
                  10,000,000Sino
                  Gas Construction Limited
              
              The
                  British
                Virgin
                  Islands
              
              1/9/2007
              
              100
              
              100
              
              USD
                  50,000Sino
                  Gas Investment Development Limited
              
              The
                  British
                Virgin
                  Islands
              
              1/9/2007
              
              100
              
              100
              
              USD
                  50,000Beijing
                  Zhong Ran Wei Ye Gas Co., Ltd
              
              PRC
              
              8/29/2001
              
              100
              
              100
              
              RMB
                  150,000,000Peixian
                  Weiye Gas Co., Ltd
              
              PRC
              
              8/22/2005
              
              100
              
              90
              
              RMB
                  5,000,000Sihong
                  Weiye Gas Co., Ltd
              
              PRC
              
              12/3/2004
              
              100
              
              95
              
              RMB
                  10,000,000Wuhe
                  Weiye Gas Co., Ltd
              
              PRC
              
              1/30/2007
              
              100
              
              100
              
              RMB
                  3,000,000Changli
                  Weiye Gas Co., Ltd
              
              PRC
              
              12/8/2006
              
              100
              
              100
              
              RMB
                  3,000,000Yutian
                  Zhongran Weiye Gas Co., Ltd
              
              PRC
              
              12/19/2003
              
              100
              
              90
              
              RMB
                  3,000,000Yuxian
                  Jinli Gas Co., Ltd
              
              PRC
              
              11/8/2005
              
              100
              
              100
              
              RMB
                  9,500,000Zhangjiakou
                  City Xiahuayuan Jinli Gas Co., Ltd.
              
              PRC
              
              9/30/2005
              
              100
              
              100
              
              RMB
                  2,000,000Wuqiao
                  Gas Co., Ltd
              
              PRC
              
              6/30/2004
              
              100
              
              95
              
              RMB
                  2,000,000
  9
  Jinzhou
                  Weiye Gas Co., Ltd
              
              PRC
              
              7/19/2004
              
              100
              
              95
              
              RMB
                  5,000,000Shenzhou
                  Weiye Gas Co., Ltd
              
              PRC
              
              12/23/2005
              
              100
              
              95
              
              RMB
                  3,000,000Ningjin
                  Weiye Gas Co., Ltd
              
              PRC
              
              12/3/2003
              
              100
              
              95
              
              RMB
                  3,000,000Linzhang
                  Weiye Gas Co., Ltd
              
              PRC
              
              7/6/2005
              
              100
              
              85
              
              RMB
                  1,000,000Hengshui
                  Weiye Gas Co., Ltd
              
              PRC
              
              12/20/2005
              
              100
              
              100
              
              RMB
                  3,000,000Longyao
                  Zhongran Weiye Gas Co., Ltd
              
              PRC
              
              10/13/2005
              
              100
              
              95
              
              RMB
                  3,000,0009Xingtang
                  Weiye Gas Co., Ltd
              
              PRC
              
              2/18/2004
              
              100
              
              95
              
              RMB
                  3,000,000Gucheng
                  Weiye Gas Co., Ltd
              
              PRC
              
              3/21/2007
              
              100
              
              100
              
              RMB
                  3,000,000Langfang
                  Development Region Weiye dangerous Goods Transportation Co.,
                  Ltd
              
              PRC
              
              3/22/2005
              
              100
              
              95
              
              RMB
                  1,000,000Beijing
                  Chenguang Gas Ltd.
              
              PRC
              
              10/30/2002
              
              100
              
              100
              
              RMB
                  20,000,000Xinji
                  Zhongchen Gas Co., Ltd
              
              PRC
              
              2/7/2007
              
              100
              
              100
              
              RMB
                  3,000,000Shijiazhuang
                  Chenguang Gas Co., Ltd
              
              PRC
              
              6/14/2007
              
              100
              
              100
              
              RMB
                  2,000,000Luquan
                  Chenguang Gas Co., Ltd
              
              PRC
              
              4/27/2007
              
              100
              
              100
              
              RMB
                  2,000,000Chenan
                  Chenguang Gas Co., Ltd
              
              PRC
              
              1/23/2007
              
              100
              
              100
              
              RMB
                  1,500,000Nangong
                  Weiye Gas Co., Ltd
              
              PRC
              
              6/25/2007
              
              100
              
              100
              
              RMB
                  3,000,000Sishui
                  Weiye Gas Co., Ltd
              
              PRC
              
              12/22/2004
              
              100
              
              95
              
              RMB
                  3,000,000
  10
  Guannan
                  Weiye Gas Co., Ltd
              
              PRC
              
              6/19/2003
              
              100
              
              100
              
              RMB
                  9,510,000Sixian
                  Weiye Gas Co., Ltd
              
              PRC
              
              9/3/2007
              
              100
              
              100
              
              RMB
                  3,000,000Baishan
                  Weiye Gas Co., Ltd
              
              PRC
              
              7/13/1007
              
              100
              
              100
              
              RMB
                  15,000,000




*(e)*
            *Cash
                and Cash Equivalents*





The
      Company considers all cash and other highly liquid investments with initial
      maturities of three months or less to be cash equivalents.




*(f)*
            *Accounts
                and Other Receivable*





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




*(g)*
            *Advances
                to Suppliers*





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




*(h)*
            *Investments
                in Equity Securities*





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





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





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




11




NominalName
                of
            
            Place
            
            Form
                of
            
            
            
            Value
                ofAssociate
            
            of
            
            Business
            
            Registered
            
            Registered
            
            PrincipalCompany
            
            Registration
            
            Structure
            
            Capital
            
            Capital
            
            ActivitiesBeijing
                Zhongran
              Xiangke
                Oil Gas
              Technology
                Co. Ltd
            
            PRC
            
            Sino
                foreign equity joint venture
            
            RMB
              20,000,000
            
            40
            
            Trading
                of natural gas and gas pipeline
                construction





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




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





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





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





During
      the reporting periods, there was no impairment loss.




*(j)*
            *Plant
                and Equipment*





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





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





Gas
                Pipelines (Up to December 31, 2007)
            
            
            25
                yearsGas
                Pipelines (Starting from January 1, 2008)
            
            
            50
                yearsMotor
                Vehicles
            
            
            10
                yearsMachinery
                & Equipment
            
            
            20
                yearsBuildings
            
            
            25
                yearsLeasehold
                Improvements
            
            
            25
                yearsOffice
                Equipment
            
            
            8
                years




12




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




*(k)*
            *Intangible
                Assets*





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





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




*(l)*
            *Construction
                in Progress*





Construction
      in progress represents the cost of constructing pipelines and is stated at
      cost.
      Costs comprise direct and indirect incremental costs of acquisition or
      construction. Completed items are transferred from construction in progress
      to
      the gas pipelines of fixed assets when they are ready for their intended use.
      The major cost of construction relates to construction materials, direct labor
      wages and other overhead. Construction of pipeline, through which to distribute
      natural gas, is one of the Group’s principal businesses. The Group builds city
      main pipeline network and branch pipeline network to make gas connection to
      resident users, industrial, and commercial users, with the objective of
      generating revenue on gas connection and gas usage fees collected from these
      customers. As of March 31, 2008, the pipelines under construction include mainly
      the projects in Beijing. These projects, once completed, will significantly
      increase the gas supply capacity.




*(m)*
            *Unearned
                Revenue*





Unearned
      revenue represents prepayments by customers for gas purchases and advance
      payments on construction and installation of pipeline contracts. The Company
      records such prepayment as unearned revenue when the payments are
      received.




*(n)*
            *Financial
                Instruments*





The
      carrying amounts of all financial instruments approximate fair value. The
      carrying amounts of cash, accounts receivable, accounts payable and accrued
      liabilities approximate fair value due to the short-term nature of these items.
      The carrying amounts of borrowings approximate the fair value based on the
      Company’s expected borrowing rate for debt with similar remaining maturities and
      comparable risk.





13




*(o)*
            *Foreign
                Currency Translation*





The
      accompanying consolidated financial statements are presented in United States
      dollars. The functional currency of the Company is the Renminbi (RMB). The
      consolidated financial statements are translated into United States dollars
      from
      RMB at March 31, 2008 exchange rates as to assets and liabilities and average
      exchange rates as to revenues and expenses. Capital accounts are translated
      at
      their historical exchange rates when the capital transactions
      occurred.




**6/30/2008**
            
            
            **3/31/2008**
            
            
            **12/31/2007**Years
                end RMB : US$ exchange rate
            
            
            6.8718
            
            
            7.0222
            
            
            7.3141Average
                yearly RMB : US$ exchange rate
            
            
            7.0726
            
            
            7.1757
            
            
            7.6172





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




*(p)*
              *Revenue
                  Recognition*


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





Net
      sales
      consist of gas and connection fee revenue. Cost of sales include gas and
      connection cost.





Gas
      connection revenue is recognized when the outcome of a contract can be estimated
      reliably and the stage of completion at the balance sheet date can be measured
      reliably.





Sales
      of
      natural gas are recognized when goods are delivered and title has
      passed.


*(q)*
                *Investment
                    Income*


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





14




*(r)*
                  *Income
                      Taxes*


Deferred
      income taxes are recognized for the tax consequences in future years of
      differences between the tax bases of assets and liabilities and their financial
      reporting amounts at each period end based on enacted tax laws and statutory
      tax
      rates applicable to the periods in which the differences are expected to affect
      taxable income. Valuation allowances are established when necessary to reduce
      deferred tax assets to the amount expected to be realized. As of December 31,
      2007, there was no significant book to tax differences.





Pursuant
      to the tax laws of PRC, general enterprises are subject to income tax at an
      effective rate of 33%. Beijing Gas is in the natural gas industry whose
      development is encouraged by the government. According to the income tax
      regulation, any company engaged in the natural gas industry enjoys a favorable
      tax rate. Also, Beijing Gas is exempt from corporate income tax for its first
      two years and is then entitled to a 50% tax reduction for the succeeding three
      years. The Company’s first profitable tax year was 2003. Accordingly, the
      Company’s income is subject to a reduced tax rate of 7.5%. From 2008 onwards,
      the Company’s income is subject to a reduced tax rate of 9%. Subsidiaries of
      Beijing Gas are subject to the effective rate of 25%.




*(s)*
                    *Advertising*


The
      Group
      expensed all advertising costs as incurred




*(t)*
                    *Concentration
                          of Credit Risk*


Concentration
      of credit risk is limited to accounts receivable and is subject to the financial
      conditions of major customers. The Company does not require collateral or other
      security to support accounts receivable. The Company conducts periodic reviews
      of its clients’ financial condition and customers’ payment practices to minimize
      collection risk on accounts receivable.




*(u)*
                    *Retirement
                          Benefits*


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




*(v)*
                    *Statutory
                          Reserves*


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




15




i.
            Making
                up cumulative prior years' losses, if
                any;





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





iii.
            Allocations
                to the discretionary surplus reserve, if approved in the shareholders'
                general meeting.




*(w)*
                  *Statement
                      of Cash Flows*


In
      accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from
      the Company’s operations is calculated based upon the local currencies. As a
      result, amounts related to assets and liabilities reported on the statement
      of
      cash flows will not necessarily agree with changes in the corresponding balances
      on the balance sheet.


*(x)*
                    *Comprehensive
                        Income*


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


*(y)*
                    *Recent
                        Accounting Pronouncements*


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





In
      December 2007, the Financial Accounting Standards Board issued FASB Statement
      No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements—an amendment of ARB No. 51* (“SFAS
      160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting
      standards for the noncontrolling interest in a subsidiary and for the
      deconsolidation of a subsidiary. This Statement is effective for fiscal
      years and interim periods within those fiscal years, beginning on or after
      December 15, 2008. The Company believes there will be no material impact on
      its financial statements upon adoption of this standard.





16




In
      December 2007, the FASB issued SFAS 141 (revised 2007), *Business
      Combinations* ,
      (‘‘SFAS
      141(R)’’). SFAS 141(R) retains the fundamental requirements of the original
      pronouncement requiring that the purchase method be used for all business
      combinations, but also provides revised guidance for recognizing and measuring
      identifiable assets and goodwill acquired and liabilities assumed arising from
      contingencies, the capitalization of in-process research and development at
      fair
      value, and the expensing of acquisition-related costs as incurred. SFAS 141(R)
      is effective for fiscal years beginning after December 15, 2008. In the event
      that the Company completes acquisitions subsequent to its adoption of SFAS
      141
      (R), the application of its provisions will likely have a material impact on
      the
      Company’s results of operations, although the Company is not currently able to
      estimate that impact.





In
      December 2007, the FASB issued SFAS 160, *Noncontrolling
      Interests in Consolidated Financial Statements − an amendment of ARB No.
      51* .
      SFAS
      160 requires that ownership interests in subsidiaries held by parties other
      than
      the parent (previously referred to as minority interests), and the amount of
      consolidated net income, be clearly identified, labeled and presented in the
      consolidated financial statements. It also requires once a subsidiary is
      deconsolidated, any retained noncontrolling equity investment in the former
      subsidiary be initially measured at fair value. Sufficient disclosures are
      required to clearly identify and distinguish between the interests of the parent
      and the interests of the noncontrolling owners as components of equity. It
      is
      effective for fiscal years beginning after December 15, 2008, and requires
      retroactive adoption of the presentation and disclosure requirements for
      existing minority interests. All other requirements are applied prospectively.
      The Company does not expect the adoption of SFAS 160 to have a material impact
      on its financial condition or results of operations.




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




*(Z)*
                    *Earnings
                          Per Share*


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





17




**3.**
            **RESTRICTED
                CASH**




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




**4.**
            **ACCOUNTS
                RECEIVABLE**




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





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





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





The
      "amounts are not due within one year" are mostly retention money from
      construction sales that are based on contracts. The continued demand from the
      natural gas sales from them also help assure the amount could be collected.
      No
      experience of wholly-unsettled accounts receivable in the year June 30, 2008
      and
      December 31, 2007





Trade
      accounts receivable are recorded at the invoiced amount, net of allowances
      for
      doubtful accounts and sales returns. The allowance for doubtful accounts is
      the
      Company’s best estimate of the amount of probable credit losses in the Company’s
      existing accounts receivable. The Company determines the allowance based on
      historical write-off experience, customer specific facts and economic
      conditions. Bad debt expense is included in the general and administrative
      expenses.





Outstanding
      account balances are reviewed individually for collectibles. Account balances
      are charged off against the allowance after all means of collection have been
      exhausted and the potential for recovery is considered remote. To date, the
      Company has not charged off any balances as it has yet to exhaust all means
      of
      collection. The Company does not have any off-balance-sheet credit exposure
      to
      its customers, except for outstanding notes receivable discounted with banks
      that are subject to recourse for non-payment.





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





18




Accounts
                Receivable6/30/2008
            
            12/31/2007Gross
                accounts receivable
            
            $
            5,961,402
            
            $
            7,352,013Allowance
                for bad debt
            
            
            (28,219
            )
            
            (36,760
            )Net
                accounts receivable
            
            $
            5,933,183
            
            $
            7,315,253








Allowance
                for Bad Debt6/30/2008
            
            12/31/2007Beginning
                balance
            
            $
            36,760
            
            $
            32,838Addition
            
            
            17,191
            
            
            26,909Less
                - write off
            
            
            (25,732
            )
            
            (22,987
            )Ending
                balance
            
            $
            28,219
            
            $
            36,760




Accounts
                Receivable Aging Report6/30/2008
            
            12/31/200730
                Days
            
            $
            5,102,537
            
            $
            5,557,17230-60
                Days
            
            
            237,327
            
            
            1,212,41360-90
                Days
            
            
            474,655
            
            
            8,74790-180
                Days
            
            
            23,733
            
            
            -180-360
                Days
            
            
            -
            
            
            27,489>360
                Days
            
            
            94,931
            
            
            509,433Total
            
            $
            5,933,183
            
            $
            7,315,254




19


The
        followings are the largest ten accounts receivable as of June 30,
        2008


Accounts
                Receivable6/30/2008Hebei
                zhonggang Steel, Ltd.
            
            $
            209,407Peixuan
                Jiannan Development, Co.,
            
            
            275,925Beijing
                Xianjin Construction, Ltd.
            
            
            276,267Hebei
                Oil Management Machine, Ltd.
            
            
            280,852Xuzhou
                Shenyuan Real Estate, Co.,
            
            
            317,564Baishang
                Jiehe Construction Development, Co.,
            
            
            336,611Jianshu
                Hongzhe Farm
            
            
            359,716Sihong
                Jinwan Development, Ltd.
            
            
            372,533Guannan
                Construction & Development, Co.,
            
            
            439,866Lianyun
                Port Development, Ltd.
            
            
            675,141Total
            
            $
            3,543,882




**5.
      OTHER RECEIVABLES**





The
      followings are the ten largest other receivables as of June 30,
      2008




**Other
                receivables**6/30/2008Qujin
                Development & Investment, Ltd.
            
            $
            58,882Langfang
                Transportation, Ltd.
            
            
            20,373West
                House, Co.,
            
            
            21,731Shenzhen
                Chengtong Investment, Co.,
            
            
            24,251Peixuan
                Construction Department
            
            
            29,104Tongshang
                Jieye, Ltd.
            
            
            37,189Beijing
                Natural Gas Investment, Ltd.
            
            
            43,657Tianjin
                Feite Consultant, Co.,
            
            
            436,567Shanghou
                Debt Corp.
            
            
            1,901,929Baoding
                City Management Department
            
            
            2,910,446Total
            
            $
            5,484,129




20




**6.**  **PROPERTY,
      PLANT AND EQUIPMENT**





Property,
      Plant and Equipment consist of the following as of June 30, 2008 and December
      31, 2007





6/30/08
            
            12/31/07At
                CostGas
                Pipelines
            
            $
            21,283,153
            
            $
            18,885,734Motor
                Vehicles
            
            
            5,262,742
            
            
            4,874,685Machinery
                & Equipment
            
            
            798,610
            
            
            885,997Buildings
            
            
            1,405,640
            
            
            1,405,638Leasehold
                Improvements
            
            
            70,970
            
            
            68,942Office
                Equipment
            
            
            186,000
            
            
            105,336Total
            
            $
            29,007,115
            
            $
            26,226,336Less:
                Accumulated Depreciation
            
            
            (2,512,423
            )
            
            (1,653,771
            )Property,
                Plant and Equipment, net
            
            $
            26,494,692
            
            $
            24,572,565







03/31/08
            
            12/31/07Accumulated
                DepreciationGas
                Pipelines
            
            $
            1,194,117
            
            $
            591,419Motor
                Vehicles
            
            
            884,844
            
            
            687,354Machinery
                & Equipment
            
            
            169,335
            
            
            161,703Buildings
            
            
            167,586
            
            
            128,514Leasehold
                Improvements
            
            
            39,861
            
            
            34,070Office
                Equipment
            
            
            56,680
            
            
            50,711Total
            
            $
            2,512,423
            
            $
            1,653,771








Depreciation
      expense included in the consolidated statements of income for the period ended
      June 30, 2008 was $858,653.





21




**7.**  **INTANGIBLE
      ASSETS**





Intangible
      assets consist of the following as of June 30, 2008 and December 31,
      2007




6/30/08
            
            12/31/07At
                CostLand
                use rights
            
            $
            510,328
            
            $
            452,345Franchises
            
            
            400,186
            
            
            359,464Goodwill
            
            
            1,662,752
            
            
            1,562,202Other
            
            
            15,225
            
            
            9,563Total
            
            $
            2,588,491
            
            $
            2,383,574Less:
                Accumulated Amortization
            
            
            (399,319
            )
            
            (355,324
            )Intangible
                Assets, net
            
            $
            2,189,172
            
            $
            2,028,250





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




**8.
      SHORT-TERM BANK LOANS**




Short-term
      bank loans are as follows:





3/31/2008
            
            12/31/2007Loans
                from China Renmin Bank Co.,Ltd.Interest
                rate at 7.22% per annual plus 10% fluctuation market rate
            
            $
            2,910,446
            
            $
            2,734,444Loans
                from Huashang Bank Co., Ltd.
            
            
            4,365,668
            
            
            -Total
            
            $
            7,276,114
            
            $
            2,734,444




Interest
      expenses for the short-term bank loans were $216,567 and $55,405 for the six
      months ended June 30, 2008, and the twelve months ended December 31,
      2007.




22




**9.** **** **OTHER
      PAYABLES**





Other
      payables at June 30, 2008 and December 31, 2007 consist of the
      following:




6/30/2008
            
            12/31/2007Employees’
                welfare payables
            
            $
            194,199
            
            $
            176,236Amount
                due to employees
            
            
            23,140
            
            
            150,711Tax
                payable
            
            
            179,792
            
            
            922,620Other
                Payable
            
            
            6,199,961
            
            
            9,134,091Total
            
            $
            6,597,092
            
            $
            10,383,657





All
      the
      amounts due to employees are unsecured, interest free, and have no fixed repayment
      terms.




The
      followings are the ten largest other payables as of June 30, 2008





6/30/2008Caiyou
                Haoche Rental, Co.,
            
            $
            26,236Education
                Associate
            
            
            44,498Work
                Union Associate
            
            
            66,261He
                Shunchun
            
            
            72,761Social
                Insurance Associate
            
            
            137,016Shenzhen
                Polian Shiye, Ltd.
            
            
            203,731Beijing
                Qianshi Development, Co.,
            
            
            241,852Liu
                Yuchuan
            
            
            291,045Chenguang
                Consulatant, Ltd.
            
            
            436,567Baishang
                Gas, Ltd.
            
            
            3,986,675$
            5,506,642





23




**10.    CAPITAL
      STOCK**





The
      authorized capital stock consists of (i) 250,000,000 shares of common stock,
      par
      value $0.001 per share, of which there are 25,489,753 shares issued and
      outstanding, and (ii) 100,000,000 shares of preferred stock, par value $0.001
      per share. The preferred stock consists of (i) series A convertible preferred
      stock, of which 20,000,000 shares have been authorized and 275,111 shares are
      issued and outstanding; and (ii) series B convertible preferred stock, of which
      5,000,000 shares have been authorized and 4,764,486 shares are issued and
      outstanding.





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





Common
      Stock





The
      Company is authorized to issue 250,000,000 shares of common stock, with a par
      value of $0.001. There are 25,489,753 shares of common stock issued and
      outstanding as of June 30, 2008. All shares of common stock have one vote per
      share on all matters including election of directors, without provision for
      cumulative voting. The common stock is not redeemable and has no conversion
      or
      preemptive rights. The common stock currently outstanding is validly issued,
      fully paid and non-assessable. In the event of liquidation of the company,
      the
      holders of common stock will share equally in any balance of the company's
      assets available for distribution to them after satisfaction of creditors and
      preferred shareholders, if any. The holders of common stock are entitled to
      equal dividends and distributions per share with respect to the common stock
      when, as and if, declared by the board of directors from funds legally
      available.




Preferred
      Stock





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





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





24




Conversion





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





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





**Total
      Capitalization**





The
      Following table depicts an analysis of total capitalization for the issuance
      of Preferred
      Stock A, Preferred Stock B, Common Stock, and the related additional Paid
      in
      Capital as of June 30, 2008:




**Preferred
                    Stock A**
                
                
                **Preferred
                    Stock B**
                
                
                **Common
                    Stock****Name
                    of Shareholder**
                
                
                **Number
                    of Shares Outstanding**
                
                
                **Capital**
                
                
                **Number
                    of Shares Outstanding**
                
                
                **Capital**
                
                
                **Number
                    of Shares Outstanding**
                
                
                **Capital**
                
                
                **Additional
                    Paid in Capital**
                
                
                **%
                    of Equity Holdings**Private
                    Investor
                
                
                275,111
                
                
                275
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,210,213
                
                
                0.90
                %Investor
                    Relations firm
                
                
                -
                
                
                -
                
                
                4,764,486
                
                
                4,765
                
                
                207,373
                
                
                207
                
                
                6,994,270
                
                
                16.29
                %Management
                    / Insider
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                12,653,661
                
                
                12,654
                
                
                4,252,959
                
                
                41.45
                %Investor
                    - 1st Round Raising
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                5,628,722
                
                
                5,629
                
                
                2,997,371
                
                
                18.44
                %*Less*:
                    Cost of Stock Issurance
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (412,241
                )
                
                -Investor
                    - 2nd Round Raising
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                6,999,997
                
                
                7,000
                
                
                15,743,000
                
                
                22.93
                %*Less*:
                    Cost of Stock Issurance
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,957,133
                )
                
                -Beneficial
                    Conversion Feature
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                6,418,864
                
                
                -275,111
                
                
                275
                
                
                4,764,486
                
                
                4,765
                
                
                25,489,753
                
                
                25,490
                
                
                35,247,303
                
                
                100.00
                %




25




**11.**  **SEGMENT
      INFORMATION**





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




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




**6/30/2008
                Balance Sheet Segment Report****As
                of June 30, 2008**Gas
                Distribution
            
            Gas
                pipeline Installation
            
            Others
            
            TotalAssetsCurrent
                Assets
            
            $
            15,883,136
            
            $
            5,264,012
            
            $
            4,091,781
            
            $
            25,238,929Non-Current
                Assets
            
            
            12,014,339
            
            
            35,745,947
            
            
            -
            
            
            47,760,286Total
                Assets
            
            $
            27,897,475
            
            $
            41,009,959
            
            $
            4,091,781
            
            $
            72,999,215LiabilitiesCurrent
                Liabilities
            
            
            1,690,577
            
            
            18,091,509
            
            
            -
            
            
            19,782,086Total
                Liabilities
            
            $
            1,690,577
            
            $
            18,091,509
            
            $
            -
            
            $
            19,782,086Net
                Assets
            
            $
            26,206,898
            
            $
            22,918,450
            
            $
            4,091,781
            
            $
            53,217,129





26




**6/30/2008
                Income Statement Segment Report**Gas
                Distribution
            
            Gas
                pipeline Installation
            
            Others
            
            TotalSales
                Revenue
            
            $
            6,553,899
            
            $
            2,909,739
            
            $
            -
            
            $
            9,463,638Cost
                of Revenue
            
            
            (5,709,186
            )
            
            (820,877
            )
            
            -
            
            
            (6,530,063
            )Gross
                Profit
            
            
            844,713
            
            
            2,088,862
            
            
            -
            
            
            2,933,575Operating
                Expense
            
            
            (494,742
            )
            
            (1,223,431
            )
            
            (646,603
            )
            
            (2,364,776
            )Other
                Income
            
            
            (67,795
            )
            
            (167,648
            )
            
            38,633
            
            
            (196,811
            )Earnings
                before tax
            
            
            282,176
            
            
            697,783
            
            
            (607,971
            )
            
            371,988Income
                tax
            
            
            (87,190
            )
            
            (215,608
            )
            
            -
            
            
            (302,798
            )Income
                from continuing operation
            
            
            194,986
            
            
            482,174
            
            
            (607,971
            )
            
            69,190Extraordinary
                Loss, net
            
            
            -
            
            
            -
            
            
            (456,751
            )
            
            (456,751
            )Net
                Income
            
            $
            194,986
            
            $
            482,174
            
            $
            (1,064,722
            )
            $
            (387,561
            )






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




27




**Income
                Statement Segment Report****For
                the six months ended June 30, 2007**Gas
                Distribution
            
            Gas
                pipeline Installation
            
            Others
            
            TotalSales
                Revenue
            
            $
            3,245,311
            
            $
            1,989,061
            
            $
            -
            
            $
            5,234,372Cost
                of Revenue
            
            
            (2,313,736
            )
            
            (1,418,097
            )
            
            -
            
            
            (3,731,833
            )Gross
                Profit
            
            
            931,574
            
            
            570,965
            
            
            -
            
            
            1,502,539Operating
                Expense
            
            
            (550,779
            )
            
            (337,574
            )
            
            -
            
            
            (888,353
            )Other
                Income
            
            
            27,350
            
            
            6,004
            
            
            -
            
            
            33,354Earnings
                before tax
            
            
            408,146
            
            
            239,394
            
            
            -
            
            
            647,540Income
                tax
            
            
            (4,922
            )
            
            (22,421
            )
            
            -
            
            
            (27,343
            )Net
                Income
            
            $
            403,224
            
            $
            216,973
            
            $
            -
            
            $
            620,197




The
      Company's operations are located in the PRC. All revenue is from customers
      in
      the PRC. All of the Company’s assets are located in the PRC. Sales of piped gas
      and gas pipeline construction are carried out in the PRC. Accordingly, no
      analysis of the Company's sales and assets by geographical market is
      presented.




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




**12.
      EXTRAORDINARY EVENT**





The
      Company entered into a registration rights agreement related to a private
      placement financing transaction with accredited investors on September 13,
      2007.
      Pursuant to the agreement, the Company had to (1) file the registration
      statement within 45 days of the execution, and (2) declare the effectiveness
      within 150 days of filing the registration statement. However, the Company
      did
      not meet the aforementioned requirements under the registration rights
      agreement, and was subjected to liquidated damages. The Company, which has
      paid
      $456,751 in liquidated damages to investors in May 2008, was reported as
      extraordinary loss net in the statements of income.





28




**Item
      2.****Management’s
      Discussion and Analysis**




The
        following discussion of our financial condition and results of operations
        should
        be read in conjunction with our consolidated financial statements and the
        notes
        to those financial statements appearing elsewhere in this Form 10-Q. This
        discussion contains forward-looking statements that involve significant risks
        and uncertainties. As a result of many factors, such as those set forth
        elsewhere in this Form 10-Q, our actual results may differ materially from
        those
        anticipated in these forward-looking statements.
 
 **Economic
        & Industrial Trend**
 
 We
        generate revenue from two sources: connection fees for constructing connections
        to our natural gas distribution network, and sales of natural gas. Our
        connection activities are closely related to the development of real estate
        industry in our targeting cities in China, given the fact that almost all
        of our
        connection fees are from new residential apartments. Natural gas facilities
        in
        new apartments are often required by local governments, who aim to promote
        the
        use of natural gas to improve local residents’ life quality.
 
 We
        have
        experienced high growth of our connection activities since inception of our
        business, thanks to Chinese real estate boom in the past five years. We see
        no
        major factors that will change the trend of real estate industry in the coming
        year. Therefore we expect to continue to see growth of household connections,
        especially in small-to-medium sized cities where the real estate market is
        at an
        early developing stage.
 
 If
        Chinese real estate market does slow down in the future, our connection business
        would be negatively affected as a result of fewer new household
        connections.
 
 Our
        gas
        users are composed of industrial and residential users. Gas sales from
        residential users are much less affected by economic and industrial factors
        and
        would maintain stable growth in the future, due to the increasing pool of
        our
        residential customers. Gas sales from industrial users is subject to the
        operating performance of the end industrial user and development of new users.
        Gas sales to our industrial users have increased 89% during the first half
        of
        2008, as our existing users have expanded their production capacity. As we
        develop into more cities, we expect to add one to two industrial users in
        the
        coming year.
 
 **Material
        Opportunities**
 
 The
        gas
        distribution market is quite fragmented in the small (population less than
        100,000)-to-medium (population between 100,000 to 300,000) sized cities.
        We have
        been in active talks with potential project targets. The size of the projects
        varies from small cities, like the ones we have, to medium-sized cities.
        For
        small city markets, many of them are still untapped or undeveloped. The
        development of these markets is generally considered major growth components
        of
        the company.
 
 Regarding
        medium-sized or large cities, most of them have already been developed by
        large
        distributors or are still operated by state-owned companies. Acquisition
        opportunities exist for those still run by state-owned companies, as the
        central
        government encourages suppliers to turn them into privately-owned companies.
        The
        acquisition of these markets would have material impact on the company,
        increasing the company’s assets and revenues significantly. The company has
        finalized one acquisition, and needs to raise money to fund another
        acquisition.
 
 **Material
        Challenges**
 
 There
        are
        vast number of small-to-medium sized cities left undeveloped, but the
        competition is intense, as there are many small new players in the market
        attracted by the profitability and growth potential of the business. Meanwhile,
        from time to time, we are also facing competitions from stronger competitors,
        as
        large city markets are getting saturated and our competitors are beginning
        to
        expand into smaller cities.
  29
  We
        are
        facing limited opportunities in developing into first-tier cities in China,
        as
        most of them have already been taken by other large gas distributors, such
        as
        Xin’ao Gas Co. Ltd (largest in China) in the past decade.
 
 Still,
        potential users in small and medium-sized cities need to be educated by the
        benefits of natural gas. It takes some time for them to get to know how natural
        gas can improve the quality of life. This is especially true for new markets,
        where there is no use of natural gas. Small cities tend to be more reluctant
        for
        use of new energies than large cities where residents depend more on coal,
        rather than natural gas.
 
 China’s
        energy market is highly regulated by the government, with regard to purchase
        price and sale price of natural gas. Whenever there is an adjustment to purchase
        price by the government, gas distributors would increase the sale price
        correspondingly, subject to a public hearing and government approval. The
        increase of natural gas price in China is lagging behind that in the
        international markets, which has soared in the past year. The Chinese government
        has seldom adjusted natural gas and we can not rule out the possibilities
        of
        increase of natural gas price by the government in the future. Even though
        we
        can adjust the sale price accordingly after the increase of purchase price,
        passing the increase to end users. However, it would make natural gas more
        expensive, as compared to other alternative energies. Thus this increase
        of
        price will deter our business development.
 
 **Risks
        in Short-Term and Long-Term**
 
 In
        each
        of the cities we are developing and aiming to develop, the real estate market
        is
        the major factor that impacts us. Most of our residential customers are the
        new
        home buyers. If the real estate market turns downward, the demands for new
        homes
        would decrease, resulting in fewer natural gas connections, and thus negatively
        impacting our business.
 
 To
        reduce
        the company’s heavy dependence on connection fees, the company is looking at
        opportunities to diversify its business by expanding into related areas,
        such as
        pipeline and gas station business. However, we do not expect to develop into
        those areas in large scale any time soon and it may take some time for those
        business to become our major business.
 
 **Liquidity
        and Capital Resources**
 
 Natural
        gas distribution is a typical capital-intensive industry, which requires
        a large
        amount of capital for the construction of pipelines and gas stations, purchase
        of transportation vehicles etc. while the investment would be paid back in
        the
        following year with increasing new household connections. Under the organic
        growth model (growth by the Company without outside funding), the Company
        can
        develop new city projects by using the money generated from existing cities.
        The
        Company would be constrained by inadequate capital when developing into bigger
        cities or making Merger &Acquisition activities, under which situation the
        company needs to raise money to finance its business
        expansion.
 
 ***Three
        Months Ended June 30, 2008 Compared to Three Months Ended June 30,
        2007***
  During
        the three months ended June 30, 2008, our company achieved strong increases
        in
        financial and operational results. Our net revenues and gross profit were
        $
        5,121,521 and $ 1,566,930, respectively, representing an increase of 83.16%
        and
        73.73%, respectively, from those of the same period in the previous year.
        Our
        operating income in 2008 was $217,308, representing a decrease of 57.49%
        from
        2007.
  30
  For
                  the 3 months ended
                June
                  30,2008
              
              
              2007
              
              
              ChangeUS$
              
              
              US$
              
              
              %Net
                  Revenues
              
              
              5,121,521
              
              
              2,796,145
              
              
              83.16
              %Gross
                  Profit
              
              
              1,566,930
              
              
              901,942
              
              
              73.73
              %Operating
                  Income
              
              
              217,308
              
              
              511,161
              
              
              -57.49
              %Net
                  Income
              
              
              -536,888
              
              
              504,814
              
              
              -206.35
              %Gross
                  Margin
              
              
              30.60
              %
              
              32.26
              %Net
                  Margin
              
              
              -10.48
              %
              
              18.05
              %
 
 **Net
        Revenues**
 
 We
        generate revenues from two sources: connection fees for constructing connections
        to our natural gas distribution network, and sales of natural gas.
 
 Total
        net
        revenues for the three months ended June 30, 2008 were $5,121,521, compared
        to
        $2,796,145 for the same period in 2007, representing an increase of 83.16%.
        The
        increase was due to new customers’ connecting to our gas distribution network
        and new customers’ purchasing our natural gas. During this period, we connected
        7,096 new residential households to our gas distribution network, resulting
        in
        total connection fees of $1,555,041. Gas sales during the same period amounted
        to 10.55 million cubic meters, or $3,566,480. In comparison, we connected
        4,326
        new residential households to our gas distribution network in 2007, resulting
        in
        total connection fees of $1,370,536. Gas sales during the period amounted
        to
        5.41 million cubic meters, or $1,425,609.
  For the 3 months ended June 30,2008
              
              2007
              
              Change(In
                  $ million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Net
                  Revenues
              
              
              5.12
              
              
              100
              %
              
              2.80
              
              
              100
              %
              
              83.16
              %Connection
                  Fees
              
              
              1.56
              
              
              30
              %
              
              1.37
              
              
              49
              %
              
              13.46
              %Gas
                  Sales
              
              
              3.57
              
              
              70
              %
              
              1.43
              
              
              51
              %
              
              150.17
              %
 
 Connection
        Fees
 
 Connection
        fees during the three months ended June 30, 2008 were $1.56 million,
        representing an increase of 13.46% over the same period of 2007, accounting
        for
        30% of the total net revenue compared with approximately 49% for the same
        period
        in 2007. With regard to the source of connection fees, 100% of total connection
        fees came from the development of new residential users. We connected 7,096
        residential users during the three months ended June 30, 2008, an increase
        of
        approximately 64.03% from 2007.
  For the 3 months ended June
                  30,2008
              
              2007
              
              Change(in
                    US$
                    millions)
              
              US$
              
              %
              
              US$
              
              %
              
              %Connection
                  Fees
              
              
              1.56
              
              
              100
              %
              
              1.37
              
              
              100
              %
              
              13.46
              %Residential
                  Users
              
              
              1.56
              
              
              100
              %
              
              1.37
              
              
              100
              %
              
              13.46
              %Industrial
                  Users
              
              
              0.00
              
              
              0
              %
              
              0.00
              
              
              0
              %
              
              0
              %
  31
  Such
        increase was primarily attributable to the following aspects.
  We
        tried
        our best to develop more residential customers in those cities of which we
        have
        obtained franchise of natural gas distribution systems. Our invested projects
        in
        the three months ended June 30, 2008 connected 7,096 new residential households
        in the three months ended June 30, 2008, resulting in approximately $1, 555,041
        to our total connection fees. In comparison, during the same period of 2007,
        we
        connected 4,326 new residential households to our gas distribution network,
        resulting in total connection fees of $1,370,536.
 
 The
        table
        below is a breakdown of our top five customers by connection fees:
  Customers
              
              
              Connection Fees:
                ($ million)Oriental
                  Sun City Real Estate Development Co. Ltd
              
              
              0.2453Shanghai
                  Datun Energy Co. Ltd
              
              
              0.1396Peixian
                  Wuzhou Real Estate Development Co.
              
              
              0.1156Beijing
                  Huiyou Real Estate Development Co.
              
              
              0.0901Xuzhou
                  Shenyuan Real Estate Development Co., Ltd.
              
              
              0.0882
 
 Due
        to
        seasonality effects, the second quarter is usually a weak season for gas
        distribution companies in China in terms of recognition of revenue from
        connection fees. New construction projects are not finished in this quarter,
        and
        only a small portion of connection fees are achieved in this
        quarter.
 
 Gas
        Sales
 
 In
        terms
        of volume, we sold 10.55 million cubic meters of natural gas during the three
        months ended June 30, 2008, compared with 5.41 million cubic meters in 2007.
        In
        terms of value, gas sales were $3.57 million during the three months ended
        June
        30, 2008, accounting for 70% of total net revenue in 2008, representing an
        increase of 150.17% over the year 2007. Gas sales to residential increased
        423.61% from $0.26 million in 2007 to $1.34 million in 2008. Gas sales to
        industrial users increased 82.74%, from $0.71 million in 2007 to $1.29 million
        in 2008. Gas sales to commercial users increased 101.79%, from $0.46 million
        in
        2007 to $0.93 million in 2008.
  For the 3 months ended June
                  30,2008
              
              2007
              
              Change($
                  million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Gas
                  Sales
              
              
              3.57
              
              
              100
              %
              
              1.43
              
              
              100
              %
              
              150.17
              %Residential
                  Users
              
              
              1.34
              
              
              36
              %
              
              0.26
              
              
              18
              %
              
              423.61
              %Industrial
                  Users
              
              
              1.29
              
              
              37
              %
              
              0.71
              
              
              50
              %
              
              82.74
              %Commercial
                  Users
              
              
              0.93
              
              
              26
              %
              
              0.46
              
              
              32
              %
              
              101.79
              %
 
 Such
        substantial increase was primarily attributable to the following
        aspect.
 
 Our
        invested projects maintained steady and rapid development. During the three
        months ended June 30, 2008, 20.00 million cubic meters of gas were sold,
        resulting in approximately $3.57 million. In comparison, during the same
        period
        of last year, 10.94 million cubic meters of gas were sold, resulting in
        approximately $1.43 million.
  32
  The
        table
        below is a breakdown of our major industrial customers for gas consumption
        in
        the second quarter of 2008.
  **Industrial
                  Customers**
              
              
              Gas Usage
                (million
                cubicmeters)
              
              
              Gas Usage
                ($ million)Hebei
                  Zhonggang Steel Co., Ltd.
              
              
              2.6577
              
              
              0.9311The
                  First Machine Factory of Huabei Petrol Bureau
              
              
              0.4231
              
              
              0.1430Tangshan
                  Changsheng Ceramic Factory
              
              
              0.2837
              
              
              0.0958Hebei
                  Jihengyuan Group Ltd.
              
              
              0.1965
              
              
              0.0885Elite
                  (Langfang) Textile Corporation
              
              
              0.0747
              
              
              0.0228
 
 Gas
        sales
        of $0.9311 million were contributed by a single industrial user, Hebei Zhonggang
        Steel Co., Ltd. (“Hebei Zhonggang”), which started to use gas at the beginning
        of 2006. The gas consumption of Hebei Zhonggang has increased to 2.6577 million
        cubic meters during the three months ended June 30, 2008 from 1.3 million
        cubic
        meters in 2007.
 
 As
        mentioned above, due to seasonality factors of our business, gas sales accounted
        for a relatively higher percentage of our total sales, though gas sales in
        absolute value remained relative stable throughout the year. Sales from
        industrial users are lower than that from residential users, due to our customer
        base grows.
 
 **Cost
        of Revenues**
 
 Cost
        of
        revenues for the three months ended June 30, 2008, which includes cost of
        connection and cost of gas sales was $3.55 million, an increase of 87.66%,
        from
        $1.66 million in the same period of 2007.
  For the 3 months
                  ended June 30,2008
              
              2007
              
              Change($
                  million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Cost
                  of Revenues
              
              
              3.55
              
              
              100
              %
              
              1.66
              
              
              100
              %
              
              87.66
              %Connection
                  Cost
              
              
              0.39
              
              
              11
              %
              
              0.52
              
              
              27
              %
              
              -24.27
              %Gas
                  Cost
              
              
              3.16
              
              
              89
              %
              
              1.38
              
              
              73
              %
              
              129.60
              %
 
 Cost
        of Connection
  Our
        cost
        of connection during the three months ended June 30, 2008 was $0.39 million,
        or
        11% of total cost of revenues. By comparison, the cost of connection during
        the
        same period of 2007 was $0.52 million, or 27% of total cost of
        revenue.
 
 Cost
        of
        connection decreased around 24.27% from the same period in 2007, mainly due
        to
        the decreased cost of gas station maintenance resulting from the development
        of
        our gas stations. Increase of revenues from connection fees increased nearly
        13%
        from the same period in 2007.
  33
  Cost
        of
        connection includes depreciation of major pipelines, the cost of courtyard
        pipelines, valves, gas meters, and installation and maintenance
        fees.
 
 Considering
        the city's overall planning and the long-term interests of our company, the
        capacity of the gas pipeline network we designed to distribute gas for a
        city
        usually greatly exceeded the number of households we served at the very
        beginning, which makes the cost of connection, specifically the depreciation
        of
        fixed assets and maintenance cost greatly increase. However, with connection
        of
        more households to the gas pipeline, the average cost to each household will
        be
        gradually reduced.
 
 Cost
        of Gas Sales
  The
        cost
        of gas sales increased 129.60% to $3.16 million during the three months ended
        June 30, 2008 from the same period in 2007, when it was $1.38 million. This
        increase is largely due to the increase of gas sales which increased
        150.17%.
 
 The
        cost
        of natural gas sales includes the purchase and transportation of natural
        gas and
        depreciation of delivery trucks.
 
 The
        purchase price that gas distributors pay for natural gas, which is set by
        the
        PRC government, is approximately CNY 1.6 to 1.9 ($0.22 to $0.26) per cubic
        meter. We signed a ten-year gas supply agreement in 2003. It is tentatively
        prescribed that every year Petro China supplied a total of 10 million cubic
        meters of natural gas at CNY 1.55 ($0.212) per cubic meter between April
        1 and
        October 31 and CNY 1.65 ($0.226) per cubic meter during the rest of the year.
        At
        the beginning of each year in the ten-year contract period, we negotiate
        with
        Petro China on the price and supply amount according to market
        conditions.
 
 The
        table
        below details our major gas suppliers in three months ended June 30,
        2008:
  Gas
                  Supplier
              
              Gas Purchase
                (million cubic
                meters)
              
              Gas Purchase
                ($ million)Beijing
                  Natural Gas Co.
              
              
              2.83
              
              
              0.64North
                  China Oil Field Fourth Oil Extraction Plant of Petro China
              
              
              2.19
              
              
              0.45Tianjin
                  Dagang Oilfield Transportation Co., Ltd.
              
              
              0.71
              
              
              0.23Suqian
                  Petro China Piped Gas Co.
              
              
              0.63
              
              
              0.19Hebei
                  Natural Gas Co. Ltd
              
              
              0.34
              
              
              0.08
 
 **Gross
        Profit**
 
 Gross
        income increased from $0.9 million in 2007 to $1.57 million for
        2008.
  For the 3 months
                  ended June 30,2008
              
              2007
              
              Change($
                  million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Gross
                  Profit
              
              
              1.57
              
              
              100
              %
              
              0.90
              
              
              100
              %
              
              73.73
              %Connection
              
              
              1.16
              
              
              74
              %
              
              0.85
              
              
              95
              %
              
              36.27
              %Gas
              
              
              0.40
              
              
              26
              %
              
              0.05
              
              
              5
              %
              
              743.27
              %
  34
  During
        the three months ended June 30, 2008, gross profit was $1.57 million, an
        increase of approximately 73.73% from the same period of 2007. Gross profit
        from
        connection fees is $1.16 million for the three months ended on June 30, 2008,
        accounting for 74% of total gross profit. In comparison, gross profit from
        connection fees was $0.85 million for the same period of 2007, accounting
        for
        95% of total gross profit. Gross profit from gas sales was $0.40 million,
        accounting for 26% of total gross profit, compared to $0.05 million, 5% of
        total
        gross profit in the same period of 2007.
  Decrease
        of gross margin for connection is attributable to the increase of cost for
        connection fees. We believe that the gross margin for connection will greatly
        increase if the number of households we developed meets the capacity of pipeline
        network. Increase of gross margin for gas sales is attributable to the fact
        that
        the growth rate of gas sales is larger than the growth rate of cost of gas
        sales. We believe that the gross margin for gas sales will increase with
        a more
        considerable amount of gas consumption.
 
 **Selling
        and Marketing Expenses**
 
 Our
        selling and marketing expenses in the three months ended June 30, 2008 were
        $186,193 and approximately 3.64% of our net revenues, compared with $143,296,
        or
        5.12% of net revenues in the same period of 2007.
 
 In
        2008,
        we acquired Tongshan Hengxin Jiaye Natural Gas Co., Ltd., and we incorporated
        one new subsidiary. The expansion of our company led to some increased staff
        salary, social insurance cost, travel and communications cost, and depreciation
        of fixed assets, which are attributable to increase of selling and marketing
        expenses.
 
 **General
        and Administrative Expenses**
 
 General
        and administrative expenses were $1.16 million for the three months ended
        June
        30, 2008, which was 370% higher than $0.25 million for the same period last
        year.
 
 The
        increase was largely due to our new 6 subsidiaries incorporated in the second
        half of 2007 and 2 in the first half of 2007, which led to increases in salary,
        social insurance, traveling expenses and other expenses. The new subsidiaries
        will definitely bring income of long-term. Nevertheless, the expenses from
        business operation occur simultaneously. Therefore, a good expense to revenue
        ration was unable to be achieved currently. The increase was also due in
        part to
        largely increased depreciation relating to new assets described above. We
        believe an upward trend in general and administrative expenses is inevitable
        in
        2008.
 
 And
        the
        increase was also resulted from the contingent payment of Gas Investment
        China
        Co., Ltd., and a joint signatory account in US.
 
 **Operating
        Income**
 
 The
        operating income for the three months ended Mar31, 2008 was $0.22 million,
        representing a decrease of 57.49%, compared to the operating income of $0.51
        million in 2007.
 
 Our
        company endured a unsatisfactory performance due to a prominent increase
        in
        contingent payments and a faster general and administrative expenses growth
        than
        revenues growth.
  35
  **Income
        tax**
  Income
        tax was $0.13 million for the three months ended June 30, 2008, compared
        to
        $0.01 million in 2007. The reason of increased income tax expense is due
        to the
        increase of tax rate from 7.5% to 25% as prepayment.
 
 Beijing
        Gas is classified as a foreign high-tech enterprise by the tax regulatory
        authority, and therefore has enjoyed a favorable tax rate for the past five
        years, with an income tax rate of zero in 2004 and 7.5% from 2005 to 2007.
        The
        income tax rate is expected to be 15% in 2008, the standard rate for foreign
        high-tech enterprises.
  The
        income tax rate of our subsidiaries is 20-25%, except for Beijing Chenguang
        and
        Beijing Gas. Beijing Chenguang has also been classified as a foreign high-tech
        enterprise and is subject to the favorable income tax rate of 7.5% from 2006
        to
        2008.
  **Net
        Income**
 
 Net
        income in the three months ended June 30, 2008 was -$0.54 million, representing
        a decrease of 206.35% from $0.50 million in the same
        period in 2007. The decrease was caused by the liquidated damages paid to
        the
        investors.
 
 ***Six
        Months Ended June 30, 2008 Compared to Six Months Ended June 30,
        2007***
 
 During
        the six months ended June 30, 2008, our company achieved strong increases
        in
        financial and operational results. Our net revenues and gross profit were
        $9,463,638 and $2,933,575, respectively, representing an increase of 80.80%
        and
        95.24%, respectively, from those of the same period in the previous year.
        Our
        operating income in 2008 was $568,799, representing a decrease of 7.39% from
        2007.
  For
                  the 6 months ended
                June
                  30,2008
              
              
              2007
              
              
              ChangeUS$
              
              
              US$
              
              
              %Net
                  Revenues
              
              
              9,463,638
              
              
              5,234,372
              
              
              80.80
              %Gross
                  Profit
              
              
              2,933,575
              
              
              1,502,539
              
              
              95.24
              %Operating
                  Income
              
              
              568,799
              
              
              511,161
              
              
              -7.39
              %Net
                  Income
              
              
              -387,561
              
              
              620,197
              
              
              -162.49
              %Gross
                  Margin
              
              
              31.00
              %
              
              28.71
              %Net
                  Margin
              
              
              -4.10
              %
              
              11.85
              %
 
 **Net
        Revenues**
 
 We
        generate revenues from two sources: connection fees for constructing connections
        to our natural gas distribution network, and sales of natural gas.
 
 Total
        net
        revenues for the six months ended June 30, 2008 were $9,463,638, compared
        to
        $5,234,372 for the same period in 2007, representing an increase of 80.80%.
        The
        increase was due to new customers’ connecting to our gas distribution network
        and new customers’ purchasing our natural gas. During this period, we connected
        11,686 new residential households to our gas distribution network, resulting
        in
        total connection fees of $2,909,739. Gas sales during the same period amounted
        to 20.00 million cubic meters, or $6,553,899. In comparison, we connected
        6,586
        new residential households to our gas distribution network in 2007, resulting
        in
        total connection fees of $1,985,872. Gas sales during the period amounted
        to
        11.73 million cubic meters, or $3,248,500.
  36
  For the 6 months ended June 30,2008
              
              2007
              
              Change(In
                  $ million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Net
                  Revenues
              
              
              9.46
              
              
              100
              %
              
              5.23
              
              
              100
              %
              
              80.80
              %Connection
                  Fees
              
              
              2.91
              
              
              31
              %
              
              1.99
              
              
              38
              %
              
              46.52
              %Gas
                  Sales
              
              
              6.55
              
              
              69
              %
              
              3.25
              
              
              62
              %
              
              101.75
              %
 
 Connection
        Fees
 
 Connection
        fees during the six months ended June 30, 2008 were $2.91 million, representing
        an increase of 46.52% over the same period of 2007, accounting for 31% of
        the
        total net revenue compared with approximately 38% for the same period in
        2007.
        With regard to the source of connection fees, 100% of total connection fees
        came
        from the development of new residential users. We connected 11,686 residential
        users during the six months ended June 30, 2008, an increase of approximately
        77.43% from 2007.
  For the 6 months ended June
                  30,(in
                  US$ millions)
              
              2008
              
              2007
              
              ChangeUS$
              
              %
              
              US$
              
              %
              
              %Connection
                  Fees
              
              
              2.91
              
              
              100
              %
              
              1.99
              
              
              100
              %
              
              46.52
              %Residential
                  Users
              
              
              2.91
              
              
              100
              %
              
              1.99
              
              
              100
              %
              
              46.52
              %Industrial
                  Users
              
              
              0.00
              
              
              0
              %
              
              0.00
              
              
              0
              %
              
              0
              %
 
 Such
        increase was primarily attributable to the following aspects.
  We
        tried
        our best to develop more residential customers in those cities of which we
        have
        obtained franchise of natural gas distribution systems. Our invested projects
        in
        the six months ended June 30, 2008 connected 11,686 new residential households
        in the six months ended June 30, 2008, resulting in approximately $2,909,739
        to
        our total connection fees. In comparison, during the same period of 2007,
        we
        connected 6,586 new residential households to our gas distribution network,
        resulting in total connection fees of $1,985,872.
 
 
 Gas
        Sales
 
 In
        terms
        of volume, we sold 20.00 million cubic meters of natural gas during the six
        months ended June 30, 2008, compared with 11.73 million cubic meters in 2007.
        In
        terms of value, gas sales were $6.55 million during the six months ended
        June
        30, 2008, accounting for 69% of total net revenue in 2008, representing an
        increase of 101.75% over the year 2007. Gas sales to residential increased
        16.51% from $0.55 million in 2007 to $0.64 million in 2008. Gas sales to
        industrial users increased 100.25%, from $0.44 million in 2007 to $0.89 million
        in 2008. Gas sales to commercial users increased 75.70%, from $0.83 million
        in
        2007 to $1.47 million in 2008.
  For the 6 months ended June
                  30,2008
              
              2007
              
              Change($
                  million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Gas
                  Sales
              
              
              6.55
              
              
              100
              %
              
              3.25
              
              
              100
              %
              
              101.75
              %Residential
                  Users
              
              
              2.03
              
              
              31
              %
              
              0.80
              
              
              25
              %
              
              152.55
              %Industrial
                  Users
              
              
              2.18
              
              
              33
              %
              
              1.15
              
              
              35
              %
              
              89.46
              %Commercial
                  Users
              
              
              2.35
              
              
              36
              %
              
              1.30
              
              
              40
              %
              
              81.16
              %
  37
 
 Such
        substantial increase was primarily attributable to the following
        aspect.
 
 Our
        invested projects maintained steady and rapid development. During the six
        months
        ended June 30, 2008, 20.00 million cubic meters of gas were sold, resulting
        in
        approximately $6.55 million. In comparison, during the same period of last
        year,
        10.94 million cubic meters of gas were sold, resulting in approximately $3.25
        million.
 
 
 **Cost
        of Revenues**
 
 Cost
        of
        revenues for the six months ended June 30, 2008, which includes cost of
        connection and cost of gas sales was $6.53 million, an increase of 74.98%,
        from
        $3.73 million in the same period of 2007.
  For the 6 months
                  ended June 30,2008
              
              2007
              
              Change($
                  million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Cost
                  of Revenues
              
              
              6.53
              
              
              100
              %
              
              3.73
              
              
              100
              %
              
              74.98
              %Connection
                  Cost
              
              
              0.82
              
              
              13
              %
              
              0.64
              
              
              17
              %
              
              28.14
              %Gas
                  Cost
              
              
              5.71
              
              
              87
              %
              
              3.09
              
              
              83
              %
              
              84.69
              %
 
 Cost
        of Connection
  Our
        cost
        of connection during the six months ended June 30, 2008 was $0.82 million,
        or
        13% of total cost of revenues. By comparison, the cost of connection during
        the
        same period of 2007 was $0.64 million, or 17% of total cost of
        revenue.
 
 Cost
        of
        connection increased around 28.14% from the same period in 2007, mainly due
        to
        the increased cost of gas station maintenance resulting from the development
        of
        our gas stations and
        increase of revenues from connection fees .
        Increase of revenues from connection fees raised nearly 47% from the same
        period
        in 2007.
  Cost
        of
        connection includes depreciation of major pipelines, the cost of courtyard
        pipelines, valves, gas meters, and installation and maintenance
        fees.
 
 Considering
        the city's overall planning and the long-term interests of our company, the
        capacity of the gas pipeline network we designed to distribute gas for a
        city
        usually greatly exceeded the number of households we served at the very
        beginning, which makes the cost of connection, specifically the depreciation
        of
        fixed assets and maintenance cost greatly increase. However, with connection
        of
        more households to the gas pipeline, the average cost to each household will
        be
        gradually reduced.
 
 Cost
        of Gas Sales
  The
        cost
        of gas sales increased 84.69% to $5.71 million during the six months ended
        June
        30, 2008 from the same period in 2007, when it was $3.09 million. This increase
        is largely due to the increase of gas sales which increased
        101.75%.
 
 The
        cost
        of natural gas sales includes the purchase and transportation of natural
        gas and
        depreciation of delivery trucks.
 
 38
 
 **Gross
        Profit**
 
 Gross
        income increased from $1.50 million in 2007 to $2.93 million for
        2008.
  For the 6 months
                  ended June 30,2008
              
              2007
              
              Change($
                  million)
              
              US$
              
              %
              
              US$
              
              %
              
              %Gross
                  Profit
              
              
              2.93
              
              
              100
              %
              
              1.50
              
              
              100
              %
              
              95.24
              %Connection
              
              
              2.09
              
              
              71
              %
              
              1.35
              
              
              90
              %
              
              55.27
              %Gas
              
              
              0.84
              
              
              29
              %
              
              0.16
              
              
              10
              %
              
              437.14
              %
 
 During
        the six months ended June 30, 2008, gross profit was $2.93 million, an increase
        of approximately 95.24% from the same period of 2007. Gross profit from
        connection fees is $2.09 million for the second six months of 2008, accounting
        for 71% of total gross profit. In comparison, gross profit from connection
        fees
        was $1.35 million for the six months of 2007, accounting for 90% of total
        gross
        profit. Gross profit from gas sales was $0.84 million, accounting for 29%
        of
        total gross profit, compared to $0.16 million, 10% of total gross profit
        in the
        same period of 2007.
  Increase
        of gross margin for connection is attributable to the number of households
        we
        developed is under the capacity of pipeline network. Increase of gross margin
        for gas sales is attributable to the fact that the growth rate of gas sales
        is
        larger than the growth rate of cost of gas sales. We believe that the gross
        margin for gas sales will increase with a more considerable amount of gas
        consumption.
 
 **Selling
        and Marketing Expenses**
 
 Our
        selling and marketing expenses in the six months ended June 30, 2008 were
        $367,896 and approximately 3.89% of our net revenues, compared with $199,494,
        or
        3.81% of net revenues in the same period of 2007.
 
 In
        2008,
        we acquired Tongshan Hengxin Jiaye Natural Gas Co., Ltd., and we incorporated
        one new subsidiary. The expansion of our company led to some increased staff
        salary, social insurance cost, travel and communications cost, and depreciation
        of fixed assets, which are attributable to increase of selling and marketing
        expenses.
 
 **General
        and Administrative Expenses**
 
 General
        and administrative expenses were $2.00 million for the six months ended June
        30,
        2008, which was 190% higher than $0.69 million for the same period last
        year.
  **Operating
        Income**
 
 The
        operating income for the six months ended Mar31, 2008 was $0.57 million,
        representing a decrease of 7.39%, compared to the operating income of $0.61
        million in 2007.
 
 39
 
 **Income
        tax**
  Income
        tax was $0.30 million for the six months ended June 30, 2008, compared to
        $0.03
        million in 2007. The reason of increased income tax expense is due to the
        increase of tax rate from 7.5% to 25% as prepayment.
 
 Beijing
        Gas is classified as a foreign high-tech enterprise by the tax regulatory
        authority, and therefore has enjoyed a favorable tax rate for the past five
        years, with an income tax rate of zero in 2004 and 7.5% from 2005 to 2007.
        The
        income tax rate is expected to be 15% in 2008, the standard rate for foreign
        high-tech enterprises.
  The
        income tax rate of our subsidiaries is 20-25%, except for Beijing Chenguang
        and
        Beijing Gas. Beijing Chenguang has also been classified as a foreign high-tech
        enterprise and is subject to the favorable income tax rate of 7.5% from 2006
        to
        2008.
  **Net
        Income**
 
 Net
        income in the six months ended June 30, 2008 was -$0.39 million, representing
        a
        decrease of 162.49% from $0.62 million in the same period in 2007.
  **Cash
        and cash equivalents**
 
 Cash
        sourced in financing activities during the six months ended June 30, 2008
        is
        $8.15 million.
 
 In
        January of 2008, Beijing Gas, the main subsidiary of Sino Gas in China, took
        out
        a loan in the amount of CNY 30 million (approximately $4.18 million), accruing
        interest at an adjustable rate (currently at 20% per year), with interest
        payable quarterly, from Chinese Mercantile Bank.
  Cash
        sourced in operating activities during the six months ended June 30, 2008
        is
        $2.32 million, which is due to our effective management of accounts
        receivable.
 
 Cash
        used
        in investing activities during the six months ended June 30, 2008 is $3.49
        million. We used the funds raised for project developments.
 
 **Accounts
        Receivable**
 
 Accounts
        receivable during the three months as of March 31, 2008 were $5.93 million,
        representing a decrease of $0.23 million from $6.16 million in 2007. The
        decrease was due to the fact that we attach great importance to the management
        and control of accounts receivable.
  40
  Our
        account receivable is expected to gradually decrease during the first six
        months
        of 2008 due to our seasonal business cycle, in which many accounts receivable
        are recorded upon completion of construction projects in the fourth quarter,
        and
        are collected in the second quarter of the following year. The term of most
        of
        our accounts receivable is one year. As of the end of March in 2008, accounts
        receivable dated from 2006 had been mostly collected, and the remainder were
        primarily warranty payments of 2007. A warranty payment is the final payment
        that a customer makes for a construction project. It consists of the final
        10%
        of the total project cost, and it becomes payable one year after construction
        has been completed, provided that no significant problems with the construction
        have arisen during the year.
 
 **Notes
        Receivable**
  Notes
        receivable of $0.28 million as of June 30, 2008 is the Note issued by Hebei
        Zhonggang for its use of gas. The Note is risk-free and will be duly honored
        by
        bank at the due date.
  **Inventory**
  Inventory
        of $0.28 million as of June 30, 2008 was comprised of the spare parts of
        Maintenance equipment stored for Langfang Development Zone Wei Ye Hazardous
        Goods Transportation Co. Ltd., steel gas storage tanks, and natural
        gas.
 
 **Prepayments**
  Prepayments
        of $0.47 million as of June 30, 2008 were consisting entirely of the prepayments
        for gas purchasing in accordance with the purchase and sale contract we signed
        with the gas suppliers.
 
 **Deferred
        and Prepaid Expense**
 The
        amount of $0.47 million of car insurance, parking fee and prepaid rent will
        be
        amortized in one year.
  **Other
        Receivable**
 
 Other
        receivable of $6.49 million includes the payment to Chenguang, expenses due to the internal business activities, employees’
borrowing, the funds for business turnover, project deposit and payments
        of
        other business activities.
 
 **Long-term
        Assets**
 
 Long
        term
        investment: we invested Beijing Zhongran Xiangke Co. Ltd with $2.70 million
        for
        40% equity in the long term run.
  Fixed
        Assets: our fixed assets were $26.49 million in the first quarter of 2008,
        causing an increase of $1.92 in comparison with the same period of
        2007. **
  Construction
        in process: $14.69 million was fully utilized for constructing the gas stations
        and gas distribution network where our major investment was put.
  Intangible
        assets: $2.19 million was used for land using rights of all gas stations,
        franchise and goodwill etc.
  41
  **Liabilities**
 
 $7.28
        million Short
        term borrowings consists of the one year liquidity loan of RMB 20 million
        from
        Industrial Bank Beijing Shangdi Sub-branch and RMB 30 million from China
        Mercantile Bank.
  Accounts
        Payable and other payables were mainly for the construction cost of gas
        distribution network and material purchase.
 Income
        tax paid was the income tax for the second quarter of 2008
        and
        operating tax for the month of June, 2008.
  ***Off-Balance
        Sheet Arrangements***
 
 We
        do not
        have any off-balance sheet arrangements.
 
 42




**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





Not
      required.




**Item
      4. Controls and Procedures**





**Management’s
      Report of Internal Control over Financial Reporting**





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





Under
      the
      supervision of and with the participation of our Chief Executive Officer and
      our
      Chief Financial Officer, our management conducted its evaluation of the
      effectiveness of our Company’s internal control over financial reporting as of
      June 30, 2008, using the criteria in the *Internal
      Control-Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Based on that evaluation, our management concluded that, as of June 30, 2008,
      our Company’s internal control over financial reporting was not effective due to
      the material weaknesses described below.





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





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





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





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





**Management’s
      Plan for Remediation of Material Weaknesses**





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




43




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





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





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





**Changes
      in Internal Control over Financial Reporting**




Other
      than the remediation measures described above, during the period ended June
      30,
      2008, there was no change in our internal controls over financial reporting
      that
      has materially affected, or that is reasonably likely to materially affect,
      our
      internal control over financial reporting.





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





None





**Item
      5. Other Information**





None




44




**Item
      6.  Exhibits**




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




Exhibit
              Number:
            
            Description31.1
            
            Certification
                of Chief Executive Officer under Section 302 of the Sarbanes-Oxley
                Act of
                2002.31.2
            
            Certification
                of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley
                Act of 2002.32.1
            
            Certifications
                Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
                Section 1350




45




**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, 2008
            By:
            /s/ Yuchuan
                LiuYuchuan
                LiuChairman
                and Chief Executive Officer




**SINO
                GAS INTERNATIONAL HOLDINGS, INC.**Date:
                August 14, 2008
            By:
            /s/ Yong
                ZhangYong
                ZhangChief
                Financial Officer




46