U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549







Amendment
No. 2 to


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 March 31, 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 xNo o




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





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




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




As of May
12, 2008, the Registrant had 24,877,271 shares of common stock
outstanding.





Explanatory
Note


This
Amendment No. 2 to our Quarterly Report on Form 10-Q for the quarter ended March
31, 2008 initially filed with the Securities and Exchange Commission on May 15,
2008 is being filed to include the conclusion of management regarding the
effectiveness of disclosure controls and procedures.





Sino Gas
International Holdings, Inc.




Table of
Contents




PagePART
      I -FINANCIAL
      INFORMATION
                        1Item
      1.
                        Financial
      Statements
                        1Notes
      to Financial Statements (Unaudited)
                        7Item
      2.
                        Management's
      Discussion and Analysis or Plan of Operation
                        28Item
      3.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        36Item
      4.
                        Controls
      and Procedures
                        36PART
      II -OTHER
      INFORMATION
                        37Item
      1.
                        Legal
      Proceedings
                        37Item
      1A.
                        Risk
      Factors
                        37Item
      2.
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        38Item
      3.
                        Defaults
      Upon Senior Securities
                        38Item
      4.
                        Submission
      of Matters to a Vote of Security Holders.
                        38Item
      5.
                        Other
      Information
                        38Item
      6.
                        Exhibits
                        38





PART
I - FINANCIAL INFORMATION




Item
1. Financial Statements




SINO
GAS INTERNATIONAL HOLDINGS, INC.





REVIEWED
FINANCIAL STATEMENTS


MARCH
31, 2008 AND DECEMBER 31, 2007


(Stated
in US dollars)










SINO GAS INTERNATIONAL
HOLDINGS, INC.





CONTENTS
                PAGESINDEPENDENT
      AUDITOR’S REPORT
                1CONSOLIDATED
      BALANCE SHEETS
                2 –
      3CONSOLIDATED
      STATEMENTS OF INCOME
                4CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY
                5CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                6NOTES
      TO FINANCIAL STATEMENTS
                7 –
      27





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 March 31, 2008 and December 31, 2007, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for the three-month periods ended March 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., LLPJune
      3, 2008
              Certified
      Public Accountants


1


SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
BALANCE SHEETS


AS
OF MARCH 31, 2008 AND DECEMBER 31, 2007


(Stated
in US Dollars)





3/31/2008
                                                        
                                                        
                                                        12/31/2007NoteASSETSCurrent
      AssetsCash
      & cash equivalents
                                                        
                                                        
                                                        2(e)
                                                        
                                                        
                                                        $
                                                        8,021,212
                                                        
                                                        
                                                        $
                                                        10,915,590Restricted
      cash
                                                        
                                                        
                                                        3
                                                        
                                                        
                                                        
                                                        664,061
                                                        
                                                        
                                                        
                                                        478,920Notes
      receivable
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        586,711
                                                        
                                                        
                                                        
                                                        825,119Accounts
      receivable
                                                        
                                                        
                                                        2(f),4
                                                        
                                                        
                                                        
                                                        6,162,418
                                                        
                                                        
                                                        
                                                        7,315,253Inventory
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        246,891
                                                        
                                                        
                                                        
                                                        207,976Advances
      to suppliers
                                                        
                                                        
                                                        2(g)
                                                        
                                                        
                                                        
                                                        1,041,556
                                                        
                                                        
                                                        
                                                        27,372Prepayments
      and others
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        465,669
                                                        
                                                        
                                                        
                                                        320,380Other
      receivables
                                                        
                                                        
                                                        5
                                                        
                                                        
                                                        
                                                        9,849,587
                                                        
                                                        
                                                        
                                                        3,100,695Total
      Current Assets
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        27,038,104
                                                        
                                                        
                                                        
                                                        23,191,305Non-Current
      AssetsInvestment
                                                        
                                                        
                                                        2(h)
                                                        
                                                        
                                                        
                                                        2,703,156
                                                        
                                                        
                                                        
                                                        4,007,310Property,
      plant & equipment, net
                                                        
                                                        
                                                        2(j),6
                                                        
                                                        
                                                        
                                                        26,852,967
                                                        
                                                        
                                                        
                                                        24,572,565Construction
      in progress
                                                        
                                                        
                                                        2(l)
                                                        
                                                        
                                                        
                                                        12,830,941
                                                        
                                                        
                                                        
                                                        11,556,820Intangible
      assets, net
                                                        
                                                        
                                                        2(k),7
                                                        
                                                        
                                                        
                                                        2,112,337
                                                        
                                                        
                                                        
                                                        2,028,250Total
      non-current assets
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        44,499,401
                                                        
                                                        
                                                        
                                                        42,164,945TOTAL
      ASSETS
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        71,537,505
                                                        
                                                        
                                                        $
                                                        65,356,250LIABILITIES
      & STOCKHOLDERS' EQUITYCurrent
      LiabilitiesBank
      Loans
                                                        
                                                        
                                                        8
                                                        
                                                        
                                                        $
                                                        7,120,276
                                                        
                                                        
                                                        $
                                                        2,734,444Accounts
      payable
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1,417,807
                                                        
                                                        
                                                        
                                                        716,707Other
      payables
                                                        
                                                        
                                                        9
                                                        
                                                        
                                                        
                                                        9,715,659
                                                        
                                                        
                                                        
                                                        10,383,657Unearned
      revenue
                                                        
                                                        
                                                        2(m)
                                                        
                                                        
                                                        
                                                        640,615
                                                        
                                                        
                                                        
                                                        312,573Accrued
      liabilities
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        41,428
                                                        
                                                        
                                                        
                                                        362,263Total
      current liabilities
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        18,935,786
                                                        
                                                        
                                                        
                                                        14,509,644TOTAL
      LIABILITIES
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        18,935,786
                                                        
                                                        
                                                        $
                                                        14,509,644




See
accompanying notes to financial statements and accountant’s
report


2


SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
BALANCE SHEETS (Continued)


AS
OF MARCH 31, 2008 AND DECEMBER 31, 2007


(Stated
in US Dollars)





STOCKHOLDERS'
      EQUITYPreferred
      Stock A US $0.001 par value; 20,000,000 shares authorized; 275,111 shares
      issued and outstanding as of March 31, 2008 and December 31,
      2007
                            
                            
                            10
                            
                            
                            $
                            275
                            
                            
                            $
                            275Preferred
      Stock B US $0.001 par value; 5,000,000 shares authorized; 4,971,859 shares
      issued and outstanding as of March 31, 2008 and December 31,
      2007
                            
                            
                            10
                            
                            
                            
                            4,972
                            
                            
                            
                            4,972Common
      Stock US $0.001 par value; 250,000,000 shares authorized; 25,282,380
      shares issued and outstanding as of March 31, 2008 and December 31,
      2007
                            
                            
                            10
                            
                            
                            
                            25,283
                            
                            
                            
                            25,283Additional
      Paid in Capital
                            
                            
                            
                            
                            
                            
                            35,247,303
                            
                            
                            
                            35,247,303Statutory
      Reserve
                            
                            
                            
                            
                            
                            
                            3,481,730
                            
                            
                            
                            3,258,201Retained
      Earnings
                            
                            
                            
                            
                            
                            
                            10,358,228
                            
                            
                            
                            10,432,430Accumulated
      Other Comprehensive Income
                            
                            
                            
                            
                            
                            
                            3,483,929
                            
                            
                            
                            1,878,142TOTAL
      STOCKHOLDERS' EQUITY
                            
                            
                            
                            
                            
                            
                            52,601,719
                            
                            
                            
                            50,846,606TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                            
                            
                            
                            
                            
                            $
                            71,537,505
                            
                            
                            $
                            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 ENDED MARCH 31, 2008 AND 2007


(Stated
in US Dollars)





3/31/2008
                                              
                                              
                                              3/31/2007Net SalesRevenues
                                              
                                              $
                                              4,342,116
                                              
                                              
                                              $
                                              2,438,227Cost
      of revenues
                                              
                                              
                                              (2,975,472
                                              )
                                              
                                              
                                              (1,837,630
                                              )Gross
      Profit
                                              
                                              
                                              1,366,645
                                              
                                              
                                              
                                              600,597Operating ExpensesSelling
      and marketing expenses
                                              
                                              
                                              (181,704
                                              )
                                              
                                              
                                              (56,198
                                              )General
      & administrative expenses
                                              
                                              
                                              (833,451
                                              )
                                              
                                              
                                              (441,374
                                              )Total
      operating expenses
                                              
                                              
                                              (1,015,154
                                              )
                                              
                                              
                                              (497,572
                                              )Operating
      Income/(Loss)
                                              
                                              
                                              351,490
                                              
                                              
                                              
                                              103,025Other Income (Expenses)Other
      income
                                              
                                              
                                              -
                                              
                                              
                                              
                                              36,088Other
      expenses
                                              
                                              
                                              (845
                                              )
                                              
                                              
                                              (1,495
                                              )Interest
      income
                                              
                                              
                                              33,166
                                              
                                              
                                              
                                              -Interest
      expense
                                              
                                              
                                              (60,467
                                              )
                                              
                                              
                                              (5,370
                                              )Total
      other income (expense)
                                              
                                              
                                              (28,146
                                              )
                                              
                                              
                                              29,223Earnings
      before tax
                                              
                                              
                                              323,344
                                              
                                              
                                              
                                              132,248Income
      tax
                                              
                                              
                                              (174,017
                                              )
                                              
                                              
                                              (16,865
                                              )Net
      income
                                              
                                              $
                                              149,327
                                              
                                              
                                              $
                                              115,383Earnings
      per shareBasic
                                              
                                              
                                              0.009
                                              
                                              
                                              
                                              0.008Diluted
                                              
                                              
                                              0.007
                                              
                                              
                                              
                                              0.004Weighted
      Average Shares OutstandingBasic
                                              
                                              
                                              17,165,894
                                              
                                              
                                              
                                              14,730,597Diluted
                                              
                                              
                                              22,017,096
                                              
                                              
                                              
                                              28,724,652





See
accompanying notes to financial statements and accountant’s
report


4


SINO
GAS INTERNATIONAL HOLDINGS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


AS
OF MARCH 31, 2008 AND DECEMBER 31, 2007


(Stated
in US Dollars)





Common
                            Stock
                          
                          
                          
                          
                          
                          
                          
                          
                          AccumulatedPreferred
      Stock A
                          
                          
                          Preferred
      Stock B
                          
                          
                          Common
      Stock
                          
                          
                          Additional
                          
                          
                          
                          
                          
                          
                          
                          
                          OtherShares
                          
                          
                          
                          
                          
                          Shares
                          
                          
                          
                          
                          
                          Shares
                          
                          
                          
                          
                          
                          Paid
      in
                          
                          
                          Statutory
                          
                          
                          Retained
                          
                          
                          ComprehensiveOutstanding
                          
                          
                          Amount
                          
                          
                          Outstanding
                          
                          
                          Amount
                          
                          
                          Outstanding
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Reserve
                          
                          
                          Earnings
                          
                          
                          Income
                          
                          
                          TotalBalance,
      January 1, 2007
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          4,023,268
                          
                          
                          
                          4,023
                          
                          
                          
                          14,693,186
                          
                          
                          
                          14,694
                          
                          
                          
                          18,488,040
                          
                          
                          
                          2,025,022
                          
                          
                          
                          3,958,239
                          
                          
                          
                          824,296
                          
                          
                          
                          25,314,314Net
      Income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          7,707,370
                          
                          
                          
                          
                          
                          
                          
                          7,707,370Issue
      of stock and warrant
                          
                          
                          275,111
                          
                          
                          
                          275
                          
                          
                          
                          948,591
                          
                          
                          
                          949
                          
                          
                          
                          10,589,194
                          
                          
                          
                          10,589
                          
                          
                          
                          16,759,263
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          16,771,076Appropriations
      of Retained Earnings
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,233,179
                          
                          
                          
                          1,233,179
                          
                          
                          
                          
                          
                          
                          
                          -Foreign
      Currency Translation Adjustment
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,053,846
                          
                          
                          
                          1,053,846Balance,
      December 31, 2007
                          
                          
                          275,111
                          
                          
                          
                          275
                          
                          
                          
                          4,971,859
                          
                          
                          
                          4,972
                          
                          
                          
                          25,282,380
                          
                          
                          
                          25,283
                          
                          
                          
                          35,247,303
                          
                          
                          
                          3,258,201
                          
                          
                          
                          10,432,430
                          
                          
                          
                          1,878,142
                          
                          
                          
                          50,846,606Balance,
      January 1, 2008
                          
                          
                          275,111
                          
                          
                          
                          275
                          
                          
                          
                          4,971,859
                          
                          
                          
                          4,972
                          
                          
                          
                          25,282,380
                          
                          
                          
                          25,283
                          
                          
                          
                          35,247,303
                          
                          
                          
                          3,258,201
                          
                          
                          
                          10,432,430
                          
                          
                          
                          1,878,142
                          
                          
                          
                          50,846,606Net
      Income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          149,327
                          
                          
                          
                          
                          
                          
                          
                          149,327Issue
      of stock and warrant
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -Appropriations
      of Retained Earnings
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          223,529
                          
                          
                          
                          (223,529
                          )
                          
                          
                          
                          
                          
                          
                          -Foreign
      Currency Translation Adjustment
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,605,787
                          
                          
                          
                          1,605,787Balance,
      March 31, 2008
                          
                          
                          275,111
                          
                          
                          
                          275
                          
                          
                          
                          4,971,859
                          
                          
                          
                          4,972
                          
                          
                          
                          25,282,380
                          
                          
                          
                          25,283
                          
                          
                          
                          35,247,303
                          
                          
                          
                          3,481,730
                          
                          
                          
                          10,358,228
                          
                          
                          
                          3,483,929
                          
                          
                          
                          52,601,719





Accumulated Comprehensive
      Income12/31/2007
                              
                              
                              3/31/2008
                              
                              
                              TotalComprehensive IncomeNet
      Income
                              
                              
                              7,707,370
                              
                              
                              
                              149,327
                              
                              
                              
                              7,856,697Comprehensive Other IncomeForeign
      Currency Translation Adjustment
                              
                              
                              1,053,846
                              
                              
                              
                              1,605,787
                              
                              
                              
                              2,659,6338,761,216
                              
                              
                              
                              1,755,114
                              
                              
                              
                              10,516,330





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 ENDED MARCH 31, 2008 AND 2007


(Stated
in US Dollars)





3/31/2008
                                
                                
                                3/31/2007Cash
      flow from operating activitiesNet
      Income
                                
                                $
                                149,327
                                
                                
                                $
                                115,383Depreciation
      expense
                                
                                
                                640,248
                                
                                
                                
                                38,844Amortization
      expense
                                
                                
                                29,532
                                
                                
                                
                                -Invested
      in restricted time deposits
                                
                                
                                (185,141
                                )
                                
                                
                                3,124,541Decrease/(increase)
      in accounts receivable
                                
                                
                                (5,357,649
                                )
                                
                                
                                310,419Increase
      in inventory
                                
                                
                                (38,915
                                )
                                
                                
                                -Increase
      in prepaid expenses
                                
                                
                                (831,430
                                )
                                
                                
                                -Increase
      in accounts payable
                                
                                
                                (287,732
                                )
                                
                                
                                3,023,295Cash
      sourced/(used) in operating activities
                                
                                
                                (5,881,760
                                )
                                
                                
                                6,612,482Cash
      flows from investing activitiesCash
      received for investment sales proceeds
                                
                                
                                1304154
                                
                                
                                
                                -Cash
      paid for investment and acquisition
                                
                                
                                -
                                
                                
                                
                                (930,801
                                )Purchase
      of property, plant & equipment
                                
                                
                                (2,920,649
                                )
                                
                                
                                (3,320,688
                                )Purchase
      of intangible assets
                                
                                
                                (113,620
                                )
                                
                                
                                (172,210
                                )Increase
      in construction in progress
                                
                                
                                (1,274,121
                                )
                                
                                
                                (1,345,436
                                )Cash
      souced/(used) in investing activities
                                
                                
                                (3,004,236
                                )
                                
                                
                                (5,769,135
                                )Cash
      flows from financing activitiesProceeds
      from bank borrowings
                                
                                
                                4,385,832
                                
                                
                                
                                (2,430,445
                                )Cash
      sourced/(used) in financing activities
                                
                                
                                4,385,832
                                
                                
                                
                                (2,430,445
                                )Net
      Increase/(Decrease) in Cash & Cash Equivalents for the
      Year
                                
                                
                                (4,500,164
                                )
                                
                                
                                (1,587,098
                                )Effect
      of Currency Translation on cash and cash equivalents
                                
                                
                                1,605,787
                                
                                
                                
                                293,589Cash
      & Cash Equivalents - Beginning of Year
                                
                                $
                                10,915,590
                                
                                
                                $
                                3,638,673Cash
      & Cash Equivalents - End of Year
                                
                                $
                                8,021,212
                                
                                
                                $
                                2,345,164Supplementary
      cash flow informationInterest
      received
                                
                                $
                                33,166
                                
                                
                                $
                                94,653Interest
      paid
                                
                                
                                60,467
                                
                                
                                
                                43,617Income
      tax paid
                                
                                
                                -
                                
                                
                                
                                16,865





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 ENDED MARCH 31, 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 BritishVirgin
                                          Islands
                                        
                                        
                                        6/19/2003
                                        
                                        
                                        100
                                        
                                        
                                        100
                                        
                                        
                                        USD
      10,000,000Sino
      Gas Construction Limited
                                        
                                        
                                        The BritishVirgin
                                          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





Name of
                                  Associate
                                  Company
                                
                                Place
                                  of
                                  Registration
                                
                                Form of
                                  Business
                                  Structure
                                
                                Registered
                                  Capital
                                
                                Nominal
                                  Value of
                                  Registered
                                  Capital
                                
                                Principal
                                  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
                  25
      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.





3/31/2008
                        
                        
                        12/31/2007Years
      end RMB : US$ exchange rate
                        
                        
                        7.0222
                        
                        
                        
                        7.3141Average
      yearly RMB : US$ exchange rate
                        
                        
                        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:





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;


15





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.





(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.


16





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 March 31, 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.


17




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.




Accounts
Receivable





3/31/2008
                        
                        
                        12/31/2007Gross
      accounts receivable
                        
                        $
                        6,193,385
                        
                        
                        $
                        7,352,013Allowance
      for bad debt
                        
                        
                        30,967
                        
                        
                        
                        (36,760
                        )Net
      accounts receivable
                        
                        $
                        6,162,418
                        
                        
                        $
                        7,315,253





Allowance for Bad
Debt





3/31/2008
                        
                        
                        12/31/2007Beginning
      balance
                        
                        $
                        36,760
                        
                        
                        $
                        32,838Addition
                        
                        
                        19,939
                        
                        
                        
                        26,909Less
      - write off
                        
                        
                        (25,732
                        )
                        
                        
                        (22,987
                        )Ending
      balance
                        
                        $
                        30,967
                        
                        
                        $
                        36,760




Accounts Receivable Aging
Report





3/31/2008
                        
                        
                        12/31/200730
      Days
                        
                        $
                        4,681,398
                        
                        
                        $
                        5,557,17230-60
      Days
                        
                        
                        1,021,345
                        
                        
                        
                        1,212,41360-90
      Days
                        
                        
                        23,157
                        
                        
                        
                        8,74790-180
      Days
                        
                        
                        171,660
                        
                        
                        
                        -180-360
      Days
                        
                        
                        257,490
                        
                        
                        
                        27,489>360
      Days
                        
                        
                        7,369
                        
                        
                        
                        509,433Total
                        
                        $
                        6,162,418
                        
                        
                        $
                        7,315,254


18





The
      followings are the largest ten accounts receivable as of March 31,
      2008Peixian
      jiangnan development Co., Ltd
                      
                      $
                      290,507Beijing
      xuancheng Construction Co., Ltd
                      
                      
                      297,881Jiangshu
      honghu farm Co., Ltd
                      
                      
                      301,558Sihong
      jinwan construction Co., Ltd
                      
                      
                      323,545Xuzhou
      shenyuan real property Co., Ltd
                      
                      
                      351,048Guannan
      construction Co., Ltd
                      
                      
                      359,716Lianyun
      port development Co., Ltd
                      
                      
                      372,533Huabei
      oil management machine Co., Ltd
                      
                      
                      412,549Shanghai
      datun energy Co., Ltd
                      
                      
                      604,771Hebei
      zhonggang stell development Co., Ltd
                      
                      
                      892,056Total
                      
                      $
                      4,206,165





5.
OTHER RECEIVABLES





The
followings are the ten largest other receivables as of March 31,
2008




Other
receivables


3/31/2008Beijing
      yanfang construction Co., Ltd.
                            
                            $
                            15,434Xisanzhuang
      Co., Ltd.
                            
                            
                            21,423Shenzhen
      shenqi investment Co., Ltd.
                            
                            
                            23,732Peixuan
      construction service department
                            
                            
                            28,481Beijing
      zhongshi investment Co., Ltd.
                            
                            
                            42,722Shangjianzhong
                            
                            
                            327,533China
      gas investment Co., Ltd.
                            
                            
                            333,939Tianjin
      feite zhixun service Co., Ltd.
                            
                            
                            356,014Baishan
      zhaiwu service Co., Ltd.
                            
                            
                            1,968,852Baoding
      city management Co., Ltd.
                            
                            
                            4,272,165Total
                            
                            $
                            7,390,295




19


6.  PROPERTY, PLANT AND
EQUIPMENT
 
 Property, Plant and Equipment consist
of the following as of March 31, 2008 and December 31, 2007
 
 03/31/08
                          
                          
                          12/31/07At CostGas
      Pipelines
                          
                          $
                          20,925,765
                          
                          
                          $
                          18,885,734Motor
      Vehicles
                          
                          
                          5,351,869
                          
                          
                          
                          4,874,685Machinery
      & Equipment
                          
                          
                          867,089
                          
                          
                          
                          885,997Buildings
                          
                          
                          1,748,881
                          
                          
                          
                          1,405,638Leasehold
      Improvements
                          
                          
                          72,036
                          
                          
                          
                          68,942Office
      Equipment
                          
                          
                          181,345
                          
                          
                          
                          105,336Total
                          
                          $
                          29,146,985
                          
                          
                          $
                          26,226,336Less:
      Accumulated Depreciation
                          
                          
                          (2,294,018
                          )
                          
                          
                          (1,653,771
                          )Property,
      Plant and Equipment, net
                          
                          $
                          26,852,967
                          
                          
                          $
                          24,572,565
 
 03/31/08
                        
                        
                        12/31/07Accumulated DepreciationGas
      Pipelines
                        
                        $
                        1,074,075
                        
                        
                        $
                        591,419Motor
      Vehicles
                        
                        
                        821,796
                        
                        
                        
                        687,354Machinery
      & Equipment
                        
                        
                        170,595
                        
                        
                        
                        161,703Buildings
                        
                        
                        131,312
                        
                        
                        
                        128,514Leasehold
      Improvements
                        
                        
                        38,269
                        
                        
                        
                        34,070Office
      Equipment
                        
                        
                        57,971
                        
                        
                        
                        50,711Total
                        
                        $
                        2,294,018
                        
                        
                        $
                        1,653,771
 
 Depreciation
expense included in the consolidated statements of income for the period ended
March 31, 2008 was $640,247.
  20
  7.  INTANGIBLE ASSETS
 
 Intangible
assets consist of the following as of March 31, 2008 and December 31,
2007
 
 03/31/08
                          
                          
                          12/31/07At CostLand
      use rights
                          
                          $
                          471,747
                          
                          
                          $
                          452,345Franchises
                          
                          
                          384,495
                          
                          
                          
                          359,464Goodwill
                          
                          
                          1,627,140
                          
                          
                          
                          1,562,202Other
                          
                          
                          13,813
                          
                          
                          
                          9,563Total
                          
                          $
                          2,497,195
                          
                          
                          $
                          2,383,574Less:
      Accumulated Amortization
                          
                          
                          (384,857
                          )
                          
                          
                          (355,324
                          )Intangible
      Assets, net
                          
                          $
                          2,112,338
                          
                          
                          $
                          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 depreciation.
 
 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
                          
                          $
                          2,848,110
                          
                          
                          $
                          2,734,444Loans
      from Huashang Bank Co., Ltd.
                          
                          
                          4,272,165
                          
                          
                          
                          -Total
                          
                          $
                          7,120,276
                          
                          
                          $
                          2,734,444
 
 Interest
expenses for the short-term bank loans were $57,877 and $55,405 for the three
months ended March 31, 2008, and the twelve months ended December 31,
2007.
  21
  9.  OTHER
PAYABLES
 
 Other
payables at March 31, 2008 and December 31, 2007 consist of the
following:
 
 3/31/2008
                      
                      
                      12/31/2007Employees’
      welfare payables
                      
                      $
                      218,637
                      
                      
                      $
                      176,236Amount
      due to employees
                      
                      
                      30,061
                      
                      
                      
                      150,711Tax
      payable
                      
                      
                      243,439
                      
                      
                      
                      922,620Other
      Payable
                      
                      
                      9,223,522
                      
                      
                      
                      9,134,091Total
                      
                      $
                      9,715,659
                      
                      
                      $
                      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 March 31, 2008
 
 Beijing
      chengguang Co., Ltd.
                            
                            $
                            19,833Caiyou
      erchuang transportation Co.
                            
                            
                            25,674Education
      department Co., Ltd.
                            
                            
                            38,528Labor
      union department
                            
                            
                            60,757Heshuchun
                            
                            
                            71,203Beijing
      qianshi technology development Co.
                            
                            
                            78,602Social
      insurance Co., Ltd.
                            
                            
                            117,263Employee
      training program Co., Ltd.
                            
                            
                            411,860Chenguang
      weizhong consultant Co., Ltd.
                            
                            
                            427,217Baishan
      natural gas Co., Ltd
                            
                            
                            4,010,447Total
                            
                            $
                            5,261,384
 
 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 25,282,380 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 4,971,859 shares are issued and
outstanding.
  22
  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 25,282,380 shares of common stock issued and
outstanding as of March 31, 2008. All shares of common stock have one vote per
share on all matters including election of directors, without provision for
cumulative voting. The common stock is not redeemable and has no conversion or
preemptive rights. The common stock currently outstanding is validly issued,
fully paid and non-assessable. In the event of liquidation of the company, the
holders of common stock will share equally in any balance of the company's
assets available for distribution to them after satisfaction of creditors and
preferred shareholders, if any. The holders of common stock are entitled to
equal dividends and distributions per share with respect to the common stock
when, as and if, declared by the board of directors from funds legally
available.
 
 Preferred
Stock
 
 In
addition to the 250,000,000 shares of common stock, The Company is authorized to
issue 100,000,000 shares of preferred stock, with a par value of $0.001 per
share. Shares of the preferred stock may be issued from time to time in one or
more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the board of directors
prior to the issuance.
 
 On August
30, 2006, the Company’s board of directors designated 20,000,000 shares of its
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.
  23
  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 March 31, 2008:
 
 PreferredStock A
                                          
                                          
                                          PreferredStock B
                                          
                                          
                                          CommonStockName ofShareholder
                                          
                                          Number of
                                            Shares
                                            Outstanding
                                          
                                          
                                          Capital
                                          
                                          
                                          Number of
                                            Shares
                                            Outstanding
                                          
                                          
                                          Capital
                                          
                                          
                                          Number of
                                            Shares
                                            Outstanding
                                          
                                          
                                          Capital
                                          
                                          
                                          Additional
                                            Paidin
                                            Capital
                                          
                                          
                                          % of
      Equity
                                            HoldingsPrivate
      Investor
                                          
                                          
                                          275,111
                                          
                                          
                                          
                                          275
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,210,213
                                          
                                          
                                          
                                          0.90
                                          %Investor
      Relations firm
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,971,859
                                          
                                          
                                          
                                          4,972
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          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
                                          
                                          
                                          
                                          4,971,859
                                          
                                          
                                          
                                          4,972
                                          
                                          
                                          
                                          25,282,380
                                          
                                          
                                          
                                          25,283
                                          
                                          
                                          
                                          35,247,303
                                          
                                          
                                          
                                          100.00
                                          %
  24
  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.
 
 3/31/2008
Balance Sheet Segment Report
 
 Gas Distribution
                            
                            
                            Gas pipeline
                              Installation
                            
                            
                            Others
                            
                            
                            TotalAssetsCurrent
      Assets
                            
                            $
                            14,147,456
                            
                            
                            $
                            4,688,771
                            
                            
                            $
                            8,201,877
                            
                            
                            $
                            27,038,104Non-Current
      Assets
                            
                            
                            11,194,047
                            
                            
                            
                            33,305,354
                            
                            
                            
                            -
                            
                            
                            
                            44,499,401Total
      Assets
                            
                            $
                            25,341,504
                            
                            
                            $
                            37,994,124
                            
                            
                            $
                            8,201,877
                            
                            
                            $
                            71,537,505LiabilitiesCurrent
      Liabilities
                            
                            
                            1,604,946
                            
                            
                            
                            17,175,131
                            
                            
                            
                            155,709
                            
                            
                            
                            18,935,786Total
      Liabilities
                            
                            $
                            1,604,946
                            
                            
                            $
                            17,175,131
                            
                            
                            $
                            155,709
                            
                            
                            $
                            18,935,786Net Assets
                            
                            $
                            23,736,558
                            
                            
                            $
                            20,818,993
                            
                            
                            $
                            8,046,168
                            
                            
                            $
                            52,601,719
  25
 
 3/31/2008
Income Statement Segment Report
 
 Gas Distribution
                                
                                
                                Gas pipeline
                                  Installation
                                
                                
                                Others
                                
                                
                                TotalSales
      Revenue
                                
                                $
                                2,987,419
                                
                                
                                $
                                1,354,697
                                
                                
                                $
                                -
                                
                                
                                $
                                4,342,116Cost
      of Revenue
                                
                                
                                (2,545,638
                                )
                                
                                
                                (429,834
                                )
                                
                                
                                -
                                
                                
                                
                                (2,975,472
                                )Gross
      Profit
                                
                                
                                441,781
                                
                                
                                
                                924,863
                                
                                
                                
                                -
                                
                                
                                
                                1,366,644Operating
      Expense
                                
                                
                                (232,194
                                )
                                
                                
                                (493,412
                                )
                                
                                
                                (289,548
                                )
                                
                                
                                (1,015,154
                                )Other
      Income
                                
                                
                                (18,061
                                )
                                
                                
                                (38,380
                                )
                                
                                
                                28,295
                                
                                
                                
                                (28,146
                                )Earnings
      before tax
                                
                                
                                191,526
                                
                                
                                
                                393,071
                                
                                
                                
                                (261,253
                                )
                                
                                
                                323,344Income
      tax
                                
                                
                                (55,685
                                )
                                
                                
                                (118,332
                                )
                                
                                
                                -
                                
                                
                                
                                (174,017
                                )Net
      Income
                                
                                $
                                135,841
                                
                                
                                $
                                274,739
                                
                                
                                $
                                (261,253
                                )
                                
                                $
                                149,327
 
 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
  26
 
 Statement
of Income Segment Report
 For
the three months ended March 31, 2007
 
 Gas Distribution
                                        
                                        
                                        Gas pipeline
                                          Installation
                                        
                                        
                                        Others
                                        
                                        
                                        TotalSales
      Revenue
                                        
                                        $
                                        1,822,891
                                        
                                        
                                        $
                                        615,336
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        2,438,227Cost
      of Revenue
                                        
                                        
                                        (1,713,412
                                        )
                                        
                                        
                                        (124,218
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,837,630
                                        )Gross
      Profit
                                        
                                        
                                        109,479
                                        
                                        
                                        
                                        491,118
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        600,597Operating
      Expense
                                        
                                        
                                        (89,563
                                        )
                                        
                                        
                                        (408,009
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (497,572
                                        )Other
      Income
                                        
                                        
                                        23,963
                                        
                                        
                                        
                                        5,260
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        29,223Earnings
      before tax
                                        
                                        
                                        23,805
                                        
                                        
                                        
                                        108,443
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        132,248Income
      tax
                                        
                                        
                                        (3,036
                                        )
                                        
                                        
                                        (13,829
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (16,865
                                        )Net
      Income
                                        
                                        $
                                        20,769
                                        
                                        
                                        $
                                        94,614
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        115,383
 
 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.
  27
  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 70% during 2007, as we
developed one new user and two of our existing users have expanded their
production capacity. Our biggest industrial user, Hebei Zhong Gang Co. Ltd, is
increasing production capacity, which is expected to increase our daily gas
sales from 30,000 cubic meters to 45,000 cubic meters in 2008. 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 are 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 needs to
raise money to fund these acquisitions.
  28
  Material
Challenges
 
 There are
vast number of small-to-medium sized cities left undeveloped, but the
competition is intense, as there are many small new players in the market
attracted by the profitability and growth potential of the business. Meanwhile,
from time to time, we are also facing competitions from stronger competitors, as
large city markets are getting saturated and our competitors are beginning to
expand into smaller cities.
 
 We are
facing limited opportunities in developing into first-tier cities in China, as
most of them have already been taken by other large gas distributors, such as
Xin’ao Gas Co. Ltd (largest in China) in the past decade.
 
 Still,
potential users in small and medium-sized cities need to be educated by the
benefits of natural gas. It takes some time for them to get to know how natural
gas can improve the quality of life. This is especially true for new markets,
where there is no use of natural gas. Small cities tend to be more reluctant for
use of new energies than large cities where residents depend more on coal,
rather than natural gas.
 
 China’s
energy market is highly regulated by the government, with regard to purchase
price and sale price of natural gas. Whenever there is an adjustment to purchase
price by the government, gas distributors would increase the sale price
correspondingly, subject to a public hearing and government approval. The
increase of natural gas 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 March 31, 2008 Compared to Three Months Ended Mar 31,
2007
 
 During
the three months ended March 31, 2008, our company achieved strong increases in
financial and operational results. Our net revenues and gross profit were
$4,342,117 and $1,366,645, respectively, representing an increase of 78.09% and
127.55%, respectively, from those of the same period in the previous year. Our
operating income in 2008 was $351,490, representing an increase of 241.17% from
2007.
  29
  For the 3 months ended
                                      March 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    ChangeUS$
                                    
                                    
                                    US$%Net
      Revenues
                                    
                                    
                                    4,342,117
                                    
                                    
                                    
                                    2,438,227
                                    
                                    
                                    
                                    78.09
                                    %Gross
      Profit
                                    
                                    
                                    1,366,645
                                    
                                    
                                    
                                    600,597
                                    
                                    
                                    
                                    127.55
                                    %Operating
      Income
                                    
                                    
                                    351,490
                                    
                                    
                                    
                                    103,025
                                    
                                    
                                    
                                    241.17
                                    %Net
      Income
                                    
                                    
                                    149,327
                                    
                                    
                                    
                                    115,383
                                    
                                    
                                    
                                    29.42
                                    %Gross
      Margin
                                    
                                    
                                    3.15
                                    %
                                    
                                    
                                    24.63
                                    %Net
      Margin
                                    
                                    
                                    3.44
                                    %
                                    
                                    
                                    4.73
                                    %
  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 March 31, 2008 were $4,342,117, compared to
$2,438,227 for the same period in 2007, representing an increase of 78.09%. 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
4,590 new residential households to our gas distribution network, resulting in
total connection fees of $1,345,698. Gas sales during the same period amounted
to 9.45 million cubic meters, or $2,987,419. In comparison, we connected 2,260
new residential households to our gas distribution network in 2007, resulting in
total connection fees of $615,336. Gas sales during the period amounted to 6.32
million cubic meters, or $1,822,891.
  For the 3 months ended December 31,2008
                        
                        
                        2007
                        
                        
                        Change(In $ million)
                        
                        US$
                        
                        
                        %
                        
                        
                        US$
                        
                        
                        %
                        
                        
                        %Net
      Revenues
                        
                        
                        4.34
                        
                        
                        
                        100
                        %
                        
                        
                        2.44
                        
                        
                        
                        100
                        %
                        
                        
                        78.09
                        %Connection
      Fees
                        
                        
                        1.35
                        
                        
                        
                        31
                        %
                        
                        
                        0.62
                        
                        
                        
                        25
                        %
                        
                        
                        120.16
                        %Gas
      Sales
                        
                        
                        2.99
                        
                        
                        
                        69
                        %
                        
                        
                        1.82
                        
                        
                        
                        75
                        %
                        
                        
                        63.88
                        %
 
 Connection
Fees
 
 Connection
fees during the three months ended March 31, 2008 were $1.35 million,
representing an increase of 120.16% over the same period of 2007, accounting for
31% of the total net revenue compared with approximately 25% for the same period
in 2007. With regard to the source of connection fees, 100% of total connection
fees came from the development of new residential users. We connected 4,590
residential users during the three months ended March 31, 2008, an increase of
approximately 120.16% from 2007.
  For the 3 months ended March 31,(in US$ millions)
                          
                          2008
                          
                          
                          2007
                          
                          
                          ChangeUS$
                          
                          
                          %
                          
                          
                          US$
                          
                          
                          %
                          
                          
                          %Connection
      Fees
                          
                          
                          1.35
                          
                          
                          
                          100
                          %
                          
                          
                          0.62
                          
                          
                          
                          100
                          %
                          
                          
                          120.16
                          %Residential
      Users
                          
                          
                          1.35
                          
                          
                          
                          100
                          %
                          
                          
                          0.62
                          
                          
                          
                          100
                          %
                          
                          
                          120.16
                          %Industrial
      Users
                          
                          
                          0.00
                          
                          
                          
                          0
                          %
                          
                          
                          0.00
                          
                          
                          
                          0
                          %
                          
                          
                          0
                          %
 
 Such
substantial increase was primarily attributable to the following two
aspects.
  30
  First of
all, 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 March 31, 2008 connected 4050 new
residential households in the three months ended March 31, 2008, resulting in
approximately $1,208,600 to our total connection fees. In comparison, during the
same period of 2007, we connected 1,125 new residential households to our gas
distribution network, resulting in total connection fees of
$615,336.
 
 Secondly,
Quality projects merger was judged to be another important factor in our good
performance. Beijing Chenguang Gas Co., Ltd. (“Beijing Chenguang”), acquired in
January 2007, connected 540 new residential households in the three months ended
March 31, 2008, resulting in approximately $0.146 million to our total
connection fees.
 
 The table
below is a breakdown of our top five customers by connection fees:
 
 Customers
                    
                    Connection Fees:
                      ($ million)Beijing
      Xinchengyuanjing Real Estate Development Co. Ltd
                    
                    
                    0.2748Tangshan
      Shunda Real Estate Development Co.
                    
                    
                    0.2776Zaoqiang
      Taihe Real Estate Development Co.
                    
                    
                    0.223Baishan
      Jiacheng Real Estate Development Co.
                    
                    
                    0.0557Su
      Qian Run Cheng Development Co., Ltd.
                    
                    
                    0.0418
 
 Due to
seasonality effects, the first quarter is usually a weak season for gas
distribution companies in China in terms of recognition of revenue from
connection fees. Construction projects are stopped because of cold weather and
the Chinese New Year holiday. New construction projects are begun only in the
latter part of the quarter, and only a small portion of connection fees are
achieved in this quarter.
 
 Gas
Sales
 
 In terms
of volume, we sold 9.45 million cubic meters of natural gas during the three
months ended March 31, 2008, compared with 6.32 million cubic meters in 2007. In
terms of value, gas sales were $2.99 million during the three months ended March
31, 2008, accounting for 69% of total net revenue in 2008, representing an
increase of 63.88% 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 3 months ended March 31,2008
                        
                        
                        2007
                        
                        
                        Change($ million)
                        
                        US$
                        
                        
                        %
                        
                        
                        US$
                        
                        
                        %
                        
                        
                        %Gas
      Sales
                        
                        
                        2.99
                        
                        
                        
                        100
                        %
                        
                        
                        1.82
                        
                        
                        
                        100
                        %
                        
                        
                        63.88
                        %Residential
      Users
                        
                        
                        0.64
                        
                        
                        
                        22
                        %
                        
                        
                        0.55
                        
                        
                        
                        25
                        %
                        
                        
                        16.51
                        %Industrial
      Users
                        
                        
                        0.89
                        
                        
                        
                        36
                        %
                        
                        
                        0.44
                        
                        
                        
                        24
                        %
                        
                        
                        100.25
                        %Commercial
      Users
                        
                        
                        1.47
                        
                        
                        
                        42
                        %
                        
                        
                        0.83
                        
                        
                        
                        50
                        %
                        
                        
                        75.70
                        %
 
 Such
substantial increase was primarily attributable to the following two
aspects.
 
 First of
all, our invested projects maintained steady and rapid development. During the
three months ended March 31, 2008, 4.3299 million cubic meters of gas were sold,
resulting in approximately $1.504 million, 74.76% of our total gas sales. In
comparison, during the same period of last year, 6.22 million cubic meters of
gas were sold, resulting in approximately $1.8 million.
  31
  Secondly,
Quality projects merger was judged to be another important factor in our good
performance. Beijing Chenguang Gas Co., Ltd. (“Beijing Chenguang”), acquired in
January 2007, sold 5.1168 million cubic meters of gas during the three months
ended March 31 2008, resulting in approximately $1.4834 million, 49.66% of our
total gas sales.
 
 The table
below is a breakdown of our major industrial customers for gas consumption in
the first quarter of 2008.
 
 Residential Customers
                    
                    Gas Usage
                      (million
                      cubic
                      meters)
                    
                    Gas Usage
                      ($ million)Hebei Zhonggang
      Steel Co., Ltd.
                    
                    
                    1.9407
                    
                    0.6294Tangshan
      Changsheng Ceramic Factory
                    
                    
                    0.1721
                    
                    0.0541Elite
      (Langfang) Textile Corporation
                    
                    
                    0.0992
                    
                    0.0298The
      First Machine Factory of Huabei Petrol Bureau
                    
                    
                    0.391
                    
                    0.128Hebei
      Jihengyuan Group Ltd.
                    
                    
                    0.1021
                    
                    0.0428
 
 Gas sales
of $0.6294 million were contributed by a single industrial project, 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
1.9407 million cubic meters during the three months ended March 31, 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 lower percentage of our total sales, though gas sales in
absolute value remained relative stable throughout the year. Sales from
industrial users are nearly more than 60% higher than that from residential
users, due to much larger consumption of natural gas by industrial users.
As our customer base grows, gas sales from residential users would increase
gradually.
 
 Cost
of Revenues
 
 Cost of
revenues for the three months ended March 31, 2008, which includes cost of
connection and cost of gas sales was $2.98 million, an increase of 61.92%, from
$1.84 million in the same period of 2007.
  For the 3 months ended March 31,2008
                      
                      
                      2007
                      
                      
                      Change($ million)
                      
                      US$
                      
                      
                      %
                      
                      
                      US$
                      
                      
                      %
                      
                      
                      %Cost
      of Revenues
                      
                      
                      2.98
                      
                      
                      
                      100
                      %
                      
                      
                      1.84
                      
                      
                      
                      100
                      %
                      
                      
                      61.92
                      %Connection
      Cost
                      
                      
                      0.43
                      
                      
                      
                      14
                      %
                      
                      
                      0.12
                      
                      
                      
                      7
                      %
                      
                      
                      246.03
                      %Gas
      Cost
                      
                      
                      2.55
                      
                      
                      
                      86
                      %
                      
                      
                      1.71
                      
                      
                      
                      93
                      %
                      
                      
                      48.57
                      %
 
 Cost of
Connection
  Our cost
of connection during the three months ended March 31, 2008 was $0.43 million, or
14% of total cost of revenues. By comparison, the cost of connection during the
same period of 2007 was $0.12 million, or 7% of total cost of
revenue.
 
 Cost of
connection increased around 246.03% 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 120% from the same period in
2007.
  32
  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 48.57% to $2.55 million during the three months ended
March 31, 2008 from the same period in 2007, when it was $1.71 million. This
increase is largely due to the increase of gas sales which increased
63.86%.
 
 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 March 31,
2008:
 
 Gas Supplier
                  
                  Gas Purchase
                    (million cubic
                    meters)
                  
                  Gas Purchase
                    ($ million)North China Oil Field Fourth Oil Extraction Plant
      of Petro China
                  
                  
                  1.84
                  
                  0.41Tianjin
      Dagang Oilfield Transportation Co., Ltd.
                  
                  
                  0.35
                  
                  0.09Henan
      Zhong Yuan Green Energy High-Tech Co., Ltd.
                  
                  
                  0.15
                  
                  0.06Hebei
      Natural Gas Co. Ltd
                  
                  
                  0.33
                  
                  0.07
 
 Gross
Profit
 
 Gross
income increased from $0.6 million in 2007 to $1.37 million for
2008.
  For the 3 months ended March 31,2008
                            
                            
                            2007
                            
                            
                            Change($ million)
                            
                            US$
                            
                            
                            %
                            
                            
                            US$
                            
                            
                            %
                            
                            
                            %Gross
      Profit
                            
                            
                            1.37
                            
                            
                            
                            100
                            %
                            
                            
                            0.60
                            
                            
                            
                            100
                            %
                            
                            
                            127.55
                            %Connection
                            
                            
                            0.92
                            
                            
                            
                            67
                            %
                            
                            
                            0.49
                            
                            
                            
                            82
                            %
                            
                            
                            88.52
                            %Gas
                            
                            
                            0.44
                            
                            
                            
                            33
                            %
                            
                            
                            0.11
                            
                            
                            
                            18
                            %
                            
                            
                            303.53
                            %
 
 During
the three months ended Mar 31, 2008, gross profit was $1.37 million, an increase
of approximately 127.55% from the same period of 2007. Gross profit from
connection fees is $0.92 million for the first three months of 2007, accounting
for 67% of total gross profit. In comparison, gross profit from connection fees
was $0.49 million for the three months of 2007, accounting for 82% of total
gross profit. Gross profit from gas sales was $0.44 million, accounting for 33%
of total gross profit, compared to $0.11 million, 18% of total gross profit in
the same period of 2007.
  33
  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 Mar 31, 2008 were
$181,700 and approximately 4.18% of our net revenues, compared with $56ô190, or
2.3 % of net revenues in the same period of 2007.
 
 In 2007,
we acquired Beijing Chenguang which owns four subsidiaries and Guannan Weiye,
and we incorporated five new subsidiaries. The expansion of our company led to
greatly 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 $0.83 million for the three months ended Mar
31, 2008, which was 88.83% higher than $0.44 million for the same period last
year.
 
 The
increase was largely due to our new 6 subsidiaries incorporated in the second
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.
 
 Operating
Income
 
 The
operating income for the three months ended Mar31, 2008 was $0.35 million,
representing an increase of 241.74%, compared to the operating income of $0.1
million in 2007.
 
 Our
company enjoyed a satisfying performance due to a prominent increase in revenues
and a faster revenues growth than general and administrative expenses
growth.
 
 Income
tax
  Income
tax was $0.17 million for the three months ended Mar 31, 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.
  34
  Net
Income
 
 Net
income in the three months ended Mar 31, 2008 was $0.15 million, representing an
increase of 29% from $0.12 million in the same period in 2007. The increase can
be attributed to the continued growth of our existing markets and the
acquisitions we have made.
 
 Cash
and cash equivalents
 
 Cash
sourced in financing activities during the three months ended Mar 31, 2008 is
$4.39 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 used
in operating activities during the three months ended Mar 31, 2008 is $5.88
million, which is due to our effective management of accounts
receivable.
 
 Cash used
in investing activities during the three months ended Mar 31, 2008 is $3.00
million. We used the funds raised for project developments.
 
 Accounts
Receivable
 
 Accounts
receivable during the three months as of March 31, 2008 were $6.16 million,
representing a decrease of $1.15 million from $7.31 million in 2007. The
decrease was due to the fact that we attach great importance to the management
and control of accounts receivable.
 
 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 $0.58 million as of March 31, 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 $0.24 million as of March 31, 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 $1.04 million as of March 31, 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 $0.4656 million of car insurance, parking fee and prepaid rent will be
amortized in one year.
  35
  Other
Receivable
 
 Other
receivable of $9.8496 million includes expenses due to the internal business
activities, employees’ borrowing, the funds for business turnover 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 $26.85 million in the first quarter of 2008,
causing an increase of $2.28 in comparison with the same period of 2007.
 Construction
in process: $12.83 million was fully utilized for constructing the gas stations
and gas distribution network where our major investment was put.
 Intangible
assets: $2.11 million was used for land using rights of all gas stations,
franchise and goodwill etc.
 
 Liabilities
 
 $7.12
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 first quarter of 2008 and operating tax for
the month of March and was prepaid in April, 2008.
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk
 
 Not
required.
  Item
4. Controls and Procedures
 
 Management’s
Report of Internal Control and Disclosure Controls and Procedures 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
March 31, 2008, using the criteria in the Internal Control-Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on that evaluation, our management concluded
that, as of March 31, 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.
  36
  (2) Our
Internal Audit Department has not taken an active role in the conduct of its
activities due to insufficient resources. The annual plan, budget, and specific
procedures to perform the internal audit function has not been developed, and
the anti-fraud audit plan has not been developed either.
 
 (3) Our
Audit Committee was not comprised of sufficient independent directors who are
"independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act. Our Audit Committee did not appoint a member who qualifies as an
"audit committee financial expert" as defined in Item 401(e) of Regulation S-B.
Our written Audit Committee Charter was not submitted to the Boards for
approval.
 
 (4) Our
Company did not formulate a Related Party Transactions Policy and develop a
master list of all Related Parties.
 
 Management’s
Plan for Remediation of Material Weaknesses
 
 In light
of the conclusion that our Company’s internal control over financial reporting
was not effective, our management has worked, and will continue to work, to
address these weaknesses in our internal control over financial reporting.
Implementations of certain remedial measures include the following:
 
 (1) We
are going to issue the Code, and arrange respective training to all the
employees in the near future. Training which includes the content of the Code
will be provided to new employees at the time of hiring. All the employees will
be required to sign an affidavit acknowledging that the employee has read and
will intend to comply with the Code;
 
 (2) The
management is committed to develop a comprehensive and risk-based internal audit
function within the Company. With the limited human capital supplies in the
market, we have engaged a third party professional to assist the management in
establishing the internal control system. At the same time, we have enhanced our
efforts of recruitment and interviews are undergoing. We expect that an internal
audit department will be set up in the near future. With the continuous
assistance from the third party professional, the roles and responsibilities of
the internal audit department will be formulated and a risk-based internal audit
plan will be developed and approved by the Audit Committee within a month after
the set up.
 
 (3) The
Board of Directors has appointed Mr. Zhang Xin Min on March 10, 2008, Mr. Zhang
serves as a financial expert of Audit Committee and will provide
oversight/monitoring over our financial reporting mechanism.
 
 (4)
Compensation Committee Charter, Audit Committee Charter and Related Party
Transactions Policy have been drafted in February, 2008, and will be approved by
the Board of Directors and become effective in the second quarter.
 
 Under the
supervision of and with the participation of our Chief Executive Officer and our
Chief Financial Officer, our management conducted its evaluation of the
effectiveness of our Company's disclosure controls and procedures for the
quarter ended March 31, 2008 and concluded that our disclosure controls and
procedures were not effective for the quarter ended March 31, 2008 due to the material weaknesses described above.
 
 Changes
in Internal Control over Financial Reporting
  Other
than the remediation measures described above, during the period ended March 31,
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.
  37
  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
 
 Item
6.  Exhibits
  The
following exhibits are hereby filed as part of this Quarterly Report on Form
10-Q Amendment No. 2.
  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
  38
  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 Amendment No. 2 to be signed on its behalf by the undersigned,
thereunto duly authorized, in Beijing.
  SINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      December 29, 2008
                        By:
                        /s/ Yuchuan
      LiuYuchuan
      LiuChairman
      and Chief Executive
Officer
  SINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      December 29, 2008
                    By:
                    /s/ Yugang
      ZhangYugang
      ZhangChief
      Financial Officer
  39