U.S. SECURITIES AND EXCHANGE
COMMISSION


Washington,
D.C. 20549







AMENDMENT NO. 1
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 June 30, 2008




or




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




Commission
File Number 000-51364









SINO
GAS INTERNATIONAL HOLDINGS, INC.


(Name of
small business issuer in its charter)




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





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




Issuer’s
telephone number:  86-10-82600527







Check
whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.    Yes 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
August 13, 2008, the Registrant had 25,084,644 shares of common stock
outstanding.





EXPLANATORY
NOTE


This
Amendment No. 1 to our quarterly report on Form 10-Q for the fiscal quarter
ended June 30, 2008 initially filed with the Securities and Exchange Commission
(“SEC”) on August 14, 2008 is being filed in response to SEC’s comment letter
dated September 5, 2008.









Sino Gas
International Holdings, Inc.




Table of
Contents




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









PART I - FINANCIAL
INFORMATION




Sino
Gas International Holdings, Inc.
 
 Reviewed
Financial Statements
 
 June
30, 2008 and December 31, 2007
 
 (Stated
in US Dollars)
 
 
  SINO GAS INTERNATIONAL
HOLDINGS, INC.
 
 CONTENTS
                  
                  PAGESINDEPENDENT
      AUDITOR’S REPORT
                  
                  1CONSOLIDATED
      BALANCE SHEETS
                  
                  2 –
      3CONSOLIDATED
      STATEMENTS OF INCOME
                  
                  4CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY
                  
                  5CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                  
                  6NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                  
                  7 –
      28
  
  Board of
Directors and Stockholders
 Sino Gas
International Holdings, Inc.
 
 Report of Independent
Registered Public Accounting Firm
 
 We have
reviewed the accompanying consolidated interim balance sheets of Sino Gas
International Holdings, Inc. as of June 30, 2008 and December 31, 2007, and the
related consolidated statements of income, stockholders’ equity, and cash flows
for the three-month and six-month periods ended June 30, 2008 and 2007. These
consolidated interim financial statements are the responsibility of the
Company's management.
 
 We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
statements consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
 
 South
      San Francisco, California
                  Samuel
      H. Wong & Co., LLPJuly
      30, 2008
                  Certified
      Public Accountants
  1
 
 Sino
Gas International Holdings, Inc.
 Consolidated
Balance Sheets
 As
of June 30, 2008 and December 31, 2007
 (Stated
in US Dollars)
  June 30, 2008
                    
                    
                    December 31, 2007Note
                    
                    
                    Unaudited
                    
                    
                    AuditedASSETSCurrent
      AssetsCash
      & cash equivalents
                    
                    
                    2(e)
                    
                    
                    $
                    8,152,907
                    
                    
                    $
                    10,915,590Restricted
      cash
                    
                    
                    3
                    
                    
                    
                    739,868
                    
                    
                    
                    478,920Notes
      receivable
                    
                    
                    
                    
                    
                    
                    283,768
                    
                    
                    
                    825,119Accounts
      receivable
                    
                    
                    2(f),4
                    
                    
                    
                    5,933,183
                    
                    
                    
                    7,315,253Inventory
                    
                    
                    
                    
                    
                    
                    276,252
                    
                    
                    
                    207,976Advances
      to suppliers
                    
                    
                    2(g)
                    
                    
                    
                    2,892,084
                    
                    
                    
                    27,372Prepayments
      and others
                    
                    
                    
                    
                    
                    
                    474,083
                    
                    
                    
                    320,380Other
      receivables
                    
                    
                    5
                    
                    
                    
                    6,486,784
                    
                    
                    
                    3,100,695Total
      Current Assets
                    
                    
                    
                    
                    
                    
                    25,238,929
                    
                    
                    
                    23,191,305Non-Current
      AssetsInvestment
                    
                    
                    2(h)
                    
                    
                    
                    4,382,417
                    
                    
                    
                    4,007,310Property,
      plant & equipment, net
                    
                    
                    2(j),6
                    
                    
                    
                    26,494,692
                    
                    
                    
                    24,572,565Construction
      in progress
                    
                    
                    2(l)
                    
                    
                    
                    14,694,005
                    
                    
                    
                    11,556,820Intangible
      assets, net
                    
                    
                    2(k),7
                    
                    
                    
                    2,189,172
                    
                    
                    
                    2,028,250Total
      non-current assets
                    
                    
                    
                    
                    
                    
                    47,760,286
                    
                    
                    
                    42,164,945TOTAL
      ASSETS
                    
                    
                    
                    
                    
                    $
                    72,999,215
                    
                    
                    $
                    65,356,250LIABILITIES
      & STOCKHOLDERS' EQUITYCurrent
      LiabilitiesBank
      Loans
                    
                    
                    8
                    
                    
                    $
                    7,276,114
                    
                    
                    $
                    2,734,444Accounts
      payable
                    
                    
                    
                    
                    
                    
                    5,147,415
                    
                    
                    
                    716,707Other
      payables
                    
                    
                    9
                    
                    
                    
                    6,597,092
                    
                    
                    
                    10,383,657Unearned
      revenue
                    
                    
                    2(m)
                    
                    
                    
                    757,261
                    
                    
                    
                    312,573Accrued
      liabilities
                    
                    
                    
                    
                    
                    
                    4,204
                    
                    
                    
                    362,263Total
      current liabilities
                    
                    
                    
                    
                    
                    
                    19,782,086
                    
                    
                    
                    14,509,644TOTAL
      LIABILITIES
                    
                    
                    
                    
                    
                    $
                    19,782,086
                    
                    
                    $
                    14,509,644
 
 See
accompanying notes to financial statements and accountant’s
report
  2
  Sino
Gas International Holdings, Inc.
 Consolidated
Balance Sheets
 As
of June 30, 2008 and December 31, 2007
 (Stated
in US Dollars)
 
 STOCKHOLDERS'
      EQUITYPreferred
      Stock A US $0.001 par value; 20,000,000 shares authorized; 275,111 shares
      issued and outstanding as of June 30, 2008 and December 31,
      2007
                                      
                                      
                                      10
                                      
                                      
                                      $
                                      275
                                      
                                      
                                      $
                                      275Preferred
      Stock B US $0.001 par value; 5,000,000 shares authorized; 4,764,486 and
      4,971,859 shares issued and outstanding as of June 30, 2008 and December
      31, 2007
                                      
                                      
                                      10
                                      
                                      
                                      
                                      4,765
                                      
                                      
                                      
                                      4,972Common
      Stock US $0.001 par value; 250,000,000 shares authorized; 25,489,753 and
      25,282,380 shares issued and outstanding as of June 30, 2008 and December
      31, 2007
                                      
                                      
                                      10
                                      
                                      
                                      
                                      25,490
                                      
                                      
                                      
                                      25,283Additional
      Paid in Capital
                                      
                                      
                                      
                                      
                                      
                                      
                                      35,247,303
                                      
                                      
                                      
                                      35,247,303Statutory
      Reserve
                                      
                                      
                                      
                                      
                                      
                                      
                                      3,258,201
                                      
                                      
                                      
                                      3,258,201Retained
      Earnings
                                      
                                      
                                      
                                      
                                      
                                      
                                      10,044,869
                                      
                                      
                                      
                                      10,432,430Accumulated Other Comprehensive Income
                                      
                                      
                                      
                                      
                                      
                                      
                                      4,636,225
                                      
                                      
                                      
                                      1,878,142TOTAL
      STOCKHOLDERS' EQUITY
                                      
                                      
                                      
                                      
                                      
                                      
                                      53,217,129
                                      
                                      
                                      
                                      50,846,606TOTAL
      LIABILITIES ANDSTOCKHOLDERS'
      EQUITY
                                      
                                      
                                      
                                      
                                      
                                      $
                                      72,999,215
                                      
                                      
                                      $
                                      65,356,250
 
 See
accompanying notes to financial statements and accountant’s
report
  3
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Income
 For
the three months and six months periods ended June 30, 2008 and
2007
 (Stated
in US Dollars)
 
 Three Months Ended
                      
                      
                      Six Months EndedJune 30,
                      
                      
                      June 30,Notes
                      
                      2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007Revenues
                      
                      $
                      5,121,521
                      
                      
                      $
                      2,796,145
                      
                      
                      $
                      9,463,638
                      
                      
                      $
                      5,234,372Cost
      of revenues
                      
                      
                      (3,554,592
                      )
                      
                      
                      (1,894,203
                      )
                      
                      
                      (6,530,063
                      )
                      
                      
                      (3,731,833
                      )Gross
      Profit
                      
                      
                      1,566,930
                      
                      
                      
                      901,942
                      
                      
                      
                      2,933,575
                      
                      
                      
                      1,502,539Operating
      ExpensesSelling
      and marketing expenses
                      
                      
                      (186,193
                      )
                      
                      
                      (143,296
                      )
                      
                      
                      (367,896
                      )
                      
                      
                      (199,494
                      )General
      & administrative expenses
                      
                      
                      (1,163,429
                      )
                      
                      
                      (247,485
                      )
                      
                      
                      (1,996,879
                      )
                      
                      
                      (688,859
                      )Total
      operating expenses
                      
                      
                      (1,349,621
                      )
                      
                      
                      (390,781
                      )
                      
                      
                      (2,364,776
                      )
                      
                      
                      (888,353
                      )Operating
      Income/(Loss)
                      
                      
                      217,308
                      
                      
                      
                      511,161
                      
                      
                      
                      568,799
                      
                      
                      
                      614,186Other
      income
                      
                      
                      1,269
                      
                      
                      
                      
                      
                      
                      
                      1,269
                      
                      
                      
                      11,781Other
      expenses
                      
                      
                      (483,081
                      )
                      
                      
                      (34,789
                      )
                      
                      
                      (483,926
                      )
                      
                      
                      (11,977
                      )Interest
      income
                      
                      
                      12,496
                      
                      
                      
                      38,920
                      
                      
                      
                      45,662
                      
                      
                      
                      33,550Interest
      expense
                      
                      
                      (156,100
                      )
                      
                      
                      
                      
                      
                      
                      (216,567
                      )
                      
                      
                      -Total
      other income (expense)
                      
                      
                      (625,416
                      )
                      
                      
                      4,131
                      
                      
                      
                      (653,562
                      )
                      
                      
                      33,354Earnings
      before tax
                      
                      
                      (408,107
                      )
                      
                      
                      515,292
                      
                      
                      
                      (84,763
                      )
                      
                      
                      647,540Income
      tax
                      
                      
                      (128,781
                      )
                      
                      
                      (10,478
                      )
                      
                      
                      (302,798
                      )
                      
                      
                      (27,343
                      )Net
      Income
                      
                      $
                      (536,888
                      )
                      
                      $
                      504,814
                      
                      
                      $
                      (387,561
                      )
                      
                      $
                      620,197Earnings
      per shareBasic
                      
                      $
                      (0.021
                      )
                      
                      $
                      0.03
                      
                      
                      $
                      (0.015
                      )
                      
                      $
                      0.04Diluted
                      
                      
                      (0.018
                      )
                      
                      
                      0.03
                      
                      
                      
                      (0.013
                      )
                      
                      
                      0.03Weighted
      Average Shares OutstandingBasic
                      
                      
                      25,312,896
                      
                      
                      
                      15,273,626
                      
                      
                      
                      25,297,638
                      
                      
                      
                      15,216,279Diluted
                      
                      
                      30,529,350
                      
                      
                      
                      19,360,386
                      
                      
                      
                      30,529,350
                      
                      
                      
                      19,486,791
 
 See
accompanying notes to financial statements and accountant’s
report
  4
  Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Stockholders’ Equity
 As
of June 30, 2008 and December 31, 2007
 (Stated
in US Dollars)
 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
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (387,561
                              )
                              
                              
                              -
                              
                              
                              
                              (387,561
                              )Conversion
      of Stock
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (207,373
                              )
                              
                              
                              (207
                              )
                              
                              
                              207,373
                              
                              
                              
                              207
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Appropriations
      of Retained Earnings
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Foreign
      Currency Translation Adjustment
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,758,083
                              
                              
                              
                              2,758,083Balance,
      June 30, 2008
                              
                              
                              275,111
                              
                              
                              
                              275
                              
                              
                              
                              4,764,486
                              
                              
                              
                              4,765
                              
                              
                              
                              25,489,753
                              
                              
                              
                              25,490
                              
                              
                              
                              35,247,303
                              
                              
                              
                              3,258,201
                              
                              
                              
                              10,044,869
                              
                              
                              
                              4,636,225
                              
                              
                              
                              53,217,129
 
 Accumulated Comprehensive
      Income12/31/2007
                                  
                                  
                                  6/30/2008
                                  
                                  
                                  TotalComprehensive IncomeNet
      Income
                                  
                                  
                                  7,707,370
                                  
                                  
                                  
                                  (387,561
                                  )
                                  
                                  
                                  7,319,809Other Comprehensive IncomeForeign
      Currency Translation Adjustment
                                  
                                  
                                  1,053,846
                                  
                                  
                                  
                                  2,758,083
                                  
                                  
                                  
                                  3,811,9298,761,216
                                  
                                  
                                  
                                  2,370,522
                                  
                                  
                                  
                                  11,131,738
  See
accompanying notes to financial statements and accountant’s
report
  5
 
 Sino
Gas International Holdings, Inc.
 Consolidated
Statements of Cash Flows
 For
the three months and six months periods ended June 30, 2008 and
2007
 (Stated
in US Dollars)
 
 Three Months Ended
                            
                            
                            Six Months EndedJune 30,
                            
                            
                            June 30,2008
                            
                            
                            2007
                            
                            
                            2008
                            
                            
                            2007Cash
      flow from operating activitiesNet
      Income
                            
                            
                            (536,888
                            )
                            
                            
                            504,814
                            
                            
                            
                            (387,561
                            )
                            
                            
                            620,197Depreciation
      expense
                            
                            
                            218,405
                            
                            
                            
                            657,609
                            
                            
                            
                            858,653
                            
                            
                            
                            696,453Amortization
      expense
                            
                            
                            14,463
                            
                            
                            
                            467
                            
                            
                            
                            43,995
                            
                            
                            
                            467Invested
      in restricted time deposits
                            
                            
                            (75,807
                            )
                            
                            
                            -
                            
                            
                            
                            (260,948
                            )
                            
                            
                            3,124,541Decrease/(increase)
      in accounts and other receivables
                            
                            
                            3,894,981
                            
                            
                            
                            (940,846
                            )
                            
                            
                            (1,462,668
                            )
                            
                            
                            (630,427
                            )Increase
      in inventory
                            
                            
                            (29,360
                            )
                            
                            
                            (57,690
                            )
                            
                            
                            (68,276
                            )
                            
                            
                            (57,690
                            )Increase
      in prepaid expenses
                            
                            
                            (2,186,986
                            )
                            
                            
                            -
                            
                            
                            
                            (3,018,416
                            )
                            
                            
                            -Increase
      in accounts and other payables
                            
                            
                            1,018,505
                            
                            
                            
                            (3,903
                            )
                            
                            
                            730,773
                            
                            
                            
                            3,019,392Cash
      sourced/(used) in operating activities
                            
                            
                            2,317,312
                            
                            
                            
                            160,451
                            
                            
                            
                            (3,564,449
                            )
                            
                            
                            6,772,933Cash
      flows from investing activitiesCash
      received/paid for investment proceeds
                            
                            
                            (1,679,262
                            )
                            
                            
                            930,801
                            
                            
                            
                            (375,108
                            )
                            
                            
                            -(Purchase)/disposal
      of property, plant & equipment
                            
                            
                            139,869
                            
                            
                            
                            (1,412,955
                            )
                            
                            
                            (2,780,780
                            )
                            
                            
                            (4,733,643
                            )(Purchase)/disposal
      of intangible assets
                            
                            
                            (91,297
                            )
                            
                            
                            479,373
                            
                            
                            
                            (204,917
                            )
                            
                            
                            307,163Acquisition
      of subsidiaries
                            
                            
                            -
                            
                            
                            
                            (173,167
                            )
                            
                            
                            -
                            
                            
                            
                            (173,167
                            )Increase
      in minority interest
                            
                            
                            -
                            
                            
                            
                            65,575
                            
                            
                            
                            -
                            
                            
                            
                            65,575Increase
      in construction in progress
                            
                            
                            (1,863,062
                            )
                            
                            
                            (1,471,000
                            )
                            
                            
                            (3,137,183
                            )
                            
                            
                            (2,816,436
                            )Cash
      sourced/(used) in investing activities
                            
                            
                            (3,493,752
                            )
                            
                            
                            (1,581,373
                            )
                            
                            
                            (6,497,988
                            )
                            
                            
                            (7,350,508
                            )Cash
      flows from financing activitiesProceeds
      from bank borrowings
                            
                            
                            155,838
                            
                            
                            
                            2,623,020
                            
                            
                            
                            4,541,670
                            
                            
                            
                            192,575Issue
      of share capital
                            
                            
                            -
                            
                            
                            
                            2,587,759
                            
                            
                            
                            -
                            
                            
                            
                            2,587,759Cash
      sourced/(used) in financing activities
                            
                            
                            155,838
                            
                            
                            
                            5,210,779
                            
                            
                            
                            4,541,670
                            
                            
                            
                            2,780,334Net
      increase/(decrease) in cash & cash equivalents for the
      year
                            
                            
                            (1,020,603
                            )
                            
                            
                            3,789,858
                            
                            
                            
                            (5,520,767
                            )
                            
                            
                            2,202,760Effect
      of Currency Translation on cash and cash equivalents
                            
                            
                            1,152,297
                            
                            
                            
                            518,617
                            
                            
                            
                            2,758,083
                            
                            
                            
                            812,206Cash
      & Cash Equivalents - Beginning of Year
                            
                            
                            8,021,212
                            
                            
                            
                            2,345,164
                            
                            
                            
                            10,915,590
                            
                            
                            
                            3,638,673Cash
      & Cash Equivalents - End of Year
                            
                            
                            8,152,907
                            
                            
                            
                            6,653,639
                            
                            
                            
                            8,152,907
                            
                            
                            
                            6,653,639Supplementary
      cash flow informationInterest
      received
                            
                            $
                            12,496
                            
                            
                            $
                            3,931
                            
                            
                            $
                            45,662
                            
                            
                            $
                            98,584Interest
      paid
                            
                            
                            156,900
                            
                            
                            
                            10,993
                            
                            
                            
                            217,367
                            
                            
                            
                            54,610Income
      tax paid
                            
                            
                            123,005
                            
                            
                            
                            10,478
                            
                            
                            
                            123,005
                            
                            
                            
                            27,343
 
 See
accompanying notes to financial statements and accountant’s report
  6
  Sino
Gas International Holdings, Inc.
 Notes
to Consolidated Financial Statements
 For
the three months and six months periods ended June 30, 2008 and
2007
 
 1.  ORGANIZATION AND PRINCIPAL
ACTIVITIES
 
 Sino Gas
International Holdings, Inc. (“the Company”) was incorporated under the laws of
the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company
changed its name to American Arms, Inc. on April 5, 1984, and then changed its
name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name to
Sino Gas International Holdings, Inc. on November 17, 2006.
 
 On
September 7, 2006, the Company underwent a reverse-merger with Gas Investment
China Ltd. (“GIC”), an International Business Company incorporated in the
British Virgin Islands, and its wholly-owned subsidiaries, involving an exchange
of shares whereby the Company issued an aggregate of 14,361,646 shares to the
shareholders of GIC in exchange for all of the issued and outstanding shares of
GIC. For financial reporting purposes, this transaction is classified as a
recapitalization of Sino Gas International Holdings, Inc. (Legal acquirer,
accounting acquiree) and the historical financial statements of Gas Investment
China Co. Ltd. (Legal acquiree, accounting acquirer)
 
 The
Company is a natural gas services operator, principally engaging in the
investment, operation and management of city gas pipeline infrastructure, in the
distribution of natural gas to residential and industrial users, in the
construction and operation gas stations, and in the development and application
of natural gas related technologies. The Company owns and operates 24 natural
gas distribution systems serving approximately 87,500 residential and five
commercial and industrial customers. The Company’s facilities include
approximately 700 kilometers of pipeline and delivery networks (including
delivery trucks) with a designed daily capacity of approximately 70,000 cubic
meters of natural gas.
 
 The
common stock of the Company is currently quoted on the National Association of
Securities Dealers' Over-the-Counter Bulletin Board under the symbol
“SGAS”.
 
 Basis of Presentation and
Organization
 
 The
Company’s consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“US GAAP”).
  This
basis of accounting differs in certain material respects from that used for the
preparation of the books of account of the Company’s principal subsidiaries,
which are prepared in accordance with the accounting principles and the relevant
financial regulations applicable to enterprises with limited liabilities
established in the PRC (“PRC GAAP”) or in the accounting standards used in the
places of their domicile. The accompanying consolidated financial statements
reflect necessary adjustments not recorded in the books of account of the
Company’s subsidiaries to present them in conformity with US
GAAP.
  7
  2.  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 
 (a)
Method of
Accounting
 
 The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States of
America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.
 
 (b) Use of
estimates
 
 The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the best
information available at the time the estimates are made; however actual results
could differ materially from those estimates.
 
 (c) Economic
and political risks
 
 The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
  The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
 
 (d)
Principles of
Consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
subsidiaries (“the Group”). Significant inter-company transactions have been
eliminated in consolidation. Investments in which the company has a 20 percent
to 50 percent voting interest and where the company exercises significant
influence over the investor are accounted for using the equity
method.
  8
  The
Company owned its subsidiaries soon after its inception and continued to acquire
and own the equity interests throughout the reporting periods. The following
table depicts the identities of the consolidating subsidiaries as of March 31,
2008 and December 31, 2007 (whichever applicable 2007).
 
 Name of Company
                              
                              Place of Incorporation
                              
                              Date of Incorporation
                              
                              Beneficiary
                                interest %
                              
                              Equity
                                Interest %
                              
                              Registered
                                CapitalThe BritishGAS
      Investment China Co., Ltd.
                              
                              Virgin
      Islands
                              
                              6/19/2003
                              
                              100
                              
                              100
                              
                              USD
      10,000,000The
      BritishSino
      Gas Construction Limited
                              
                              Virgin
      Islands
                              
                              1/9/2007
                              
                              100
                              
                              100
                              
                              USD
      50,000Sino
      Gas Investment Development Limited
                              
                              The
      British
                                Virgin
      Islands
                              
                              1/9/2007
                              
                              100
                              
                              100
                              
                              USD
      50,000Beijing
      Zhong Ran Wei Ye Gas Co., Ltd
                              
                              PRC
                              
                              8/29/2001
                              
                              100
                              
                              100
                              
                              RMB
      150,000,000Peixian
      Weiye Gas Co., Ltd
                              
                              PRC
                              
                              8/22/2005
                              
                              100
                              
                              90
                              
                              RMB
      5,000,000Sihong
      Weiye Gas Co., Ltd
                              
                              PRC
                              
                              12/3/2004
                              
                              100
                              
                              95
                              
                              RMB
      10,000,000Wuhe
      Weiye Gas Co., Ltd
                              
                              PRC
                              
                              1/30/2007
                              
                              100
                              
                              100
                              
                              RMB
      3,000,000Changli
      Weiye Gas Co., Ltd
                              
                              PRC
                              
                              12/8/2006
                              
                              100
                              
                              100
                              
                              RMB
      3,000,000Yutian
      Zhongran Weiye Gas Co., Ltd
                              
                              PRC
                              
                              12/19/2003
                              
                              100
                              
                              90
                              
                              RMB
      3,000,000Yuxian
      Jinli Gas Co., Ltd
                              
                              PRC
                              
                              11/8/2005
                              
                              100
                              
                              100
                              
                              RMB
      9,500,000Zhangjiakou
      City Xiahuayuan Jinli Gas Co., Ltd.
                              
                              PRC
                              
                              9/30/2005
                              
                              100
                              
                              100
                              
                              RMB
      2,000,000Wuqiao
      Gas Co., Ltd
                              
                              PRC
                              
                              6/30/2004
                              
                              100
                              
                              95
                              
                              RMB
      2,000,000
  9
 
 Jinzhou
      Weiye Gas Co., Ltd
                        
                        PRC
                        
                        7/19/2004
                        
                        100
                        
                        95
                        
                        RMB
      5,000,000Shenzhou
      Weiye Gas Co., Ltd
                        
                        PRC
                        
                        12/23/2005
                        
                        100
                        
                        95
                        
                        RMB
      3,000,000Ningjin
      Weiye Gas Co., Ltd
                        
                        PRC
                        
                        12/3/2003
                        
                        100
                        
                        95
                        
                        RMB
      3,000,000Linzhang
      Weiye Gas Co., Ltd
                        
                        PRC
                        
                        7/6/2005
                        
                        100
                        
                        85
                        
                        RMB
      1,000,000Hengshui
      Weiye Gas Co., Ltd
                        
                        PRC
                        
                        12/20/2005
                        
                        100
                        
                        100
                        
                        RMB
      3,000,000Longyao
      Zhongran Weiye Gas Co., Ltd
                        
                        PRC
                        
                        10/13/2005
                        
                        100
                        
                        95
                        
                        RMB
      3,000,0009Xingtang
      Weiye Gas Co., Ltd
                        
                        PRC
                        
                        2/18/2004
                        
                        100
                        
                        95
                        
                        RMB
      3,000,000Gucheng
      Weiye Gas Co., Ltd
                        
                        PRC
                        
                        3/21/2007
                        
                        100
                        
                        100
                        
                        RMB
      3,000,000Langfang
      Development Region Weiye dangerous Goods Transportation Co.,
      Ltd
                        
                        PRC
                        
                        3/22/2005
                        
                        100
                        
                        95
                        
                        RMB
      1,000,000Beijing
      Chenguang Gas Ltd.
                        
                        PRC
                        
                        10/30/2002
                        
                        100
                        
                        100
                        
                        RMB
      20,000,000Xinji
      Zhongchen Gas Co., Ltd
                        
                        PRC
                        
                        2/7/2007
                        
                        100
                        
                        100
                        
                        RMB
      3,000,000Shijiazhuang
      Chenguang Gas Co., Ltd
                        
                        PRC
                        
                        6/14/2007
                        
                        100
                        
                        100
                        
                        RMB
      2,000,000Luquan
      Chenguang Gas Co., Ltd
                        
                        PRC
                        
                        4/27/2007
                        
                        100
                        
                        100
                        
                        RMB
      2,000,000Chenan
      Chenguang Gas Co., Ltd
                        
                        PRC
                        
                        1/23/2007
                        
                        100
                        
                        100
                        
                        RMB
      1,500,000Nangong
      Weiye Gas Co., Ltd
                        
                        PRC
                        
                        6/25/2007
                        
                        100
                        
                        100
                        
                        RMB
      3,000,000Sishui
      Weiye Gas Co., Ltd
                        
                        PRC
                        
                        12/22/2004
                        
                        100
                        
                        95
                        
                        RMB
      3,000,000
  10
 
 Guannan
      Weiye Gas Co., Ltd
                    
                    PRC
                    
                    6/19/2003
                    
                    100
                    
                    100
                    
                    RMB
      9,510,000Sixian
      Weiye Gas Co., Ltd
                    
                    PRC
                    
                    9/3/2007
                    
                    100
                    
                    100
                    
                    RMB
      3,000,000Baishan
      Weiye Gas Co., Ltd
                    
                    PRC
                    
                    7/13/1007
                    
                    100
                    
                    100
                    
                    RMB
      15,000,000
  (e) Cash and Cash
Equivalents
 
 The
Company considers all cash and other highly liquid investments with initial
maturities of three months or less to be cash equivalents.
 
 (f) Accounts
and Other Receivable
 
 Accounts
and other receivable are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as needed. The
Company extends unsecured credit to customers in the normal course of business
and does not accrue interest on trade accounts receivable.
 
 (g) Advances to
Suppliers
 
 Advances
to suppliers represent the cash paid in advance for purchasing raw materials.
The advances to suppliers are interest free and unsecured.
 
 (h) Investments in Equity
Securities
 
 The
equity method of accounting was used to account for the Company’s investment in
equity securities for which the Company did not have controlling equity
interest.  Non controlling equity interest for the Company is
typically a position of less than 50% beneficial ownership.
 
 The
consolidated statement of income includes the Company's share of the
post-acquisition results of the investment’s performance for the year. In the
consolidated balance sheet, investments in equity securities are stated at the
Company's share of the net assets of the investments plus any potential premium,
or less discounts paid at the time of acquisition, and less any identified
impairment loss.
 
 Beijing
Zhongran Xiangke Oil Gas Technology Co. Ltd is the Company’s 40% owned
investment and is principally engaged in sale of compressed natural gas to
domestic households and industrial firms around the suburbs of Beijing as well
as the suburban areas of the Hebei Province and Tianjin.
  11
 
 NominalName of
                  
                  Place
                  
                  Form of
                  
                  
                  
                  Value ofAssociate
                  
                  of
                  
                  Business
                  
                  Registered
                  
                  Registered
                  
                  PrincipalCompany
                  
                  Registration
                  
                  Structure
                  
                  Capital
                  
                  Capital
                  
                  ActivitiesBeijing Zhongran
                    Xiangke
      Oil Gas
                    Technology
      Co. Ltd
                  
                  PRC
                  
                  Sino
      foreign equity joint venture
                  
                  RMB
                    20,000,000
                  
                  40
                  
                  Trading
      of natural gas and gas pipeline
construction
 
 The
Company did not record any goodwill when it acquired its equity position in
Xiangke. Accordingly, in accordance with SFAS 142, the Company has not taken an
amortization expense of goodwill during the time it has carried a 40% stake in
Xiangke.
 
 (i)
                    Accounting for the Impairment of Long-Lived
      Assets
 
 The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.
 
 If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
 
 During
the reporting periods, there was no impairment loss.
 
 (j)
                  Plant and
      Equipment
 
 Plant and
equipment, other than construction in progress, are stated at cost less
depreciation and amortization and accumulated impairment loss.
 
 Plant and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows:
 
 Gas
      Pipelines (Up to December 31, 2007)
                
                
                25
      yearsGas
      Pipelines (Starting from January 1, 2008)
                
                
                50
      yearsMotor
      Vehicles
                
                
                10
      yearsMachinery
      & Equipment
                
                
                20
      yearsBuildings
                
                
                25
      yearsLeasehold
      Improvements
                
                
                25
      yearsOffice
      Equipment
                
                
                8
      years
  12
  The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
  (k)
                  Intangible
      Assets
 
 Intangible
assets, are stated at cost less amortization and accumulated impairment loss.
Amortization is provided over their estimated useful lives, using the
straight-line method. Estimated useful lives of the intangibles are as
follows:
 
 Land
      use rights
                40
      - 50 yearsFranchises
                30
      yearsOther
      intangibles
                3
      years
 
 (l)
                  Construction in
  Progress
 
 Construction
in progress represents the cost of constructing pipelines and is stated at cost.
Costs comprise direct and indirect incremental costs of acquisition or
construction. Completed items are transferred from construction in progress to
the gas pipelines of fixed assets when they are ready for their intended use.
The major cost of construction relates to construction materials, direct labor
wages and other overhead. Construction of pipeline, through which to distribute
natural gas, is one of the Group’s principal businesses. The Group builds city
main pipeline network and branch pipeline network to make gas connection to
resident users, industrial, and commercial users, with the objective of
generating revenue on gas connection and gas usage fees collected from these
customers. As of March 31, 2008, the pipelines under construction include mainly
the projects in Beijing. These projects, once completed, will significantly
increase the gas supply capacity.
 
 
 (m)
                  Unearned
      Revenue
 
 Unearned
revenue represents prepayments by customers for gas purchases and advance
payments on construction and installation of pipeline contracts. The Company
records such prepayment as unearned revenue when the payments are
received.
 
 (n)
                  Financial
      Instruments
 
 The
carrying amounts of all financial instruments approximate fair value. The
carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities approximate fair value due to the short-term nature of these items.
The carrying amounts of borrowings approximate the fair value based on the
Company’s expected borrowing rate for debt with similar remaining maturities and
comparable risk.
  13
 
 (o)
                  Foreign Currency
  Translation
 
 The
accompanying consolidated financial statements are presented in United States
dollars. The functional currency of the Company is the Renminbi (RMB). The
consolidated financial statements are translated into United States dollars from
RMB at March 31, 2008 exchange rates as to assets and liabilities and average
exchange rates as to revenues and expenses. Capital accounts are translated at
their historical exchange rates when the capital transactions
occurred.
 
 6/30/2008
                          
                          
                          3/31/2008
                          
                          
                          12/31/2007Years
      end RMB : US$ exchange rate
                          
                          
                          6.8718
                          
                          
                          
                          7.0222
                          
                          
                          
                          7.3141Average
      yearly RMB : US$ exchange rate
                          
                          
                          7.0726
                          
                          
                          
                          7.1757
                          
                          
                          
                          7.6172
 
 The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation.
  (p)
                  Revenue
  Recognition
 
 Revenue
is recognized when services are rendered to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as unearned revenue.
 
 Net sales
consist of gas and connection fee revenue. Cost of sales include gas and
connection cost.
 
 Gas
connection revenue is recognized when the outcome of a contract can be estimated
reliably and the stage of completion at the balance sheet date can be measured
reliably.
 
 Sales of
natural gas are recognized when goods are delivered and title has
passed.
 
 (q)
                  Investment
Income
 
 Investment
income represents the Group’s share of post-acquisition results of its
investment in equity securities for the year.
  14
 
 (r)
                  Income
Taxes
 
 Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. As of December 31,
2007, there was no significant book to tax differences.
 
 Pursuant
to the tax laws of PRC, general enterprises are subject to income tax at an
effective rate of 33%. Beijing Gas is in the natural gas industry whose
development is encouraged by the government. According to the income tax
regulation, any company engaged in the natural gas industry enjoys a favorable
tax rate. Also, Beijing Gas is exempt from corporate income tax for its first
two years and is then entitled to a 50% tax reduction for the succeeding three
years. The Company’s first profitable tax year was 2003. Accordingly, the
Company’s income is subject to a reduced tax rate of 7.5%. From 2008 onwards,
the Company’s income is subject to a reduced tax rate of 9%. Subsidiaries of
Beijing Gas are subject to the effective rate of 25%.
 
 (s)
                  Advertising
 
 The Group
expensed all advertising costs as incurred
 
 (t)
                  Concentration of Credit
  Risk
 
 Concentration
of credit risk is limited to accounts receivable and is subject to the financial
conditions of major customers. The Company does not require collateral or other
security to support accounts receivable. The Company conducts periodic reviews
of its clients’ financial condition and customers’ payment practices to minimize
collection risk on accounts receivable.
 
 (u)
                  Retirement
  Benefits
 
 Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred.
 
 (v)
                  Statutory
  Reserves
 
 As
stipulated by the Company Law of the People's Republic of China (PRC) as
applicable to Chinese companies with foreign ownership, net income after
taxation can only be distributed as dividends after appropriation has been made
for the following:
  15
 
 i.
                  Making
      up cumulative prior years' losses, if
any;
 
 ii.
                  Allocations
      to the "Statutory surplus reserve" of at least 10% of income after tax, as
      determined under PRC accounting rules and regulations, until the fund
      amounts to 50% of the Company's registered
  capital;
 
 iii.
                  Allocations
      to the discretionary surplus reserve, if approved in the shareholders'
      general meeting.
 
 (w)
                  Statement of Cash
  Flows
 
 In
accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from
the Company’s operations is calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
  (x)
                  Comprehensive
  Income
 
 Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other consolidated
financial statements. The Company’s current component of other comprehensive
income is the foreign currency translation adjustment.
 
 (y)
                  Recent Accounting
      Pronouncements
  In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R
provides additional guidance on improving the relevance, representational
faithfulness, and comparability of the financial information that a reporting
entity provides in its financial reports about a business combination and its
effects. This Statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company
believes there will be no material impact on its financial statements upon
adoption of this standard.
 
 In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51(“SFAS 160”). SFAS 160 amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This Statement is effective for fiscal
years and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company believes there will be no material impact on
its financial statements upon adoption of this standard.
  16
 
 In
December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations,
(‘‘SFAS 141(R)’’). SFAS 141(R) retains the fundamental requirements of the
original pronouncement requiring that the purchase method be used for all
business combinations, but also provides revised guidance for recognizing and
measuring identifiable assets and goodwill acquired and liabilities assumed
arising from contingencies, the capitalization of in-process research and
development at fair value, and the expensing of acquisition-related costs as
incurred. SFAS 141(R) is effective for fiscal years beginning after December 15,
2008. In the event that the Company completes acquisitions subsequent to its
adoption of SFAS 141 (R), the application of its provisions will likely have a
material impact on the Company’s results of operations, although the Company is
not currently able to estimate that impact.
 
 In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements − an amendment of ARB No. 51. SFAS 160
requires that ownership interests in subsidiaries held by parties other than the
parent (previously referred to as minority interests), and the amount of
consolidated net income, be clearly identified, labeled and presented in the
consolidated financial statements. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. Sufficient disclosures are
required to clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners as components of equity. It is
effective for fiscal years beginning after December 15, 2008, and requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements are applied prospectively.
The Company does not expect the adoption of SFAS 160 to have a material impact
on its financial condition or results of operations.
  The
Company does not anticipate that the adoption of the above standards will have a
material impact on these consolidated financial statements.
 
 (Z)
                  Earnings Per
  Share
 
 Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period.  Diluted
earnings per share is computed on the basis of the weighted average number of
shares of common stock plus the effect of dilutive potential common shares
outstanding during the period using the treasury stock method for warrants and
the as-if method for convertible securities.  Dilutive potential
common shares include outstanding warrants, and convertible preferred
stock.
  17
 
 3.
                RESTRICTED
      CASH
  Restricted
Cash represents compensating balances held at banks to partially secure banking
facilities in the form of loans and notes payable.  The imposed
restrictions dictate that funds cannot be withdrawn when there are outstanding
loans and notes payable, and the funds are only allowed to be used to settle
bank indebtedness.  The funds deposited as compensating balances are
interest bearing.  The amount of cash restricted varies based on the
Bank’s credit policy at the time that the Company requests for increase or
extension of credit facilities.
 
 4.
                ACCOUNTS
      RECEIVABLE
  For
natural gas sales, it is due when the gas is sold. Normally, most of them are
settled by prepayments from the customers.
 
 In
general for construction projects, deposits of 30% of total contract sum are
received from client when the project commences. Second payment of 30% is
received after the construction is completed for around 6 months. The final sum
of the remaining portion normally acts as retention money for quality warranty
to the developer. The retention money would be received by the company after the
1 year warranty period.
 
 The
phrase "receivables are due within one year of aging" means the receivable that
are within one year of aging.
 
 The
"amounts are not due within one year" are mostly retention money from
construction sales that are based on contracts. The continued demand from the
natural gas sales from them also help assure the amount could be collected. No
experience of wholly-unsettled accounts receivable in the year June 30, 2008 and
December 31, 2007
 
 Trade
accounts receivable are recorded at the invoiced amount, net of allowances for
doubtful accounts and sales returns. The allowance for doubtful accounts is the
Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on
historical write-off experience, customer specific facts and economic
conditions. Bad debt expense is included in the general and administrative
expenses.
 
 Outstanding
account balances are reviewed individually for collectibles. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. To date, the
Company has not charged off any balances as it has yet to exhaust all means of
collection. The Company does not have any off-balance-sheet credit exposure to
its customers, except for outstanding notes receivable discounted with banks
that are subject to recourse for non-payment.
 
 The
credit and billing policy is that, for the residential customer, we collect
prepayment from customers; for the industrial customers, we settle the payment
based on the contract terms signed, from 10 days to one month; for the
construction business, we collect the payment from customer based on the
percentage of the construction progress. The risk that business faces from
inability to collect account is Operation risk in industrial
customers.
  18
  Accounts
Receivable
 
 6/30/2008
                          
                          
                          12/31/2007Gross
      accounts receivable
                          
                          $
                          5,961,402
                          
                          
                          $
                          7,352,013Allowance
      for bad debt
                          
                          
                          (28,219
                          )
                          
                          
                          (36,760
                          )Net
      accounts receivable
                          
                          $
                          5,933,183
                          
                          
                          $
                          7,315,253
 
 Allowance for Bad
Debt
 
 6/30/2008
                          
                          
                          12/31/2007Beginning
      balance
                          
                          $
                          36,760
                          
                          
                          $
                          32,838Addition
                          
                          
                          17,191
                          
                          
                          
                          26,909Less
      - write off
                          
                          
                          (25,732
                          )
                          
                          
                          (22,987
                          )Ending
      balance
                          
                          $
                          28,219
                          
                          
                          $
                          36,760
 
 Accounts Receivable Aging
Report
 
 6/30/2008
                          
                          
                          12/31/200730
      Days
                          
                          $
                          5,102,537
                          
                          
                          $
                          5,557,17230-60
      Days
                          
                          
                          237,327
                          
                          
                          
                          1,212,41360-90
      Days
                          
                          
                          474,655
                          
                          
                          
                          8,74790-180
      Days
                          
                          
                          23,733
                          
                          
                          
                          -180-360
      Days
                          
                          
                          -
                          
                          
                          
                          27,489>360
      Days
                          
                          
                          94,931
                          
                          
                          
                          509,433Total
                          
                          $
                          5,933,183
                          
                          
                          $
                          7,315,254
  19
 
 The
      followings are the largest ten accounts receivable as of June 30,
      2008Accounts
      Receivable6/30/2008Hebei
      zhonggang Steel, Ltd.
                      
                      $
                      209,407Peixuan
      Jiannan Development, Co.,
                      
                      
                      275,925Beijing
      Xianjin Construction, Ltd.
                      
                      
                      276,267Hebei
      Oil Management Machine, Ltd.
                      
                      
                      280,852Xuzhou
      Shenyuan Real Estate, Co.,
                      
                      
                      317,564Baishang
      Jiehe Construction Development, Co.,
                      
                      
                      336,611Jianshu
      Hongzhe Farm
                      
                      
                      359,716Sihong
      Jinwan Development, Ltd.
                      
                      
                      372,533Guannan
      Construction & Development, Co.,
                      
                      
                      439,866Lianyun
      Port Development, Ltd.
                      
                      
                      675,141Total
                      
                      $
                      3,543,882
 
 5.
OTHER RECEIVABLES
 
 The followings are the ten largest
other receivables as of June 30, 2008
 Other
receivables
 6/30/2008Qujin
      Development & Investment, Ltd.
                            
                            $
                            58,882Langfang
      Transportation, Ltd.
                            
                            
                            20,373West
      House, Co.,
                            
                            
                            21,731Shenzhen
      Chengtong Investment, Co.,
                            
                            
                            24,251Peixuan
      Construction Department
                            
                            
                            29,104Tongshang
      Jieye, Ltd.
                            
                            
                            37,189Beijing
      Natural Gas Investment, Ltd.
                            
                            
                            43,657Tianjin
      Feite Consultant, Co.,
                            
                            
                            436,567Shanghou
      Debt Corp.
                            
                            
                            1,901,929Baoding
      City Management Department
                            
                            
                            2,910,446Subtotal
                            
                            $
                            5,484,129
  20
 
 6.  PROPERTY, PLANT AND
EQUIPMENT
 
 Property,
Plant and Equipment consist of the following as of June 30, 2008 and December
31, 2007
 
 6/30/08
                          
                          
                          12/31/07At CostGas
      Pipelines
                          
                          $
                          21,283,153
                          
                          
                          $
                          18,885,734Motor
      Vehicles
                          
                          
                          5,262,742
                          
                          
                          
                          4,874,685Machinery
      & Equipment
                          
                          
                          798,610
                          
                          
                          
                          885,997Buildings
                          
                          
                          1,405,640
                          
                          
                          
                          1,405,638Leasehold
      Improvements
                          
                          
                          70,970
                          
                          
                          
                          68,942Office
      Equipment
                          
                          
                          186,000
                          
                          
                          
                          105,336Total
                          
                          $
                          29,007,115
                          
                          
                          $
                          26,226,336Less:
      Accumulated Depreciation
                          
                          
                          (2,512,423
                          )
                          
                          
                          (1,653,771
                          )Property,
      Plant and Equipment, net
                          
                          $
                          26,494,692
                          
                          
                          $
                          24,572,565
 
 6/31/08
                        
                        
                        12/31/07Accumulated DepreciationGas
      Pipelines
                        
                        $
                        1,194,117
                        
                        
                        $
                        591,419Motor
      Vehicles
                        
                        
                        884,844
                        
                        
                        
                        687,354Machinery
      & Equipment
                        
                        
                        169,335
                        
                        
                        
                        161,703Buildings
                        
                        
                        167,586
                        
                        
                        
                        128,514Leasehold
      Improvements
                        
                        
                        39,861
                        
                        
                        
                        34,070Office
      Equipment
                        
                        
                        56,680
                        
                        
                        
                        50,711Total
                        
                        $
                        2,512,423
                        
                        
                        $
                        1,653,771
 
 Depreciation
expense included in the consolidated statements of income for the period ended
June 30, 2008 was $858,653.
  21
 
 7.  INTANGIBLE ASSETS
 
 Intangible
assets consist of the following as of June 30, 2008 and December 31,
2007
 
 6/30/08
                        
                        
                        12/31/07At CostLand
      use rights
                        
                        $
                        510,328
                        
                        
                        $
                        452,345Franchises
                        
                        
                        400,186
                        
                        
                        
                        359,464Goodwill
                        
                        
                        1,662,752
                        
                        
                        
                        1,562,202Other
                        
                        
                        15,225
                        
                        
                        
                        9,563Total
                        
                        $
                        2,588,491
                        
                        
                        $
                        2,383,574Less:
      Accumulated Amortization
                        
                        
                        (399,319
                        )
                        
                        
                        (355,324
                        )Intangible
      Assets, net
                        
                        $
                        2,189,172
                        
                        
                        $
                        2,028,250
 
 The Group
operates as a local natural gas distributor in a city or county, known as an
operation location, under an exclusive franchise agreement between the Group and
the local government or entities in charge of gas utility. Franchises are the
rights to develop sites in Anping and Jinzhou in China. They are stated at cost
less accumulated amortization.
 
 8.
      SHORT-TERM BANK LOANS
 
 Short-term
bank loans are as follows:
 
 Name
      of Bank
                        
                        Due
      Date
                        
                        
                        Interest
      Rate
                        
                        
                        Amount6/30/2008
                        
                        
                        12/31/2007China
      Renmin Bank
                        
                        7/1/2008
                        
                        
                        7.22%
      plus 10%
                          fluctuation
      market rate
                        
                        
                        $
                        2,910,446
                        
                        
                        $
                        2,734,444Huashang
      Bank
                        
                        10/30/2008
                        
                        
                        
                        9.00%
                        
                        
                        
                        4,376,304
                        
                        
                        
                        -Total
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        7,276,114
                        
                        
                        $
                        2,734,444
 
 Interest
expenses for the short-term bank loans were $216,567 and $197,959 for the six
months ended June 30, 2008, and twelve months ended December 31, 2007
respectively.
  22
 
 9.  OTHER
PAYABLES
 
 Other
payables at June 30, 2008 and December 31, 2007 consist of the
following:
 
 6/30/2008
                      
                      
                      12/31/2007Employees’
      welfare payables
                      
                      $
                      194,199
                      
                      
                      $
                      176,236Amount
      due to employees
                      
                      
                      23,140
                      
                      
                      
                      150,711Tax
      payable
                      
                      
                      179,792
                      
                      
                      
                      922,620Other
      Payable
                      
                      
                      6,199,961
                      
                      
                      
                      9,134,091Total
                      
                      $
                      6,597,092
                      
                      
                      $
                      10,383,657
 
 All the
amounts due to employees are unsecured, interest free, and have no
fixed
 repayment
terms.
 
 The
followings are the ten largest other payables as of June 30, 2008
 
 6/30/2008Caiyou
      Haoche Rental, Co.,
                      
                      $
                      26,236Education
      Associate
                      
                      
                      44,498Work
      Union Associate
                      
                      
                      66,261He
      Shunchun
                      
                      
                      72,761Social
      Insurance Associate
                      
                      
                      137,016Shenzhen
      Polian Shiye, Ltd.
                      
                      
                      203,731Beijing
      Qianshi Development, Co.,
                      
                      
                      241,852Liu
      Yuchuan
                      
                      
                      291,045Chenguang
      Consulatant, Ltd.
                      
                      
                      436,567Baishang
      Gas Co., Ltd.
                      
                      
                      3,986,675$
                      5,506,642
  23
 
 10.    CAPITAL
STOCK
 
 The
authorized capital stock consists of (i) 250,000,000 shares of common stock, par
value      $0.001 per share, of which there are
25,489,753 shares issued and outstanding, and (ii) 100,000,000 shares of
preferred stock, par value $0.001 per share. The preferred stock consists of (i)
series A convertible preferred stock, of which 20,000,000 shares have been
authorized and 275,111 shares are issued and outstanding; and (ii) series B
convertible preferred stock, of which 5,000,000 shares have been authorized and
4,764,486 shares are issued and outstanding.
 
 The
following is a summary of the material terms of its capital stock. This summary
is subject to and qualified in its entirety by its Articles of Incorporation, as
amended and corrected, certificates of designations for its series A and series
B convertible preferred stock, its by-laws and by the applicable provisions of
Utah law.
 
 Common
Stock
 
 The
Company is authorized to issue 250,000,000 shares of common stock, with a par
value of $0.001. There are 25,489,753 shares of common stock issued and
outstanding as of June 30, 2008. All shares of common stock have one vote per
share on all matters including election of directors, without provision for
cumulative voting. The common stock is not redeemable and has no conversion or
preemptive rights. The common stock currently outstanding is validly issued,
fully paid and non-assessable. In the event of liquidation of the company, the
holders of common stock will share equally in any balance of the company's
assets available for distribution to them after satisfaction of creditors and
preferred shareholders, if any. The holders of common stock are entitled to
equal dividends and distributions per share with respect to the common stock
when, as and if, declared by the board of directors from funds legally
available.
 
 Preferred
Stock
 
 In
addition to the 250,000,000 shares of common stock, The Company is authorized to
issue 100,000,000 shares of preferred stock, with a par value of $0.001 per
share. Shares of the preferred stock may be issued from time to time in one or
more classes or series, each of which class or series shall have such
distinctive designation or title as shall be fixed by the board of directors
prior to the issuance.
 
 On August
30, 2006, the Company’s board of directors designated 20,000,000 shares of its
authorized $0.001 par value per share preferred stock as series A convertible
preferred stock and 5,000,000 shares of its preferred stock as series B
convertible preferred stock. On August 31, 2006, the Company filed certificates
of designations for the series A and series B convertible preferred stock with
the Office of the Secretary of State of Utah. On September 6, 2006, the board of
directors amended the designations of the Series B convertible preferred stock
and the Company filed an amended certificate of designations for the Series B
convertible preferred stock with the Office of the Secretary of State of Utah.
The board of directors created the series A
convertible preferred stock to allow the Company to consummate the share
exchange transaction with the Gas (BVI) Shareholders and the series B
convertible preferred stock in connection with its private financing
transactions, although the Company does not have sufficient unissued authorized
common stock to allow for a complete conversion. Each of the shares of series A
convertible preferred stock was automatically converted into one share of its
common stock upon the effectiveness of its reverse stock-split on November 17,
2006. Therefore, as of December 31, 2006, the Company has no shares of series A
convertible preferred stock issued and outstanding.
 
 24
  Conversion
 
 The
Company issued 14,361,646 of its common shares upon the automatic conversion of
its series A convertible preferred shares after the 304.44-for-1 reverse
stock-split on November 17, 2006. The Company no longer has any series A
convertible preferred shares outstanding.
 
 Each
share of the series B convertible preferred stock will become convertible into
common stock, at the option of its holder after the 304.44-for-1 reverse
stock-split, based on the then applicable conversion rate, which is initially
one share of series B convertible preferred stock for one share of common
stock.
 
 Total
Capitalization
 
 The
Following table depicts an analysis of total capitalization for the issuance of Preferred
Stock A, Preferred Stock B, Common Stock, and the related additional Paid in
Capital as of June 30, 2008:
 
 Preferred Stock A
                                
                                
                                Preferred Stock A
                                
                                
                                Common StockName of Shareholder
                                
                                Number of
                                  Shares
                                  Outstanding
                                
                                
                                Capital
                                
                                
                                Number of
                                  Shares
                                  Outstanding
                                
                                
                                Capital
                                
                                
                                Number of
                                  Shares
                                  Outstanding
                                
                                
                                Capital
                                
                                
                                Additional
                                  Paid in
                                  Capital
                                
                                
                                % of Equity
                                  HoldingsPrivate
      Investor
                                
                                
                                275,111
                                
                                
                                
                                275
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,210,213
                                
                                
                                
                                0.90
                                %Investor
      Relations firm
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                4,764,486
                                
                                
                                
                                4,765
                                
                                
                                
                                207,373
                                
                                
                                
                                207
                                
                                
                                
                                6,994,270
                                
                                
                                
                                16.29
                                %Management
      / Insider
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                12,653,661
                                
                                
                                
                                12,654
                                
                                
                                
                                4,252,959
                                
                                
                                
                                41.45
                                %Investor
      - 1st Round Raising
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5,628,722
                                
                                
                                
                                5,629
                                
                                
                                
                                2,997,371
                                
                                
                                
                                18.44
                                %Less: Cost of Stock Issurance
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (412,241
                                )
                                
                                
                                -Investor
      - 2nd Round Raising
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                6,999,997
                                
                                
                                
                                7,000
                                
                                
                                
                                15,743,000
                                
                                
                                
                                22.93
                                %Less: Cost of Stock Issurance
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (1,957,133
                                )
                                
                                
                                -Beneficial
      Conversion Feature
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                6,418,864
                                
                                
                                
                                -275,111
                                
                                
                                
                                275
                                
                                
                                
                                4,764,486
                                
                                
                                
                                4,765
                                
                                
                                
                                25,489,753
                                
                                
                                
                                25,490
                                
                                
                                
                                35,247,303
                                
                                
                                
                                100.00
                                %
  25
 
 11.  SEGMENT
INFORMATION
 
 The
Company has contracted with customers usually in two revenue segments
altogether, one is for the construction and installation of gas facilities and
another one is the subsequent sales of gas to that customers through the gas
facilities the Company constructs. However, the respective gas facilities
contracts and gas supply contracts have separately provided for the basis of
revenue recognition and distinctive from each other for the relevant
cost-and-revenue to be incurred and hence separate calculation and subsequent
payment of fees for respective business without any interdependence on each
other in this respect.
  For
management purposes, the company is currently organized into two major operating
divisions - gas pipeline construction (installation of gas facilities) and sales
of piped gas. These principal operating activities are the basis on which the
Company reports its primary segment information.
  6/30/2008
Balance Sheet Segment Report
 As
of June 30, 2008
 Gas Distribution
                                  
                                  
                                  Gas pipeline
                                    Installation
                                  
                                  
                                  Others
                                  
                                  
                                  TotalAssetsCurrent
      Assets
                                  
                                  $
                                  15,883,136
                                  
                                  
                                  $
                                  5,264,012
                                  
                                  
                                  $
                                  4,091,781
                                  
                                  
                                  $
                                  25,238,929Non-Current
      Assets
                                  
                                  
                                  12,014,339
                                  
                                  
                                  
                                  35,745,947
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  47,760,286Total
      Assets
                                  
                                  $
                                  27,897,475
                                  
                                  
                                  $
                                  41,009,959
                                  
                                  
                                  $
                                  4,091,781
                                  
                                  
                                  $
                                  72,999,215LiabilitiesCurrent
      Liabilities
                                  
                                  
                                  1,690,577
                                  
                                  
                                  
                                  18,091,509
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  19,782,086Total
      Liabilities
                                  
                                  $
                                  1,690,577
                                  
                                  
                                  $
                                  18,091,509
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  19,782,086Net Assets
                                  
                                  $
                                  26,206,898
                                  
                                  
                                  $
                                  22,918,450
                                  
                                  
                                  $
                                  4,091,781
                                  
                                  
                                  $
                                  53,217,129
  26
  
 6/30/2008
Income Statement Segment Report
 Gas Distribution
                              
                              
                              Gas pipeline
                                Installation
                              
                              
                              Others
                              
                              
                              TotalSales
      Revenue
                              
                              $
                              6,553,899
                              
                              
                              $
                              2,909,739
                              
                              
                              $
                              -
                              
                              
                              $
                              9,463,638Cost
      of Revenue
                              
                              
                              (5,709,186
                              )
                              
                              
                              (820,877
                              )
                              
                              
                              -
                              
                              
                              
                              (6,530,063
                              )Gross
      Profit
                              
                              
                              844,713
                              
                              
                              
                              2,088,862
                              
                              
                              
                              -
                              
                              
                              
                              2,933,575Operating
      Expense
                              
                              
                              (494,742
                              )
                              
                              
                              (1,223,431
                              )
                              
                              
                              (646,603
                              )
                              
                              
                              (2,364,776
                              )Other
      Expense
                              
                              
                              (67,795
                              )
                              
                              
                              (167,648
                              )
                              
                              
                              (418,119
                              )
                              
                              
                              (653,562
                              )Earnings
      before tax
                              
                              
                              282,176
                              
                              
                              
                              697,783
                              
                              
                              
                              (1,064,722
                              )
                              
                              
                              (84,763
                              )Income
      tax
                              
                              
                              (87,190
                              )
                              
                              
                              (215,608
                              )
                              
                              
                              -
                              
                              
                              
                              (302,798
                              )Net
      Income
                              
                              $
                              194,986
                              
                              
                              $
                              482,174
                              
                              
                              $
                              (1,064,722
                              )
                              
                              $
                              (387,561
                              )
 Balance
Sheet Segment Report As
of  December 31, 2007
 Gas Distribution
                                    
                                    
                                    Gas pipeline
                                      Installation
                                    
                                    
                                    Others
                                    
                                    
                                    TotalAssetsCurrent
      Assets
                                    
                                    
                                    11,509,765
                                    
                                    
                                    
                                    3,814,583
                                    
                                    
                                    
                                    7,866,957
                                    
                                    
                                    
                                    23,191,305Non-Current
      Assets
                                    
                                    
                                    10,606,803
                                    
                                    
                                    
                                    31,558,142
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    42,164,945Total
      Assets
                                    
                                    
                                    22,116,568
                                    
                                    
                                    
                                    35,372,725
                                    
                                    
                                    
                                    7,866,957
                                    
                                    
                                    
                                    65,356,250LiabilitiesCurrent
      Liabilities
                                    
                                    
                                    1,228,727
                                    
                                    
                                    
                                    13,149,074
                                    
                                    
                                    
                                    131,843
                                    
                                    
                                    
                                    14,509,644Total
      Liabilities
                                    
                                    
                                    1,228,727
                                    
                                    
                                    
                                    13,149,074
                                    
                                    
                                    
                                    131,843
                                    
                                    
                                    
                                    14,509,644Net Assets
                                    
                                    
                                    20,887,841
                                    
                                    
                                    
                                    22,223,651
                                    
                                    
                                    
                                    7,735,114
                                    
                                    
                                    
                                    50,846,606
  27
  
 Income
Statement Segment Report
 For
the six months ended June 30, 2007
 Gas
                                  Distribution
                                
                                
                                Gas pipeline
                                  Installation
                                
                                
                                Others
                                
                                
                                TotalSales
      Revenue
                                
                                $
                                3,245,311
                                
                                
                                $
                                1,989,061
                                
                                
                                $
                                -
                                
                                
                                $
                                5,234,372Cost
      of Revenue
                                
                                
                                (2,313,736
                                )
                                
                                
                                (1,418,097
                                )
                                
                                
                                -
                                
                                
                                
                                (3,731,833
                                )Gross
      Profit
                                
                                
                                931,574
                                
                                
                                
                                570,965
                                
                                
                                
                                -
                                
                                
                                
                                1,502,539Operating
      Expense
                                
                                
                                (550,779
                                )
                                
                                
                                (337,574
                                )
                                
                                
                                -
                                
                                
                                
                                (888,353
                                )Other
      Income
                                
                                
                                27,350
                                
                                
                                
                                6,004
                                
                                
                                
                                -
                                
                                
                                
                                33,354Earnings
      before tax
                                
                                
                                408,146
                                
                                
                                
                                239,394
                                
                                
                                
                                -
                                
                                
                                
                                647,540Income
      tax
                                
                                
                                (4,922
                                )
                                
                                
                                (22,421
                                )
                                
                                
                                -
                                
                                
                                
                                (27,343
                                )Net
      Income
                                
                                $
                                403,224
                                
                                
                                $
                                216,973
                                
                                
                                $
                                -
                                
                                
                                $
                                620,197
 
 The
Company's operations are located in the PRC. All revenue is from customers in
the PRC. All of the Company’s assets are located in the PRC. Sales of piped gas
and gas pipeline construction are carried out in the PRC. Accordingly, no
analysis of the Company's sales and assets by geographical market is
presented.
  No other
measures of segment profit or loss and assets have been provided or reviewed by
the company's chief operating decision maker.
 
 12.
Liquidated Damages
 
 The
Company entered into a registration rights agreement related to a private
placement financing transaction with accredited investors on September 13,
2007.  Pursuant to the agreement, the Company had to (1) file the
registration statement within 45 days of the execution, and (2) declare the
effectiveness within 150 days of filing the registration
statement.  However, the Company did not meet the aforementioned
requirements under the registration rights agreement, and was subjected to
liquidated damages. The Company, which has paid $456,751 in liquidated damages
to investors in May 2008, reported as other expense of $483,926 (including
$456,751) in the statements of income.




28




Item 2.  Management’s Discussion and
Analysis




The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form 10-Q. This
discussion contains forward-looking statements that involve significant risks
and uncertainties. As a result of many factors, such as those set forth
elsewhere in this Form 10-Q, our actual results may differ materially from those
anticipated in these forward-looking statements.





Economic
& Industrial Trend





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





We have
experienced high growth of our connection activities since inception of our
business, thanks to Chinese real estate boom in the past five years. We see no
major factors that will change the trend of real estate industry in the coming
year. Therefore we expect to continue to see growth of household connections,
especially in small-to-medium sized cities where the real estate market is at an
early developing stage.





If
Chinese real estate market does slow down in the future, our connection business
would be negatively affected as a result of fewer new household
connections.





Our gas
users are composed of industrial and residential users. Gas sales from
residential users are much less affected by economic and industrial factors and
would maintain stable growth in the future, due to the increasing pool of our
residential customers. Gas sales from industrial users is subject to the
operating performance of the end industrial user and development of new users.
Gas sales to our industrial users have increased 89% during the first half of
2008, as our existing users have expanded their production capacity. As we
develop into more cities, we expect to add one to two industrial users in the
coming year.





Material
Opportunities





The gas
distribution market is quite fragmented in the small (population less than
100,000)-to-medium (population between 100,000 to 300,000) sized cities. We have
been in active talks with potential project targets. The size of the projects
varies from small cities, like the ones we have, to medium-sized cities. For
small city markets, many of them are still untapped or undeveloped. The
development of these markets is generally considered major growth components of
the company.





Regarding
medium-sized or large cities, most of them have already been developed by large
distributors or are still operated by state-owned companies. Acquisition
opportunities exist for those still run by state-owned companies, as the central
government encourages suppliers to turn them into privately-owned companies. The
acquisition of these markets would have material impact on the company,
increasing the company’s assets and revenues significantly. The company has
finalized one acquisition, and needs to raise money to fund another
acquisition.





Material
Challenges





There are
vast number of small-to-medium sized cities left undeveloped, but the
competition is intense, as there are many small new players in the market
attracted by the profitability and growth potential of the business. Meanwhile,
from time to time, we are also facing competitions from stronger competitors, as
large city markets are getting saturated and our competitors are beginning to
expand into smaller cities.




29




We are
facing limited opportunities in developing into first-tier cities in China, as
most of them have already been taken by other large gas distributors, such as
Xin’ao Gas Co. Ltd (largest in China) in the past decade.





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





China’s
energy market is highly regulated by the government, with regard to purchase
price and sale price of natural gas. Whenever there is an adjustment to purchase
price by the government, gas distributors would increase the sale price
correspondingly, subject to a public hearing and government approval. The
increase of natural gas price in China is lagging behind that in the
international markets, which has soared in the past year. The Chinese government
has seldom adjusted natural gas and we can not rule out the possibilities of
increase of natural gas price by the government in the future. Even though we
can adjust the sale price accordingly after the increase of purchase price,
passing the increase to end users. However, it would make natural gas more
expensive, as compared to other alternative energies. Thus this increase of
price will deter our business development.





Risks
in Short-Term and Long-Term





In each
of the cities we are developing and aiming to develop, the real estate market is
the major factor that impacts us. Most of our residential customers are the new
home buyers. If the real estate market turns downward, the demands for new homes
would decrease, resulting in fewer natural gas connections, and thus negatively
impacting our business.





To reduce
the company’s heavy dependence on connection fees, the company is looking at
opportunities to diversify its business by expanding into related areas, such as
pipeline and gas station business. However, we do not expect to develop into
those areas in large scale any time soon and it may take some time for those
business to become our major business.





Liquidity
and Capital Resources





Natural
gas distribution is a typical capital-intensive industry, which requires a large
amount of capital for the construction of pipelines and gas stations, purchase
of transportation vehicles etc. while the investment would be paid back in the
following year with increasing new household connections. Under the organic
growth model (growth by the Company without outside funding), the Company can
develop new city projects by using the money generated from existing cities. The
Company would be constrained by inadequate capital when developing into bigger
cities or making Merger &Acquisition activities, under which situation the
company needs to raise money to finance its business
expansion.





Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007




During
the three months ended June 30, 2008, our company achieved strong increases in
financial and operational results. Our net revenues and gross profit were $
5,121,521 and $ 1,566,930, respectively, representing an increase of 83.16% and
73.73%, respectively, from those of the same period in the previous year. Our
operating income in 2008 was $217,308, representing a decrease of 57.49% from
2007.




30




For the 3 months ended
                                    June 30,2008
                                  
                                  2007
                                  
                                  ChangeUS$
                                  
                                  US$
                                  
                                  %Net
      Revenues
                                  
                                  
                                  5,121,521
                                  
                                  2,796,145
                                  
                                  83.16
                                  %Gross
      Profit
                                  
                                  
                                  1,566,930
                                  
                                  901,942
                                  
                                  73.73
                                  %Operating
      Income
                                  
                                  
                                  217,308
                                  
                                  511,161
                                  
                                  -57.49
                                  %Net
      Income
                                  
                                  
                                  -536,888
                                  
                                  504,814
                                  
                                  -206.35
                                  %Gross
      Margin
                                  
                                  
                                  30.60
                                  %
                                  32.26
                                  %Net
      Margin
                                  
                                  
                                  -10.48
                                  %
                                  18.05
                                  %





Net
Revenues





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





Total net
revenues for the three months ended June 30, 2008 were $5,121,521, compared to
$2,796,145 for the same period in 2007, representing an increase of 83.16%. The
increase was due to new customers’ connecting to our gas distribution network
and new customers’ purchasing our natural gas. During this period, we connected
7,096 new residential households to our gas distribution network, resulting in
total connection fees of $1,555,041. Gas sales during the same period amounted
to 10.55 million cubic meters, or $3,566,480. In comparison, we connected 4,326
new residential households to our gas distribution network in 2007, resulting in
total connection fees of $1,370,536. Gas sales during the period amounted to
5.41 million cubic meters, or $1,425,609.




For the 3 months ended June 30,2008
                                                
                                                
                                                2007
                                                
                                                Change(In
      $ million)
                                                US$
                                                %
                                                
                                                
                                                US$
                                                
                                                %
                                                
                                                %Net
      Revenues
                                                5.12
                                                100
                                                %
                                                
                                                2.80
                                                
                                                
                                                100
                                                %
                                                83.16
                                                %Connection
      Fees
                                                1.56
                                                30
                                                %
                                                
                                                1.37
                                                
                                                
                                                49
                                                %
                                                13.46
                                                %Gas
      Sales
                                                3.57
                                                70
                                                %
                                                
                                                1.43
                                                
                                                
                                                51
                                                %
                                                150.17
                                                %





Connection
Fees





Connection
fees during the three months ended June 30, 2008 were $1.56 million,
representing an increase of 13.46% over the same period of 2007, accounting for
30% of the total net revenue compared with approximately 49% for the same period
in 2007. With regard to the source of connection fees, 100% of total connection
fees came from the development of new residential users. We connected 7,096
residential users during the three months ended June 30, 2008, an increase of
approximately 64.03% from 2007.




For the 3 months ended June
      30,2008
                            
                            2007
                            
                            Change(in US$
      millions)
                            
                            US$
                            
                            %
                            
                            US$
                            
                            %
                            
                            %Connection
      Fees
                            
                            
                            1.56
                            
                            100
                            %
                            1.37
                            
                            
                            100
                            %
                            13.46
                            %Residential
      Users
                            
                            
                            1.56
                            
                            100
                            %
                            1.37
                            
                            
                            100
                            %
                            13.46
                            %Industrial
      Users
                            
                            
                            0.00
                            
                            0
                            %
                            0.00
                            
                            
                            0
                            %
                            0
                            %




31




Such
increase was primarily attributable to the following aspects.




We tried
our best to develop more residential customers in those cities of which we have
obtained franchise of natural gas distribution systems. Our invested projects in
the three months ended June 30, 2008 connected 7,096 new residential households
in the three months ended June 30, 2008, resulting in approximately $1, 555,041
to our total connection fees. In comparison, during the same period of 2007, we
connected 4,326 new residential households to our gas distribution network,
resulting in total connection fees of $1,370,536.





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




Customers
                  
                  Connection Fees:
                    ($ million)Oriental
      Sun City Real Estate Development Co. Ltd
                  
                  
                  0.2453Shanghai
      Datun Energy Co. Ltd
                  
                  
                  0.1396Peixian
      Wuzhou Real Estate Development Co.
                  
                  
                  0.1156Beijing
      Huiyou Real Estate Development Co.
                  
                  
                  0.0901Xuzhou
      Shenyuan Real Estate Development Co., Ltd.
                  
                  
                  0.0882





Due to
seasonality effects, the second quarter is usually a weak season for gas
distribution companies in China in terms of recognition of revenue from
connection fees. New construction projects are not finished in this quarter, and
only a small portion of connection fees are achieved in this
quarter.





Gas
Sales





In terms
of volume, we sold 10.55 million cubic meters of natural gas during the three
months ended June 30, 2008, compared with 5.41 million cubic meters in 2007. In
terms of value, gas sales were $3.57 million during the three months ended June
30, 2008, accounting for 70% of total net revenue in 2008, representing an
increase of 150.17% over the year 2007. Gas sales to residential increased
423.61% from $0.26 million in 2007 to $1.34 million in 2008. Gas sales to
industrial users increased 82.74%, from $0.71 million in 2007 to $1.29 million
in 2008. Gas sales to commercial users increased 101.79%, from $0.46 million in
2007 to $0.93 million in 2008.




For the 3 months ended June
      30,2008
                                  
                                  
                                  2007
                                  
                                  Change($
      million)
                                  
                                  US$
                                  
                                  %
                                  
                                  
                                  US$
                                  
                                  %
                                  
                                  %Gas
      Sales
                                  
                                  
                                  3.57
                                  
                                  100
                                  
                                  %
                                  1.43
                                  
                                  
                                  100
                                  %
                                  150.17
                                  %Residential
      Users
                                  
                                  
                                  1.34
                                  
                                  36
                                  
                                  %
                                  0.26
                                  
                                  
                                  18
                                  %
                                  423.61
                                  %Industrial
      Users
                                  
                                  
                                  1.29
                                  
                                  37
                                  
                                  %
                                  0.71
                                  
                                  
                                  50
                                  %
                                  82.74
                                  %Commercial
      Users
                                  
                                  
                                  0.93
                                  
                                  26
                                  
                                  %
                                  0.46
                                  
                                  
                                  32
                                  %
                                  101.79
                                  %





Such
substantial increase was primarily attributable to the following
aspect.





Our
invested projects maintained steady and rapid development. During the three
months ended June 30, 2008, 20.00 million cubic meters of gas were sold,
resulting in approximately $3.57 million. In comparison, during the same period
of last year, 10.94 million cubic meters of gas were sold, resulting in
approximately $1.43 million.




32




The table
below is a breakdown of our major industrial customers for gas consumption in
the second quarter of 2008.




Industrial
      Customers
                  
                  Gas Usage
                    (million
                    cubic meters)
                  
                  
                  Gas Usage
                    ($ million)Hebei
      Zhonggang Steel Co., Ltd.
                  
                  
                  2.6577
                  
                  
                  
                  0.9311The
      First Machine Factory of Huabei Petrol Bureau
                  
                  
                  0.4231
                  
                  
                  
                  0.1430Tangshan
      Changsheng Ceramic Factory
                  
                  
                  0.2837
                  
                  
                  
                  0.0958Hebei
      Jihengyuan Group Ltd.
                  
                  
                  0.1965
                  
                  
                  
                  0.0885Elite
      (Langfang) Textile Corporation
                  
                  
                  0.0747
                  
                  
                  
                  0.0228





Gas sales
of $0.9311 million were contributed by a single industrial user, Hebei Zhonggang
Steel Co., Ltd. (“Hebei Zhonggang”), which started to use gas at the beginning
of 2006. The gas consumption of Hebei Zhonggang has increased to 2.6577 million
cubic meters during the three months ended June 30, 2008 from 1.3 million cubic
meters in 2007.





As
mentioned above, due to seasonality factors of our business, gas sales accounted
for a relatively higher percentage of our total sales, though gas sales in
absolute value remained relative stable throughout the year. Sales from
industrial users are lower than that from residential users, due to our customer
base grows.





Cost
of Revenues





Cost of
revenues for the three months ended June 30, 2008, which includes cost of
connection and cost of gas sales was $3.55 million, an increase of 87.66%, from
$1.66 million in the same period of 2007.




For the 3 months
      ended June 30,2008
                                
                                2007
                                
                                Change($
      million)
                                
                                US$
                                
                                %
                                
                                US$
                                
                                %
                                
                                %Cost
      of Revenues
                                
                                
                                3.55
                                
                                100
                                %
                                1.66
                                
                                
                                100
                                %
                                87.66
                                %Connection
      Cost
                                
                                
                                0.39
                                
                                11
                                %
                                0.52
                                
                                
                                27
                                %
                                -24.27
                                %Gas
      Cost
                                
                                
                                3.16
                                
                                89
                                %
                                1.38
                                
                                
                                73
                                %
                                129.60
                                %





Cost of
Connection




Our cost
of connection during the three months ended June 30, 2008 was $0.39 million, or
11% of total cost of revenues. By comparison, the cost of connection during the
same period of 2007 was $0.52 million, or 27% of total cost of
revenue.





Cost of
connection decreased around 24.27% from the same period in 2007, mainly due to
the decreased cost of gas station maintenance resulting from the development of
our gas stations. Increase of revenues from connection fees increased nearly 13%
from the same period in 2007.




33




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





Considering
the city's overall planning and the long-term interests of our company, the
capacity of the gas pipeline network we designed to distribute gas for a city
usually greatly exceeded the number of households we served at the very
beginning, which makes the cost of connection, specifically the depreciation of
fixed assets and maintenance cost greatly increase. However, with connection of
more households to the gas pipeline, the average cost to each household will be
gradually reduced.





Cost of Gas
Sales




The cost
of gas sales increased 129.60% to $3.16 million during the three months ended
June 30, 2008 from the same period in 2007, when it was $1.38 million. This
increase is largely due to the increase of gas sales which increased
150.17%.





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





The
purchase price that gas distributors pay for natural gas, which is set by the
PRC government, is approximately CNY 1.6 to 1.9 ($0.22 to $0.26) per cubic
meter. We signed a ten-year gas supply agreement in 2003. It is tentatively
prescribed that every year Petro China supplied a total of 10 million cubic
meters of natural gas at CNY 1.55 ($0.212) per cubic meter between April 1 and
October 31 and CNY 1.65 ($0.226) per cubic meter during the rest of the year. At
the beginning of each year in the ten-year contract period, we negotiate with
Petro China on the price and supply amount according to market
conditions.





The table
below details our major gas suppliers in three months ended June 30,
2008:




Gas
      Supplier
                
                Gas Purchase
                  (million cubic
                  meters)
                
                Gas Purchase
                  ($ million)Beijing
      Natural Gas Co.
                
                
                2.83
                
                0.64North
      China Oil Field Fourth Oil Extraction Plant of Petro China
                
                
                2.19
                
                0.45Tianjin
      Dagang Oilfield Transportation Co., Ltd.
                
                
                0.71
                
                0.23Suqian
      Petro China Piped Gas Co.
                
                
                0.63
                
                0.19Hebei
      Natural Gas Co. Ltd
                
                
                0.34
                
                0.08





Gross
Profit





Gross
income increased from $0.9 million in 2007 to $1.57 million for
2008.




For the 3 months
      ended June 30,2008
                            
                            2007
                            
                            Change($
      million)
                            
                            US$
                            
                            %
                            
                            US$
                            
                            %
                            
                            %Gross
      Profit
                            
                            
                            1.57
                            
                            100
                            %
                            0.90
                            
                            
                            100
                            %
                            73.73
                            %Connection
                            
                            
                            1.16
                            
                            74
                            %
                            0.85
                            
                            
                            95
                            %
                            36.27
                            %Gas
                            
                            
                            0.40
                            
                            26
                            %
                            0.05
                            
                            
                            5
                            %
                            743.27
                            %




34




During
the three months ended June 30, 2008, gross profit was $1.57 million, an
increase of approximately 73.73% from the same period of 2007. Gross profit from
connection fees is $1.16 million for the three months ended on June 30, 2008,
accounting for 74% of total gross profit. In comparison, gross profit from
connection fees was $0.85 million for the same period of 2007, accounting for
95% of total gross profit. Gross profit from gas sales was $0.40 million,
accounting for 26% of total gross profit, compared to $0.05 million, 5% of total
gross profit in the same period of 2007.




Decrease
of gross margin for connection is attributable to the increase of cost for
connection fees. We believe that the gross margin for connection will greatly
increase if the number of households we developed meets the capacity of pipeline
network. Increase of gross margin for gas sales is attributable to the fact that
the growth rate of gas sales is larger than the growth rate of cost of gas
sales. We believe that the gross margin for gas sales will increase with a more
considerable amount of gas consumption.





Selling
and Marketing Expenses





Our
selling and marketing expenses in the three months ended June 30, 2008 were
$186,193 and approximately 3.64% of our net revenues, compared with $143,296, or
5.12% of net revenues in the same period of 2007.





In 2008,
we acquired Tongshan Hengxin Jiaye Natural Gas Co., Ltd., and we incorporated
one new subsidiary. The expansion of our company led to some increased staff
salary, social insurance cost, travel and communications cost, and depreciation
of fixed assets, which are attributable to increase of selling and marketing
expenses.





General
and Administrative Expenses





General
and administrative expenses were $1.16 million for the three months ended June
30, 2008, which was 370% higher than $0.25 million for the same period last
year.





The
increase was largely due to our new 6 subsidiaries incorporated in the second
half of 2007 and 2 in the first half of 2007, which led to increases in salary,
social insurance, traveling expenses and other expenses. The new subsidiaries
will definitely bring income of long-term. Nevertheless, the expenses from
business operation occur simultaneously. Therefore, a good expense to revenue
ration was unable to be achieved currently. The increase was also due in part to
largely increased depreciation relating to new assets described above. We
believe an upward trend in general and administrative expenses is inevitable in
2008.





And the
increase was also resulted from the contingent payment of Gas Investment China
Co., Ltd., and a joint signatory account in US.





Operating
Income





The
operating income for the three months ended Mar31, 2008 was $0.22 million,
representing a decrease of 57.49%, compared to the operating income of $0.51
million in 2007.





Our
company endured a unsatisfactory performance due to a prominent increase in
contingent payments and a faster general and administrative expenses growth than
revenues growth.




35




Income
tax




Income
tax was $0.13 million for the three months ended June 30, 2008, compared to
$0.01 million in 2007. The reason of increased income tax expense is due to the
increase of tax rate from 7.5% to 25% as prepayment.





Beijing
Gas is classified as a foreign high-tech enterprise by the tax regulatory
authority, and therefore has enjoyed a favorable tax rate for the past five
years, with an income tax rate of zero in 2004 and 7.5% from 2005 to 2007. The
income tax rate is expected to be 15% in 2008, the standard rate for foreign
high-tech enterprises.




The
income tax rate of our subsidiaries is 20-25%, except for Beijing Chenguang and
Beijing Gas. Beijing Chenguang has also been classified as a foreign high-tech
enterprise and is subject to the favorable income tax rate of 7.5% from 2006 to
2008.




Net
Income





Net
income in the three months ended June 30, 2008 was -$0.54 million, representing
a decrease of 206.35% from $0.50 million in the same period in 2007. The
decrease was caused by the liquidated damages paid to the
investors.





Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007





During
the six months ended June 30, 2008, our company achieved strong increases in
financial and operational results. Our net revenues and gross profit were
$9,463,638 and $2,933,575, respectively, representing an increase of 80.80% and
95.24%, respectively, from those of the same period in the previous year. Our
operating income in 2008 was $568,799, representing a decrease of 7.39% from
2007.




For the 6 months ended
                                  June 30,2008
                                
                                2007
                                
                                ChangeUS$
                                
                                US$
                                
                                %Net
      Revenues
                                
                                
                                9,463,638
                                
                                5,234,372
                                
                                80.80
                                %Gross
      Profit
                                
                                
                                2,933,575
                                
                                1,502,539
                                
                                95.24
                                %Operating
      Income
                                
                                
                                568,799
                                
                                511,161
                                
                                -7.39
                                %Net
      Income
                                
                                
                                -387,561
                                
                                620,197
                                
                                -162.49
                                %Gross
      Margin
                                
                                
                                31.00
                                %
                                28.71
                                %Net
      Margin
                                
                                
                                -4.10
                                %
                                11.85
                                %





Net
Revenues





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





Total net
revenues for the six months ended June 30, 2008 were $9,463,638, compared to
$5,234,372 for the same period in 2007, representing an increase of 80.80%. The
increase was due to new customers’ connecting to our gas distribution network
and new customers’ purchasing our natural gas. During this period, we connected
11,686 new residential households to our gas distribution network, resulting in
total connection fees of $2,909,739. Gas sales during the same period amounted
to 20.00 million cubic meters, or $6,553,899. In comparison, we connected 6,586
new residential households to our gas distribution network in 2007, resulting in
total connection fees of $1,985,872. Gas sales during the period amounted to
11.73 million cubic meters, or $3,248,500.




36




For the 6 months ended June 30,2008
                                  
                                  2007
                                  
                                  Change(In
      $ million)
                                  
                                  US$
                                  
                                  %
                                  
                                  US$
                                  
                                  %
                                  
                                  %Net
      Revenues
                                  
                                  
                                  9.46
                                  
                                  100
                                  %
                                  5.23
                                  
                                  
                                  100
                                  %
                                  80.80
                                  %Connection
      Fees
                                  
                                  
                                  2.91
                                  
                                  31
                                  %
                                  1.99
                                  
                                  
                                  38
                                  %
                                  46.52
                                  %Gas
      Sales
                                  
                                  
                                  6.55
                                  
                                  69
                                  %
                                  3.25
                                  
                                  
                                  62
                                  %
                                  101.75
                                  %





Connection
Fees





Connection
fees during the six months ended June 30, 2008 were $2.91 million, representing
an increase of 46.52% over the same period of 2007, accounting for 31% of the
total net revenue compared with approximately 38% for the same period in 2007.
With regard to the source of connection fees, 100% of total connection fees came
from the development of new residential users. We connected 11,686 residential
users during the six months ended June 30, 2008, an increase of approximately
77.43% from 2007.




For the 6 months ended June
      30,(in
      US$ millions)
                                
                                2008
                                
                                2007
                                
                                ChangeUS$
                                
                                %
                                
                                US$
                                
                                %
                                
                                %Connection
      Fees
                                
                                
                                2.91
                                
                                100
                                %
                                1.99
                                
                                
                                100
                                %
                                46.52
                                %Residential
      Users
                                
                                
                                2.91
                                
                                100
                                %
                                1.99
                                
                                
                                100
                                %
                                46.52
                                %Industrial
      Users
                                
                                
                                0.00
                                
                                0
                                %
                                0.00
                                
                                
                                0
                                %
                                0
                                %





Such
increase was primarily attributable to the following aspects.




We tried
our best to develop more residential customers in those cities of which we have
obtained franchise of natural gas distribution systems. Our invested projects in
the six months ended June 30, 2008 connected 11,686 new residential households
in the six months ended June 30, 2008, resulting in approximately $2,909,739 to
our total connection fees. In comparison, during the same period of 2007, we
connected 6,586 new residential households to our gas distribution network,
resulting in total connection fees of $1,985,872.




Gas
Sales





In terms
of volume, we sold 20.00 million cubic meters of natural gas during the six
months ended June 30, 2008, compared with 11.73 million cubic meters in 2007. In
terms of value, gas sales were $6.55 million during the six months ended June
30, 2008, accounting for 69% of total net revenue in 2008, representing an
increase of 101.75% over the year 2007. Gas sales to residential increased
16.51% from $0.55 million in 2007 to $0.64 million in 2008. Gas sales to
industrial users increased 100.25%, from $0.44 million in 2007 to $0.89 million
in 2008. Gas sales to commercial users increased 75.70%, from $0.83 million in
2007 to $1.47 million in 2008.




For the 6 months ended June
      30,2008
                            
                            2007
                            
                            Change($
      million)
                            
                            US$
                            
                            %
                            
                            US$
                            
                            %
                            
                            %Gas
      Sales
                            
                            
                            6.55
                            
                            100
                            %
                            3.25
                            
                            
                            100
                            %
                            101.75
                            %Residential
      Users
                            
                            
                            2.03
                            
                            31
                            %
                            0.80
                            
                            
                            25
                            %
                            152.55
                            %Industrial
      Users
                            
                            
                            2.18
                            
                            33
                            %
                            1.15
                            
                            
                            35
                            %
                            89.46
                            %Commercial
      Users
                            
                            
                            2.35
                            
                            36
                            %
                            1.30
                            
                            
                            40
                            %
                            81.16
                            %




37




Such
substantial increase was primarily attributable to the following
aspect.





Our
invested projects maintained steady and rapid development. During the six months
ended June 30, 2008, 20.00 million cubic meters of gas were sold, resulting in
approximately $6.55 million. In comparison, during the same period of last year,
10.94 million cubic meters of gas were sold, resulting in approximately $3.25
million.




Cost
of Revenues





Cost of
revenues for the six months ended June 30, 2008, which includes cost of
connection and cost of gas sales was $6.53 million, an increase of 74.98%, from
$3.73 million in the same period of 2007.




For the 6 months
      ended June 30,2008
                            
                            2007
                            
                            Change($
      million)
                            
                            US$
                            
                            %
                            
                            US$
                            
                            %
                            
                            %Cost
      of Revenues
                            
                            
                            6.53
                            
                            100
                            %
                            3.73
                            
                            
                            100
                            %
                            74.98
                            %Connection
      Cost
                            
                            
                            0.82
                            
                            13
                            %
                            0.64
                            
                            
                            17
                            %
                            28.14
                            %Gas
      Cost
                            
                            
                            5.71
                            
                            87
                            %
                            3.09
                            
                            
                            83
                            %
                            84.69
                            %





Cost of
Connection




Our cost
of connection during the six months ended June 30, 2008 was $0.82 million, or
13% of total cost of revenues. By comparison, the cost of connection during the
same period of 2007 was $0.64 million, or 17% of total cost of
revenue.





Cost of
connection increased around 28.14% from the same period in 2007, mainly due to
the increased cost of gas station maintenance resulting from the development of
our gas stations and increase of revenues from connection fees. Increase of
revenues from connection fees raised nearly 47% from the same period in
2007.




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





Considering
the city's overall planning and the long-term interests of our company, the
capacity of the gas pipeline network we designed to distribute gas for a city
usually greatly exceeded the number of households we served at the very
beginning, which makes the cost of connection, specifically the depreciation of
fixed assets and maintenance cost greatly increase. However, with connection of
more households to the gas pipeline, the average cost to each household will be
gradually reduced.





Cost of Gas
Sales




The cost
of gas sales increased 84.69% to $5.71 million during the six months ended June
30, 2008 from the same period in 2007, when it was $3.09 million. This increase
is largely due to the increase of gas sales which increased
101.75%.





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




38





Gross
Profit





Gross
income increased from $1.50 million in 2007 to $2.93 million for
2008.




For the 6 months
      ended June 30,2008
                                
                                2007
                                
                                Change($
      million)
                                
                                US$
                                
                                %
                                
                                US$
                                
                                %
                                
                                %Gross
      Profit
                                
                                
                                2.93
                                
                                100
                                %
                                1.50
                                
                                
                                100
                                %
                                95.24
                                %Connection
                                
                                
                                2.09
                                
                                71
                                %
                                1.35
                                
                                
                                90
                                %
                                55.27
                                %Gas
                                
                                
                                0.84
                                
                                29
                                %
                                0.16
                                
                                
                                10
                                %
                                437.14
                                %





During
the six months ended June 30, 2008, gross profit was $2.93 million, an increase
of approximately 95.24% from the same period of 2007. Gross profit from
connection fees is $2.09 million for the second six months of 2008, accounting
for 71% of total gross profit. In comparison, gross profit from connection fees
was $1.35 million for the six months of 2007, accounting for 90% of total gross
profit. Gross profit from gas sales was $0.84 million, accounting for 29% of
total gross profit, compared to $0.16 million, 10% of total gross profit in the
same period of 2007.




Increase
of gross margin for connection is attributable to the number of households we
developed is under the capacity of pipeline network. Increase of gross margin
for gas sales is attributable to the fact that the growth rate of gas sales is
larger than the growth rate of cost of gas sales. We believe that the gross
margin for gas sales will increase with a more considerable amount of gas
consumption.





Selling
and Marketing Expenses





Our
selling and marketing expenses in the six months ended June 30, 2008 were
$367,896 and approximately 3.89% of our net revenues, compared with $199,494, or
3.81% of net revenues in the same period of 2007.





In 2008,
we acquired Tongshan Hengxin Jiaye Natural Gas Co., Ltd., and we incorporated
one new subsidiary. The expansion of our company led to some increased staff
salary, social insurance cost, travel and communications cost, and depreciation
of fixed assets, which are attributable to increase of selling and marketing
expenses.





General
and Administrative Expenses





General
and administrative expenses were $2.00 million for the six months ended June 30,
2008, which was 190% higher than $0.69 million for the same period last
year.




Operating
Income





The
operating income for the six months ended Mar31, 2008 was $0.57 million,
representing a decrease of 7.39%, compared to the operating income of $0.61
million in 2007.


39


Income
tax




Income
tax was $0.30 million for the six months ended June 30, 2008, compared to $0.03
million in 2007. The reason of increased income tax expense is due to the
increase of tax rate from 7.5% to 25% as prepayment.





Beijing
Gas is classified as a foreign high-tech enterprise by the tax regulatory
authority, and therefore has enjoyed a favorable tax rate for the past five
years, with an income tax rate of zero in 2004 and 7.5% from 2005 to 2007. The
income tax rate is expected to be 15% in 2008, the standard rate for foreign
high-tech enterprises.




The
income tax rate of our subsidiaries is 20-25%, except for Beijing Chenguang and
Beijing Gas. Beijing Chenguang has also been classified as a foreign high-tech
enterprise and is subject to the favorable income tax rate of 7.5% from 2006 to
2008.




Net
Income





Net
income in the six months ended June 30, 2008 was -$0.39 million, representing a
decrease of 162.49% from $0.62 million in the same period in 2007.




Cash
and cash equivalents





Cash
sourced in financing activities during the six months ended June 30, 2008 is
$8.15 million.





In
January of 2008, Beijing Gas, the main subsidiary of Sino Gas in China, took out
a loan in the amount of CNY 30 million (approximately $4.18 million), accruing
interest at an adjustable rate (currently at 20% per year), with interest
payable quarterly, from Chinese Mercantile Bank.




Cash
sourced in operating activities during the six months ended June 30, 2008 is
$2.32 million, which is due to our effective management of accounts
receivable.





Cash used
in investing activities during the six months ended June 30, 2008 is $3.49
million. We used the funds raised for project developments.





Accounts
Receivable





Accounts
receivable during the three months as of March 31, 2008 were $5.93 million,
representing a decrease of $0.23 million from $6.16 million in 2007. The
decrease was due to the fact that we attach great importance to the management
and control of accounts receivable.




40




Our
account receivable is expected to gradually decrease during the first six months
of 2008 due to our seasonal business cycle, in which many accounts receivable
are recorded upon completion of construction projects in the fourth quarter, and
are collected in the second quarter of the following year. The term of most of
our accounts receivable is one year. As of the end of March in 2008, accounts
receivable dated from 2006 had been mostly collected, and the remainder were
primarily warranty payments of 2007. A warranty payment is the final payment
that a customer makes for a construction project. It consists of the final 10%
of the total project cost, and it becomes payable one year after construction
has been completed, provided that no significant problems with the construction
have arisen during the year.





Notes
Receivable




Notes
receivable of $0.28 million as of June 30, 2008 is the Note issued by Hebei
Zhonggang for its use of gas. The Note is risk-free and will be duly honored by
bank at the due date.




Inventory




Inventory
of $0.28 million as of June 30, 2008 was comprised of the spare parts of
Maintenance equipment stored for Langfang Development Zone Wei Ye Hazardous
Goods Transportation Co. Ltd., steel gas storage tanks, and natural
gas.





Prepayments




Prepayments
of $0.47 million as of June 30, 2008 were consisting entirely of the prepayments
for gas purchasing in accordance with the purchase and sale contract we signed
with the gas suppliers.





Deferred
and Prepaid Expense


The
amount of $0.47 million of car insurance, parking fee and prepaid rent will be
amortized in one year.




Other
Receivable





Other
receivable of $6.49 million includes expenses due to the internal business
activities, employees’ borrowing, the funds for business turnover, project
deposit and payments of other business activities.





Long-term
Assets





Long term
investment: we invested Beijing Zhongran Xiangke Co. Ltd with $2.70 million for
40% equity in the long term run.




Fixed
Assets: our fixed assets were $26.49 million in the first quarter of 2008,
causing an increase of $1.92 in comparison with the same period of 2007.




Construction
in process: $14.69 million was fully utilized for constructing the gas stations
and gas distribution network where our major investment was put.




Intangible
assets: $2.19 million was used for land using rights of all gas stations,
franchise and goodwill etc.




41




Liabilities





$7.28
million Short term borrowings consists of the one year liquidity loan of RMB 20
million from Industrial Bank Beijing Shangdi Sub-branch and RMB 30 million from
China Mercantile Bank.




Accounts
Payable and other payables were mainly for the construction cost of gas
distribution network and material purchase.


Income
tax paid was the income tax for the second quarter of 2008 and operating tax for
the month of June, 2008.




Off-Balance
Sheet Arrangements





We do not
have any off-balance sheet arrangements.




42




Item
3. Quantitative and Qualitative Disclosures About Market Risk





Not
required.




Item
4. Controls and Procedures





Management’s
Report of Internal Control 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
June 30, 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 June 30, 2008, our Company’s internal control over financial
reporting was not effective due to the material weaknesses described
below.





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





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





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





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





Management’s
Plan for Remediation of Material Weaknesses





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




43




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





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





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





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 June 30, 2008 and concluded that our disclosure controls and
procedures were not effective for the quarter ended June 30, 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 June 30,
2008, there was no change in our internal controls over financial reporting that
has materially affected, or that is reasonably likely to materially affect, our
internal control over financial reporting.





PART
II - OTHER INFORMATION


Item
1. Legal Proceedings





None





Item
1A. Risk Factors





Not
required.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





None.





Item
3. Defaults Upon Senior Securities





None





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





None





Item
5. Other Information





None




44




Item
6.  Exhibits




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




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




45




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant certifies that it has duly caused this Quarterly Report on
Form 10-Q to be signed on its behalf by the undersigned, thereunto duly
authorized, in Beijing.




SINO
      GAS INTERNATIONAL HOLDINGS, INC.Date:
      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




46