UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C.
20549





FORM 10-Q/A


(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





o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
  ACT





For the
transition period from ____________ to __________




000-31539


(Commission
file number)





CHINA NATURAL GAS,
INC.


(Exact
name of registrant as
specified in its charter)





Delaware
            98-0231607(State
      or other jurisdiction of
            (IRS
      Employer ofincorporation
      or organization)
            Identification
      No.)




Tang Xing Shu Ma Building, Suite
418


Tang Xing Road


Xian High Tech
Area


Xian, Shaanxi Province,
China


(Address
of principal executive offices)





_______________________


(zip
code)




86-29-8832-7391


( registrant 's
telephone number ,
including area code )





N/A


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


Yes x  No o





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


Large
      accelerated filer o
              Accelerated
      filer oNon-accelerated
      filer x
              Smaller
      reporting company o


(Do not
check if a smaller reporting company)





Number of
shares of Common Stock outstanding as of May 14, 2008: 29,200,304


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


Yes o No x








China Natural Gas, Inc.


Index





PART
      I.
            FINANCIAL
      INFORMATION
            2Item
      1.
            Financial
      Statements
            2Notes
      to Consolidated Financial Statements (unaudited)
            5Item
      2.
            Management's
      Discussion and Analysis ofFinancial
      Condition and Results ofOperations
            26Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            35Item
      4.
            Controls
      and Procedures
            35PART
      II.
            OTHER
      INFORMATION
            36Item
      1.
            Legal
      Proceedings
            36Item
      1A.
            Risk
      Factors
            37Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            47Item
      3.
            Defaults
      Upon Senior Securities
            47Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            47Item
      5.
            Other
      Information
            47Item
      6.
            Exhibits
            47SIGNATURES
            
            48




1


CHINA NATURAL GAS, INC. AND
      SUBSIDIARIESCONSOLIDATED BALANCE
      SHEETSAS OF JUNE 30, 2008 and
      DECEMBER 31, 2007


June 30,
      2008
              
              December 31,
      2007(Unaudited)ASSETSCURRENT
      ASSETS:Cash
      & cash equivalents
              
              $
              29,180,315
              
              $
              13,291,729Short-term
      investments
              
              
              -
              
              
              238,554Accounts
      receivable
              
              
              854,537
              
              
              306,179Other
      receivable - employee advances
              
              
              480,690
              
              
              549,820Inventories
              
              
              523,027
              
              
              231,339Advances
              
              
              993,348
              
              
              663,041Prepaid
      expense and other current assets
              
              
              771,327
              
              
              109,722Loan
      receivable
              
              
              291,800
              
              
              274,200Total current
      assets
              
              
              33,095,044
              
              
              15,664,584PROPERTY AND EQUIPMENT,
      net
              
              
              45,581,330
              
              
              32,291,995CONSTRUCTION IN
      PROGRESS
              
              
              15,537,703
              
              
              2,210,367FINANCING
      COSTS
              
              
              1,951,746
              
              
              -OTHER
    ASSETS
              
              
              7,030,886
              
              
              3,123,052TOTAL
    ASSETS
              
              $
              103,196,709
              
              $
              53,289,998LIABILITIES AND
      STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
              
              $
              365,561
              
              $
              293,970Other
      payables
              
              
              68,458
              
              
              249,719Accrued
      expense
              
              
              141,170
              
              
              -Unearned
      revenue
              
              
              893,960
              
              
              327,220Accrued
      interest
              
              
              741,667
              
              
              -Taxes
      payable
              
              
              1,732,193
              
              
              1,211,775Total current
      liabilities
              
              
              3,943,009
              
              
              2,082,684LONG-TERM
      LIABILITIES:Notes
      payable, net of $16,693,697 discount
              
              
              23,306,303
              
              
              -Derivative
      liabilities - warrants
              
              
              17,500,000
              
              
              -Total long-term
      liabilities
              
              
              40,806,303
              
              
              -COMMITMENTS AND
      CONTINGENCIES
              
              
              -
              
              
              -STOCKHOLDERS'
      EQUITY:Preferred
      stock, $0.0001 per share; authorized 5,000,000 shares; none issued
              
              
              -
              
              
              -Common
      stock, $0.0001 per share; 45,000,000 authorized shares29,200,304
      shares issued and outstanding at June 30, 2008and
      December 31, 2007
              
              
              2,920
              
              
              2,920Additional
      paid-in capital
              
              
              32,085,775
              
              
              32,046,879Stockholder
      receivable
              
              
              (2,918,000
              )
              
              -Cumulative
      translation adjustment
              
              
              7,274,749
              
              
              3,477,025Statutory
      reserves
              
              
              2,654,063
              
              
              1,802,735Retained
      earnings
              
              
              19,347,890
              
              
              13,877,755Total stockholders' equity
              
              
              58,447,397
              
              
              51,207,314TOTAL LIABILITIES AND
      STOCKHOLDERS' EQUITY
              
              $
              103,196,709
              
              $
              53,289,998


The
accompanying notes are an integral part of these consolidated financial
statements.


2




CHINA NATURAL GAS, INC. AND
      SUBSIDIARIESCONSOLIDATED STATEMENTS OF
      INCOME AND OTHER COMPREHENSIVE INCOMEFOR THE THREE AND SIX MONTHS
      ENDED JUNE 30, 2008 AND 2007(Unaudited)
  Three months
      ended
              
              Six months
      endedJune 30
              
              June 302008
              
              2007
              
              2008
              
              2007RevenueNatural
      gas revenue
              
              $
              13,794,866
              
              $
              6,765,265
              
              $
              25,140,185
              
              $
              11,688,837Installation
      and other
              
              
              3,095,620
              
              
              1,508,044
              
              
              5,775,975
              
              
              3,328,048Total
      revenue
              
              
              16,890,486
              
              
              8,273,309
              
              
              30,916,160
              
              
              15,016,885Cost of
      revenueNatural
      gas cost
              
              
              7,214,469
              
              
              3,463,242
              
              
              13,396,743
              
              
              5,955,893Installation
      and other
              
              
              2,010,254
              
              
              666,957
              
              
              3,765,178
              
              
              1,400,523Total
      cost of revenue
              
              
              9,224,723
              
              
              4,130,199
              
              
              17,161,921
              
              
              7,356,416Gross
    profit
              
              
              7,665,763
              
              
              4,143,110
              
              
              13,754,239
              
              
              7,660,469Operating
      expensesSelling
              
              
              1,568,674
              
              
              682,423
              
              
              2,910,288
              
              
              1,276,552General
      and administrative
              
              
              1,040,000
              
              
              260,883
              
              
              1,979,325
              
              
              682,262Total
      operating expenses
              
              
              2,608,674
              
              
              943,306
              
              
              4,889,613
              
              
              1,958,814Income from
      operations
              
              
              5,057,089
              
              
              3,199,804
              
              
              8,864,626
              
              
              5,701,655Non-operating income
      (expense):Interest
      income
              
              
              51,476
              
              
              8,330
              
              
              106,761
              
              
              17,739Interest
      expense
              
              
              (676,569
              )
              
              -
              
              
              (1,036,229
              )
              
              -Other
      income
              
              
              7,766
              
              
              7,973
              
              
              8,440
              
              
              8,356Other
      expense
              
              
              (64,197
              )
              
              -
              
              
              (71,997
              )
              
              -Total
      non-operating income (expense)
              
              
              (681,524
              )
              
              16,303
              
              
              (993,025
              )
              
              26,095Income before income
      tax
              
              
              4,375,565
              
              
              3,216,107
              
              
              7,871,601
              
              
              5,727,750Provision for income
      tax
              
              
              862,673
              
              
              471,098
              
              
              1,550,138
              
              
              872,415Net
    income
              
              
              3,512,892
              
              
              2,745,009
              
              
              6,321,463
              
              
              4,855,335Other comprehensive
      incomeForeign
      currency translation gain
              
              
              1,494,722
              
              
              455,308
              
              
              3,797,724
              
              
              736,712Comprehensive Income
              
              $
              5,007,614
              
              $
              3,200,317
              
              $
              10,119,187
              
              $
              5,592,047Weighted average shares
      outstandingBasic
              
              
              29,200,304
              
              
              24,210,183
              
              
              29,200,304
              
              
              24,210,183Diluted
              
              
              29,323,495
              
              
              24,210,183
              
              
              29,329,733
              
              
              24,210,183Earnings per shareBasic
              
              $
              0.12
              
              $
              0.11
              
              $
              0.22
              
              $
              0.20Diluted
              
              $
              0.12
              
              $
              0.11
              
              $
              0.22
              
              $
              0.20


The
accompanying notes are an integral part of these consolidated financial
statements.


3


CHINA NATURAL GAS, INC. AND
      SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH
      FLOWSFOR THE SIX MONTHS ENDED JUNE
      2008 AND 2007(Unaudited)
  Six months
      endedJune 302008
              
              2007CASH FLOWS FROM OPERATING
      ACTIVITIES:Net
      income
              
              $
              6,321,463
              
              $
              4,855,335Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
              
              
              1,358,378
              
              
              726,256Loss
      on disposal of building improvements and equipment
              
              
              12,134
              
              
              -Amortization
      of discount on senior notes
              
              
              459,473
              
              
              -Amortization
      of financing costs
              
              
              122,592
              
              
              -Stock
      based compensation
              
              
              38,896
              
              
              -Change
      in assets and liabilities:Accounts
      receivable
              
              
              (513,994
              )
              
              (123,663
              )Other
      receivable
              
              
              101,267
              
              
              (608,070
              )Inventories
              
              
              (269,136
              )
              
              156,897Advances
              
              
              (279,741
              )
              
              207,903Prepaid
      expense and other current assets
              
              
              (637,244
              )
              
              199,307Accounts
      payable
              
              
              50,023
              
              
              358,550Other
      payables
              
              
              8,525
              
              
              (161,022
              )Accrued
      expense
              
              
              (61,463
              )
              
              -Accrued
      interest
              
              
              454,164
              
              
              -Unearned
      revenue
              
              
              530,551
              
              
              58,409Taxes
      payable
              
              
              430,244
              
              
              (343,379
              )Net
      cash provided by operating activities
              
              
              8,126,132
              
              
              5,326,523CASH FLOWS FROM INVESTING
      ACTIVITIESPurchase
      of property and equipment
              
              
              (12,471,764
              )
              
              (3,203,009
              )Additions
      to construction in progress
              
              
              (11,736,887
              )
              
              -Prepayment
      on long term assets
              
              
              (3,559,485
              )
              
              -Payment
      for land use rights
              
              
              (36,341
              )
              
              -Proceeds
      from short term investments
              
              
              246,802
              
              
              -Increase
      in stockholder receivable
              
              
              (2,836,800
              )Net
      cash used in investing activities
              
              
              (30,394,475
              )
              
              (3,203,009
              )CASH FLOWS FROM FINANCING
      ACTIVITIES:Proceeds
      from senior notes
              
              
              40,000,000
              
              
              -Payment
      for offering costs
              
              
              (2,122,509
              )
              
              -Net
      cash provided by financing activities
              
              
              37,877,491
              
              
              -Effect
      of exchange rate changes on cash and cash equivalents
              
              
              279,438
              
              
              183,631NET INCREASE IN CASH & CASH
      EQUIVALENTS
              
              
              15,888,586
              
              
              2,307,145CASH & CASH EQUIVALENTS,
      BEGINNING OF PERIOD
              
              
              13,291,729
              
              
              5,294,213CASH & CASH EQUIVALENTS,
      END OF PERIOD
              
              $
              29,180,315
              
              $
              7,601,358SUPPLEMENTAL DISCLOSURE OF CASH
      FLOW INFORMATION:Interest
      paid
              
              $
              -
              
              $
              -Income
      taxes paid
              
              $
              1,203,048
              
              $
              -
  The
accompanying notes are an integral part of these consolidated financial
statements.
 4





CHINA NATURAL GAS, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS


JUNE 30, 2008


(Unaudited)





Note 1 - Organization





Organization and Line of
Business




China
Natural Gas, Inc. (the “Company”) was incorporated in the state of Delaware on
March 31, 1999. The Company through its wholly owned subsidiaries and variable
interest entities engages in distribution of natural gas to commercial,
industrial and residential customers, construction of pipeline networks, and
installation of natural gas fittings and parts for end-users.




On May
15, 2007, t he
Company’s variable interest entity, through Xi’an
Xilan Natural Gas Co, Ltd. (“XXNGC”) established Xi'an Xilan Auto Bodyshop Co., Ltd (“XXABC”) with registered capital
of $519,200 in Shaanxi province, People’s Republic of China (“PRC”). XXABC was
established for the purpose of providing modification services to different
types of automobiles to be able to use natural gas. XXABC is 100% owned by Xi’an
Xilan Natural Gas Co, Ltd .





On March
18, 2008, Xilan Natural Gas Equipment Co., Ltd (“XNGE”)  increased
its registered capital from $30,000,000 to $53,929,260. The additional
$14,429,271 registered capital was contributed by China Natural Gas, Inc on
April 17, 2008 and the $9,500,000 registered capital was contributed by China
Natural Gas Inc. as a payment to Chemtex International Inc on January 31, 2008,
for the purchase of license, know-how, design of constructing the Liquefied
Natural Gas (“LNG”) processing plant.




On April
22, 2008, Shaanxi Jingbian Liquefied Natural Gas Co., Ltd. (“SJLNG”) increased
its registered capital by $2,862,000. SJLNG is 100% owned by Xi’an Xilan
Natural Gas Co., Ltd.





On April
30, 2008, the Industrial and Commercial Administration Bureau approved XXNGC to
increase registered capital from $8,336,856 to $43,443,640 as an additional
contribution by the shareholders of XXNGC under PRC Law. $15,513,526 was
approved by the Industrial and Commercial Administration Bureau to be
transferred out from the surplus reserve and retained earning as an increase of
registered capital. Another $19,593,258 was contributed by XNGE cumulatively
prior April 30, 2008, which was previously classified as intercompany payable in
XXNGC and was eliminated in the consolidated financial statements. The increase
in registered capital in XXNGC was in compliance with the Addendum to Option
Agreement entered by the Company through XXGE and XXNGC, Mr. Qinan
Ji, chairman and shareholder of XXNGC, and each of the shareholders of XXNGC
(hereafter collectively referred to as the “Transferor”) on August 8, 2008, and
made retroactive to June 30, 2008. See “Consolidation of Variable Interest
Entity” section for further detail on the Addendum to Option
Agreement.


5





Note 2 - Summary of Significant
Accounting Policies





Principles of Consolidation





The
accompanying consolidated financial statements include the accounts of China
Natural Gas, Inc. and its wholly owned subsidiary, Xilan Natural Gas Equipment
Co., Ltd and its 100% variable interest entities (“VIE”), Xi’an Xilan Natural
Gas Co. Ltd., Shaanxi Jingbian Liquefied Natural Gas Co., Ltd and Xian Xilan
Auto Bodyshop Co., Ltd. All inter-company accounts and transactions have been
eliminated in the consolidation.





Consolidation of Variable
Interest Entity





In
accordance with Financial Interpretation No. 46R, Consolidation of Variable
Interest Entities ("FIN 46R"), VIEs are generally entities that lack sufficient
equity to finance their activities without additional financial support from
other parties or whose equity holders lack adequate decision making ability. All
VIEs with which the Company is involved must be evaluated to determine the
primary beneficiary of the risks and rewards of the VIE. The primary beneficiary
is required to consolidate the VIE for financial reporting
purposes.





On
February 21, 2006, we formed Xilan
Natural Gas Equipment Co., Ltd as a
wholly-owned foreign enterprise (WOFE). We then, through XNGE, entered into
exclusive arrangements with Xian Xilan Natural Gas and its shareholders that
give us the ability to substantially influence Xian Xilan Natural Gas’ daily
operations and financial affairs, appoint its senior executives and approve all
matters requiring shareholder approval. We memorialized these arrangements on
August 17, 2007. As a result, the Company consolidates the financial results of
Xian Xilan Natural Gas as variable interest entity pursuant to Financial
Interpretation No. 46R, “Consolidation of Variable Interest Entities.” The
arrangements consist of the following agreements:




a.
            Xian
      Xilan Natural Gas holds the licenses and approvals necessary to operate
      its natural gas business in China.





b.
            XNGE
      provides exclusive technology consulting and other general business
      operation services to Xian Xilan Natural Gas in return for a consulting
      services fee which is equal to Xian Xilan Natural Gas’s
      revenue.





c.
            Xian
      Xilan Natural Gas’s shareholders have pledged their equity interests in
      Xian Xilan Natural Gas to the
Company.





d.
            Irrevocably
      granted the Company an exclusive option to purchase, to the extent
      permitted under PRC law, all or part of the equity interests in Xian Xilan
      Natural Gas and agreed to entrust all the rights to exercise their voting
      power to the person appointed by the
Company.





On August
8, 2008, the Company through XXGE entered into an Addendum to Option Agreement
with Mr. Qinan
Ji, chairman and shareholder of XXNGC, and each of the shareholders of XXNGC
(hereafter collectively referred to as the “Transferor”), and made retroactive
to June 30, 2008. According to the agreement, the Chairman and the Shareholders
of XXNGC irrevocably grants to XNGE an option to purchase or cause any person
designated by XNGE to purchase, to the extent permitted under PRC Law, according
to the steps determined by XNGE, at $1.00 for each Transferors’ Purchased Equity
Interest or the lowest price permissible under the applicable laws if the
applicable PRC laws stipulate restrictions on the purchase price of the
Additional Equity Interest at the time that Equipment exercise the Option. The
Agreement limits the XXNGC and the transferors’ right to make certain
equity interest related decisions. This Addendum supplements that certain Option
Agreement entered into as of August 17, 2007 and effective as of March 8, 2006
and is in addition to the rights granted in the Agreement.


6





Basis of
Presentation





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the
Company’s reporting currency is the United States Dollar (“USD”), therefore, the
accompanying consolidated financial statements have been translated and
presented in USD.





In the
opinion of management, the unaudited consolidated financial statements furnished
herein include all adjustments, all of which are of a normal recurring nature,
necessary for a fair statement of the results for the interim period presented.
Operating results for the period ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008 .





Foreign Currency Translation





As of
June 30, 2008 and December 31, 2007, the accounts of the Company were
maintained, and their consolidated financial statements were expressed in RMB.
Such consolidated financial statements were translated into USD in accordance
with Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign
Currency Translation," with the RMB as the functional currency. According to the
Statement, all assets and liabilities were translated at the exchange rate on
the balance sheet date, stockholder's equity are translated at the historical
rates and statement of income and cash flow items are translated at the weighted
average exchange rate for the year. The resulting translation adjustments are
reported under other comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income."





The
balance sheet amounts with the exception of equity at June 30, 2008 were
translated 6.85 RMB to $1.00 USD as compared to 7.29 RMB at December 31, 2007.
The equity accounts were stated at their historical rate. The average
translation rates applied to income and cash flow statement amounts for the six
months ended June 30, 2008 and 2007 were 7.05 RMB and 7.73 RMB to $1.00 USD,
respectively.  The average translation rates applied to income and cash
flow statement amounts for the three months ended June 30, 2008 and 2007 were
6.97 RMB and 7.69 RMB to $1.00 USD, respectively. Translation adjustments
resulting from this process in the amount of $7,274,749 and $3,477,025 as of
June 30, 2008 and December 31, 2007, respectively are classified as an item of
other comprehensive income in the stockholders’ equity section of the
consolidated balance sheet. During the six months ended June 30, 2008 and 2007,
other comprehensive income in the consolidated statements of income and other
comprehensive income included translation gains of $3,797,724 and $736,712,
respectively. For the three months ended June 30, 2008 and 2007, other
comprehensive income in the consolidated statements of income and other
comprehensive income included translation gains of $1,494,722 and $455,308,
respectively.





Use of
Estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles 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 period.
Actual results could differ from those estimates.





7


Cash and Cash
Equivalents





Cash and
cash equivalents include cash on hand and demand deposits in accounts maintained
with state-owned banks within the PRC and the United States. The Company
considers all highly liquid investments with original maturities of three months
or less at the time of purchase to be cash equivalents.





Certain
financial instruments, which subject the Company to concentration of credit
risk, consist of cash. The Company maintains balances at financial institutions
which, from time to time, may exceed Federal Deposit Insurance Corporation
insured limits for the banks located in the United States. Balances at financial
institutions or state-owned banks within the PRC are not covered by insurance.
As of June 30, 2008 and December 31, 2007, the Company had deposits in excess of
federally insured limits of $29,063,157 and $13,053,994, respectively. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risks on its cash in bank accounts.





Short Term
Investments





Short-term
investments are securities classified as available for sale, held by a private
investment trust company for investing activities. Gain or loss on securities is
computed using cost basis of first-in, first-out (FIFO) basis. The fair value of
securities at December 31, 2007 totaled $238,554, which equaled the original
costs, and was returned to the Company in March 2008.





Accounts
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 maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Reserves are recorded primarily on a specific
identification basis in the period of the related sales. The Company’s
management has determined that all receivables are collectible and there is no
need for a reserve for bad debts as of June 30, 2008 and December 31,
2007.





Other Receivable - employee
advances





From time
to time, the Company advances predetermined amounts based upon internal Company
policy to certain employees and internal units to ensure certain transactions to
be performed in a timely manner. The Company has full oversight and control over
the advanced accounts. Therefore, the allowance for the uncollectible accounts
is nil.





Advances





The
Company advances to certain vendors for purchase of its material. The advances
are interest free and unsecured.





8


Inventory





Inventory
is stated at the lower of cost, as determined on a first-in, first-out basis, or
market. Management compares the cost of inventories with the market value, and
allowance is made for writing down the inventories to their market value, if
lower. Inventory consists of material used in the construction of pipelines and
material used in repairing and modifying of vehicles. Inventory also consists of
natural gas and gasoline.





At June
30, 2008 and December 31, 2007, the following are the details of the
inventories:





June
      30, 2008
            
            December
      31, 2007(Unaudited)Materials
      and supplies
            
            $
            205,068
            
            $
            109,333Natural
      gas and gasoline
            
            
            317,959
            
            
            122,006$
            523,027
            
            $
            231,339





Property and Equipment





Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives as follows:





Office
      equipment
            5
      yearsOperating
      equipment
            5-20
      yearsVehicles
            5
      yearsBuildings
            30
      years





At June
30, 2008 and December 31, 2007, the following are the details of the property
and equipment:





June
      30, 2008
            
            December
      31,2007(Unaudited)Office
      equipment
            
            $
            192,676
            
            $
            163,432Operating
      equipment
            
            
            31,972,049
            
            
            22,413,270Vehicles
            
            
            1,980,343
            
            
            1,484,892Buildings
            
            
            16,740,143
            
            
            11,943,00650,885,211
            
            
            36,004,600Less
      accumulated depreciation
            
            
            (5,303,881
            )
            
            (3,712,605
            )$
            45,581,330
            
            $
            32,291,995




Depreciation
expense for the six months ended June 30, 2008 and 2007 was $1,358,378 and
$726,256, respectively. Depreciation expense for the three months ended June 30,
2008 and 2007 was $701,854 and $374,480, respectively.




9


Long-Lived
Assets





The
Company applies the provision of Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144") to all long lived assets. SFAS 144 addresses accounting and reporting for
impairment and disposal of long-lived assets. The Company periodically evaluates
the carrying value of long-lived assets to be held and used in accordance with
SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal. Based on its review, the Company believes that, as of June 30, 2008
there were no significant impairments of its long-lived assets.





Construction in
Progress





Construction
in progress consists of the cost of constructing property and equipment for the
Company’s use. The major cost of construction in progress relates to material,
labor and overhead.




Interest
cost capitalized into construction in progress for the six months ended June 30,
2008 and 2007
amounted to $682,504 and $0, respectively. Interest cost capitalized into
construction in progress for the three months ended June 30,
2008 and 2007
amounted to $491,856 and $0, respectively.





Fair Value of Financial
Instruments





On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the balance sheets for
receivables and current liabilities each qualify as financial instruments and
are a reasonable estimate of fair value because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels are defined as
follow:


·
              Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 
 ·
              Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.
 
 ·
              Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.




10




The
Company analyzes all financial instruments with features of both liabilities and
equity under SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”




The
Company’s warrant liability is carried at fair value totaling $17,500,000 as of
June 30, 2008. The Company used Level 2 inputs for its valuation methodology for
the warrant liability, and their fair values are determined by the price that
the Company would be required to repurchase the warrants if they are not
exercised.




Fair
      Value as of
            
            Fair
      Value Measurements at June 30, 2008June 30, 2008
            
            Using
      Fair Value HierarchyLiabilities
            
            
            
            Level
      1
            
            Level
      2
            
            Level
      3Warrant
      liability
            
            $
            17,500,000
            
            
            
            
            $
            17,500,000





The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the balance sheet at fair value in accordance with
SFAS No. 157.




Derivative Accounting





The
financial instruments are accounted for in accordance with Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, which established accounting and reporting requirements for
derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS
No. 138 and 149, requires that all derivative instruments subject to the
requirements of the statement be measured at fair market value and recognized as
assets or liabilities in the balance sheet. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and the
resulting designation is generally established at the inception of a derivative.
For derivatives designated as cash flow hedges and meeting the effectiveness
guidelines of SFAS No. 133, changes in fair value, to the extent effective, are
recognized in other comprehensive income until the hedged item is recognized in
earnings. Hedge effectiveness is measured at least quarterly based on the
relative changes in fair value between the derivative contract and the hedged
item over time. Any change in fair value of a derivative resulting from
ineffectiveness or an excluded component of the gain/loss is recognized
immediately in the statement of operations.





The
Company elected not to apply hedge accounting; therefore the change in fair
value is recognized in earnings each reporting period. The Company did not have
any derivatives during the period.





Revenue
Recognition





The
Company's revenue recognition policies are in accordance with Staff
accounting bulletin (SAB) 104. 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. Revenue from gas and gasoline sales is recognized when gas
and gasoline is pumped through pipelines to the end users. Revenue from
installation of pipelines is recorded when the contract is completed and
accepted by the customers. The construction contracts are usually completed
within one to two months. Revenue from repairing and modifying vehicles is
recorded when service are rendered to and accepted by the
customers.





11


Unearned
Revenue





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





Advertising Costs





The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the six and three
months ended June 30, 2008 and 2007 were insignificant.





Stock-Based
Compensation





The
Company records and reports stock-based compensation pursuant to SFAS 123R
“Accounting for Stock-Based Compensation”, which defines a fair-value-based
method of accounting for stock-based employee compensation and transactions in
which an entity issues its equity instruments to acquire goods and services from
non-employees. Stock compensation for stock granted to non-employees has been
determined in accordance with SFAS 123R and the Emerging Issues Task Force
consensus Issue No. (EITF) 96-18, "Accounting for Equity Instruments that are
issued to Other than Employees for Acquiring, or in Conjunction with Selling
Goods or Services", as the fair value of the consideration received or the fair
value of equity instruments issued, whichever is more reliably measured.




Income
Taxes





The
Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, 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. At June 30, 2008 and December 31, 2007, there was no
significant book to tax differences. There is no difference between book
depreciation and tax depreciation as the Company uses the same method for both
book and tax. The Company adopted FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. A tax position
is recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being
presumed to occur. The amount recognized is the largest amount of tax benefit
that is greater than 50% likely of being realized on examination. For tax
positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no affect on the Company’s financial
statements.


12





Local PRC Income
Tax





The
Company’s subsidiary or variable interest entities operate in China. Starting
January 1, 2008, pursuant to the tax laws of China, general enterprises are
subject to income tax at an effective rate of 25% compare to 33% prior to 2008.
The Company’s variable interest entity, XXNGC, 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. Accordingly, except for income from XNGE, SJLNG, XXABC,
which subjects to 25% PRC income tax rate, XXNGC’s income is subject to a
reduced tax rate of 15%.





A
reconciliation of tax at United States federal statutory rate to provision for
income tax recorded in the financial statements is as follows:





For
      three months ended
            
            For
      six months endedJune
      30,
            
            June
      30,(Unaudited)
            
            (Unaudited)2008
            
            2007
            
            2008
            
            2007Tax
      provision (credit) at statutory rate
            
            
            34
            %
            
            34
            %
            
            34
            %
            
            34
            %Foreign
      tax rate difference
            
            
            (9
            %)
            
            (1
            %)
            
            (9
            %)
            
            (1
            %)Effect
      of favorable tax rate
            
            
            (4
            %)
            
            (14
            %)
            
            (4
            %)
            
            (14
            %)21
            %
            
            19
            %
            
            21
            %
            
            19
            %





The
estimated tax savings for the six months ended June 30, 2008 and 2007 amounted
to $933,423 and $1,042,675, respectively. The net effect on earnings per share
had the income tax been applied would decrease basic earnings per share for the
six months ended June 30, 2008 and 2007 from $0.22 to $0.19 and $0.20 to $0.16,
respectively. The estimated tax savings for the three months ended June 30, 2008
and 2007 amounted to $531,372 and $560,804, respectively. The net effect on
earnings per share had the income tax been applied would decrease basic earnings
per share for the three months ended June 30, 2008 and 2007 from $0.12 to $0.10
and $0.11 to $0.09, respectively.





Value added tax





Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s variable interest entity XXNGC’s products that are
sold in the PRC are subject to a Chinese value-added tax at a rate of 13% of the
gross sales price. This VAT may be offset by VAT paid by the XXNGC on raw
materials and other materials included in the cost of producing their finished
product. XXNGC recorded VAT payable and VAT receivable net of payments in the
financial statements. The VAT tax return is filed offsetting the payables
against the receivables.





All
revenues from XXABC subject to a Chinese value-added tax at a rate of 6%. This
VAT cannot offset with VAT paid for materials included in the cost of revenues.





13


Basic and Diluted Earning
Per Share




Earning
per share is calculated in accordance with the SFAS 128, “Earnings per share”.
Basic net earnings per share is based upon the weighted average number of common
shares outstanding. Diluted net earnings per share is based on the assumption
that all dilutive convertible shares and stock options were converted or
exercised. Dilution
is computed by applying the treasury stock method. Under this method, options
and warrants are assumed to be exercised at the beginning of the period (or at
the time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the period.





Statement of Cash
Flows





In
accordance with Statement of Financial Accounting Standards No. 95, "Statement
of Cash Flows," cash flows from the Company's operations is calculated based
upon the local currencies and translated to USD at average translation rates for
the period. As a result, translation adjustments 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.





Reclassifications





Certain
prior period amounts have been reclassified to conform to current period’s
presentation. This reclassification had no material effect on operations or cash
flows.





Recent
Pronouncements





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that  are not
currently required to be measured at fair value. The objective of FAS 159 is to
provide opportunities to mitigate volatility in reported earnings caused
by  measuring
related assets and liabilities differently without having to apply hedge
accounting provisions. FAS 159 also establishes presentation and
disclosure  requirements
designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. The Company
adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect the
option to measure the fair value of eligible financial assets and
liabilities.





In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed. The
Company adopted FSP EITF 07-3 and expensed the research and development as
incurred.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
has not determined the effect that the application of SFAS 160 will have on its
consolidated financial statements.


14





In
December 2007, Statement of Financial Accounting Standards No. 141(R), Business
Combinations , was
issued. SFAS No. 141R replaces SFAS No. 141, Business Combinations. SFAS 141R
retains the fundamental requirements in SFAS 141 that the acquisition method of
accounting (which SFAS 141 called the purchase method ) be used
for all business combinations and for an acquirer to be identified for each
business combination. SFAS 141R requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This replaces SFAS 141’s cost-allocation process, which
required the cost of an acquisition to be allocated to the individual assets
acquired and liabilities assumed based on their estimated fair values. SFAS 141R
also requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined in
accordance with SFAS 141R). SFAS 141R 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. An entity
may not apply it before that date. The Company is currently evaluating the
impact that adopting SFAS No. 141R will have on its financial
statements.





In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - An Amendment of SFAS
No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for
derivative instruments and hedging activities by requiring enhanced disclosures
regarding the impact on financial position, financial performance, and cash
flows. To achieve this increased transparency, SFAS 161 requires (1) the
disclosure of the fair value of derivative instruments and gains and losses in a
tabular format; (2) the disclosure of derivative features that are credit
risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is
effective on January 1, 2009. The Company is in the process of evaluating
the new disclosure requirements under SFAS 161.





In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("FAS 162"). FAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. FAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The Company is in the
process of evaluating the impact of adoption of this statement on the results of
operations, financial position or cash flows.





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
This standard triggers liability accounting on all options and warrants
exercisable at strike prices denominated in any currency other than the
functional currency in China (Renminbi). The Company is currently evaluating the
impact of adoption of EITF No. 07-5 on the Company’s consolidated financial
statements.


15





Note 3 - Other
Assets





Other
assets at June 30, 2008 and December 31, 2007 consisted of the
following,





June
      30,
            
            December
      31,2008
            
            2007(Unaudited)Prepaid
      rent - natural gas stations
            
            $
            277,807
            
            $
            225,924Prepayment
      for acquiring land use right
            
            
            1,057,775
            
            
            993,975Advances
      on purchasing equipment/construction in progress
            
            
            5,259,187
            
            
            1,501,443Refundable
      security deposits
            
            
            379,340
            
            
            356,460Others
            
            
            56,777
            
            
            45,250Total
            
            $
            7,030,886
            
            $
            3,123,052





All land
in the People’s Republic of China is government owned. However, the government
grants the user a land use right to use the land. As of June 30, 2008 and
December 31, 2007, the Company prepaid $1,057,775 and $993,975, respectively, to
the PRC local government to purchase land use rights. The Company is in the
process of negotiating the final purchase price with the local government and
the land use rights have not been granted to the Company. Therefore, the Company
did not amortize the prepaid land use rights.





Advances
on the purchase of equipment/construction in progress are monies deposited or
advanced to outside vendors/subcontractors for the purchase of operating
equipment or for services to be provided for constructions in progress.





Refundable
security deposits are monies deposited with one of the Company’s major vendors
and gas station landlord. These amounts will be returned to the Company if they
terminate the business relationship or at the end of the lease.





Note 4 - Senior Notes
Payable





On
December 30, 2007, the Company entered into a Securities Purchase Agreement with
Abax Lotus Ltd. (the “Investor”). The Purchase Agreement was subsequently
amended on January 29, 2008, pursuant to which the Company (i) agreed to issue
5.00% Guaranteed Senior Notes due 2014 (the “Senior Notes”) of approximately
$20,000,000, (ii) agreed to issue to the Investor Senior Notes in aggregate
principal amount of approximately $20,000,000 on or before March 3, 2008 subject
to the Company meeting certain closing conditions, (iii) granted the Investor an
option to purchase up to approximately $10,000,000 in principal amount of its
Senior Notes and (iv) agreed to issue to the Investor seven-year warrants
exercisable for up to 2,900,000 shares of the Company’s common stock (the
“Warrants”) at an initial exercise price equal to $7.3652 per share, subject to
certain adjustments. On January 29, 2008, the Company issued $20,000,000 Senior
Notes 2,900,000 warrants pursuant to the Purchase Agreement. On March 3, 2008,
the Investor exercised its first option for an additional $20,000,000 of Senior
Notes. On March 10, 2008, the Company issued $20,000,000 in additional Senior
Notes resulting in total Senior Notes of $40,000,000.


At the
closing, the Company entered into:





·
            An
      indenture for the 5.00% Guaranteed Senior Notes due
  2014;


·
            An
      investor rights agreement;


·
            A
      registration rights agreement covering the shares of common stock issuable
      upon exercise of the warrants;


16


·
            An
      information rights agreement that grants to the Investor, subject to
      applicable law, the right to receive certain information regarding the
      Company, and


·
            A
      share-pledge agreement whereby the Company granted to the Collateral Agent
      (on behalf of the holders of the Senior Notes) a pledge on 65% of the
      Company’s equity interest in Shaanxi Xilan Natural Gas Equipment Co.,
      Ltd., a PRC corporation and wholly-owned subsidiary of the Company.


·
            An
      account pledge and security agreement whereby the Company granted to the
      Collateral Agent a security interest in the account where the proceeds
      from the Senior Notes are
deposited.





In
addition, Qinan Ji, Chief Executive Officer and Chairman of the Board of the
Company, executed a non-compete agreement for the benefit of the
Investor.





The
Senior Notes were issued pursuant to an indenture between the Company and DB
Trustees (Hong Kong) Limited, as trustee, at the closing. The Senior Notes will
mature on January 30, 2014 and will initially bear interest at the stated
interest rate of 5.00% per annum, subject to increase in the event of certain
circumstances. The Company is required to make mandatory prepayments on the
Senior Notes on the following dates and in the following amounts, expressed as a
percentage of the aggregate principal amount of Notes that will be outstanding
on the first such payment date:




Date
            Prepayment
      AmountJuly
      30, 2011
            8.3333%January
      30, 2012
            8.3333%July
      30, 2012
            16.6667%January
      30, 2013
            16.6667%July
      30, 2013
            25.0000%





During
the twelve month period commencing January 30 of the years set forth below, the
Company may redeem the Senior Notes at the following principal
amount:




Year
            
            Principal2009
            $
            43,200,0002010
            
            42,400,0002011
            
            41,600,0002012
            
            40,800,0002013
      and thereafter
            
            40,000,000





17


Upon the
occurrence of certain events defined in the indenture, the Company must offer
the holders of the Senior Notes the right to require the Company to purchase the
Senior Notes in an amount equal to 105% of the aggregate principal amount
purchased plus accrued and unpaid interest on the Senior Notes purchased.





The
indenture requires the Company to pay additional interest at the rate of 3.0%
per annum of the Senior Notes if the Company has not obtained a listing of its
common stock on the Nasdaq Global Market, the Nasdaq Capital Market or the New
York Stock Exchange by January 29, 2009 and maintained such listing continuously
thereafter as long as the Senior Notes are outstanding. Pursuant to the
registration rights agreement (described herein), the Company has agreed to pay
additional interest at the rate of 1.0% per annum of the Senior Notes principal
amount outstanding for each 90-day period in which the Company has failed to
comply with the registration obligations under the registration rights
agreement.





The
indenture limits the Company's ability to incur debt and liens, make dividend
payments and stock repurchases, make investments, reinvest proceeds from asset
sales and enter into transactions with affiliates, among other things. The
indenture also requires the Company to maintain certain financial
ratios.





The
Company also entered into an investor rights agreement, pursuant to which, as
long as an investor holds at least 10% of the aggregate principal amount of the
Senior Notes issued and outstanding or at least 3% of the Company’s issued and
outstanding common stock pursuant to the warrants on an as-exercised basis
(“Minimum Holding”), the Company has agreed not to undertake certain corporate
actions without prior Investor approval. In addition, so long as an Investor
owns the Minimum Holding, such Investor shall have a right of first refusal for
future debt securities offerings by the Company and the Company is subject to
certain transfer restrictions on its securities and certain other
properties.




From the
Closing Date and as long as the Investor continues to hold more than 10% of the
outstanding shares of common stock on an as-converted, fully-diluted basis, the
Investor shall be entitled to appoint one of the Company’s board of directors
(the “Investor Director”). The Investor Director shall be entitled to serve on
each committee of the board, except that, the Investor Director shall not serve
on the audit committee unless it is an independent director. Mr. Ji has agreed
to vote his shares for the election of the Investor Director.




The
Company is required to prepare and file a registration statement covering the
sales of all of the shares of common stock issuable upon exercise of the
warrants (the “Warrant Shares”), subject to any limitation required by
applicable of Rule 415 of the SEC pursuant to the Securities Act of 1933 and to
have the registration statement declared effective by June 27, 2008. In the
event that the registration statement has not been declared effective by the SEC
on or before June 27, 2008 or if effectiveness of the registration statement is
suspended at any time other than pursuant to a suspension notice, for each
90-day period during which the registration default remains uncured, the Company
shall be required to pay additional interest at the rate of one percent (1%) of
the Senior Notes.





On March
3, 2008, the Investor exercised its option to purchase an additional $20,000,000
of Senior Notes. On March 10, 2008, the Company issued the additional
$20,000,000 in Senior Notes resulting in total Senior Notes of
$40,000,000.





18


In
connection with the issuance of the Securities Purchase Agreement, the Company
paid $2,122,509 in debt issuance costs which is being amortized over the life of
the Senior Notes. For the six months ended June 30, 2008, the Company amortized
$122,592 of the aforesaid issuance costs, net of capitalized of interest. For
the three months ended June 30, 2008, the Company amortized $66,322 of the
aforesaid issuance costs, net of capitalized of interest.





In
connection with the Securities Purchase Agreement, the Company agreed to issue
to the Investor seven-year warrants exercisable for up to 2,900,000 shares of
the Company’s common stock at an initial exercise price equal to $7.3652 per
share, subject to certain adjustments. The exercise price of the Warrants is
adjusted on the first anniversary of issuance and thereafter, at every six month
anniversary beginning in the fiscal year 2009 if the volume weighted average
price, or VWAP, (as defined therein) for the 15 trading days prior to the
applicable reset date is less than the then applicable exercise price, in which
case the exercise price shall be adjusted downward to the then current VWAP;
provided, however, that in no event shall the exercise price be adjusted below
$3.6826 per share.





If the
Company’s consolidated net profit after tax does not reach the stated level for
2007 or 2008, the exercise price of the warrants shall be adjusted by
multiplying the current exercise price by a fraction, the numerator of which is
the sum of (i) the number of shares of the Company’s common stock outstanding
immediately prior to such adjustment and (ii) 87,000, and the denominator of
which is the number of shares of the Company’s common stock outstanding
immediately prior to such adjustment. Pursuant to the terms of the warrant
agreement, a holder cannot exercise the Warrants to the extent that the number
of shares of Common Stock beneficially owned by the holder would, following such
exercise, exceed 9.9% of the outstanding shares of common stock at the time of
exercise.





The
warrants granted to the Investor on January 29, 2008 are considered derivative
instruments that need to be bifurcated from the original security. If the
Warrants have not been exercised within the seven year period, then the Investor
can have the Company purchase the Warrants for $17,500,000. This amount is shown
as a debt discount and is being amortized over the term of the Senior Notes. For
the six months ended June 30, 2008, the Company amortized $459,473 of the
aforesaid discounts, net of capitalized of interest. For the three months ended
June 30, 2008, the Company amortized $312,810 of the aforesaid discounts, net of
capitalized of interest.





Note 5 - Stockholders’
Equity





Stockholder
Receivable





As of
June 30, 2008, a loan outstanding of $2,918,000 was receivable from the
shareholder of Xi’an ShengWei Science and Technology Industry Co., Ltd. The
outstanding amount is reported as a reduction of stockholders’ equity. The
maturity date of loan is September 30, 2008. The loan was subsequently repaid in
August 2008.





Common
stock





On August
2, 2007, the Company entered into a Securities Purchase Agreement with investors
to sell 4,615,385 shares of the Company’s common stock and attached warrants to
purchase up to 692,308 shares of Common stock (“Investor warrants”) for $3.25
per share (or an aggregate purchase price of $15,000,000) and for total net
proceeds of $13,823,467. Warrants are exercisable for a period of five years
with exercise price of $7.79 per share.





19


In
connection with the above-mentioned offering, the Company entered into a finance
representation agreement (“Agreement”) with a placement agent (“Agent”).
Pursuant to the agreement, the Company agreed to pay the Agent $10,000 and
issued a warrant (“Placement Agent Warrants”) to acquire 75,000 shares of the
Company’s common stock. In addition, the Company paid $1,050,000 fee (7% of the
gross proceeds).





Warrants
associated with the above-mentioned issuance of common stock were issued in
October 2007 upon the effective filing of its certificate of Amendment of
Articles of Incorporation to increase the authorized number of shares of common
stock from 30,000,000 to 45,000,000.





Both
Investor Warrants and Placement Agent Warrants meet the conditions for equity
classification pursuant to FAS 133 “Accounting for Derivatives” and EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.” Therefore, these warrants were classified as
equity and accounted as common stock issuance cost.





Following
is a summary of the warrant activity:





Warrants
              Outstanding
            
            Weighted
      Average
              Exercise
      Price
            
            Aggregate
      Intrinsic ValueOutstanding,
      December 31, 2006
            
            
            1,140,286
            
            $
            3.60
            
            
            -Granted
            
            
            767,308
            
            $
            7.79
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (819,110
            )
            $
            3.60
            
            
            -Outstanding,
      December 31, 2007
            
            
            1,088,484
            
            $
            6.55
            
            $
            376,977Granted
            
            
            2,900,000
            
            $
            7.37
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Outstanding,
      June 30, 2008 (Unaudited)
            
            
            3,988,484
            
            $
            7.14
            
            
            -


Following
is a summary of the status of warrants outstanding at June 30, 2008:





Outstanding
      Warrants
            
            
            
            Exercisable
      WarrantsExercise
      Price
            
            Number
            
            Average
      Remaining Contractual Life
            
            Average
      Exercise Price
            
            Number$3.60
            
            321,176
            
            0.53
            
            $3.60
            
            321,176$7.37
            
            2,900,000
            
            6.58
            
            $7.37
            
            2,900,000$7.79
            
            767,308
            
            4.09
            
            $7.79
            
            767,308$7.14
            
            3,988,484
            
            5.61
            
            $7.14
            
            3,988,484




20


Note 6 - Defined Contribution
Plan





The
Company is required to participate in a defined contribution plan operated by
the local municipal government in accordance with Chinese law and regulations.
The Company makes annual contributions of 14% of all employees' salaries to the
plan. Starting from 2008, no minimum contribution is required but the maximum
contribution cannot be more than 14 % of the current salary expense. The total
contribution for the above plan was $0 and $54,992 for the six months ended June
30, 2008 and 2007, respectively. The total contribution for the above plan was
$0 and $34,860 for the three months ended June 30, 2008 and 2007,
respectively.





Note 7 - Statutory
Reserve





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




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





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





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





The
Company has appropriated $851,328 and $494,383 as reserve for the statutory
surplus reserve for six months ended June 30, 2008 and 2007. The Company had
appropriated $ 485,562 and 152,523 as reserve for the statutory surplus reserve
for three months ended June 30, 2008 and 2007.





Note 8 - Accounting for stock-based
compensation





On
September 22, 2007, Mr. Qinan Ji, chairman and shareholder of the Company (the
“Grantor”) entered into a Stock Option Agreement with Crone Rozynko LLP (the
“Optionee”) to grant Optionee an option to purchase 100,000 shares the Company’s
common stock. 30% of the shares vest on September 22, 2008, 30% vest on
September 22, 2009, and the remaining 40% vest on September 22, 2010. Upon
termination of the Optionee as a service provider to the Company, the Optionee
shall return all unvested options. This Option may be exercised until June 1,
2012.





The
Company used the Black-Sholes model to value the options at the time they were
issued, based on the stock price on its grant date, the stated exercise prices
and expiration dates of the instruments and using a risk-free rate of 4.10%. The
estimated life is based on one half of the sum of the vesting period and the
contractual life of the option. This is the same as assuming that the options
are exercised at the mid-point between the vesting date and expiration date. The
stock option that shall vest on September 22, 2008 had a fair value of
approximately $51,861 and they are being amortized over the vesting period.


21


As of June 30,
2008 ,
approximately $160,367 of estimated expense with respect to non-vested
stock-based compensation has yet to be recognized and will be recognized in
expense over the optionee’s remaining weighted average service period of
approximately 2.725 years.




Note 9 - Earnings Per
Share





Earnings
per share for the period ended June 30, 2008 and 2007 is determined by dividing
net income for the periods by the weighted average number of both basic and
diluted shares of common stock and common stock equivalents outstanding. The
following is an analysis of the differences between basic and diluted earnings
per common share in accordance with Statement of Financial Accounting Standards
No. 128, “Earnings Per Share.”





The
following demonstrates the calculation for earnings per share for the three and
six months ended June 30, 2008 and 2007:





For
      three months ended
            
            For
      six months endedBasic earning per
      share
            
            2008
            
            2007
            
            2008
            
            2007Net
      income
            
            $
            3,512,892
            
            $
            2,745,009
            
            $
            6,321,463
            
            $
            4,855,335Weighted
      shares outstanding-Basic
            
            
            29,200,304
            
            
            24,210,183
            
            
            29,200,304
            
            
            24,210,183Earnings
      per share-Basic
            
            $
            0.12
            
            $
            0.11
            
            $
            0.22
            
            $
            0.20Diluted earning per
      shareNet
      income
            
            $
            3,512,892
            
            $
            2,745,009
            
            $
            6,321,463
            
            $
            4,855,335Weighted
      shares outstanding-Basic
            
            
            29,200,304
            
            
            24,210,183
            
            
            29,200,304
            
            
            24,210,183Effect
      of diluted securities-Warrants
            
            
            123,191
            
            
            -
            
            
            129,429
            
            
            -Weighted
      shares outstanding-Diluted
            
            
            29,323,495
            
            
            24,210,183
            
            
            29,329,733
            
            
            24,210,183Earnings
      per share -Diluted
            
            $
            0.12
            
            $
            0.11
            
            $
            0.22
            
            $
            0.20




22


At June
30, 2008 and 2007, the Company had outstanding warrants of 3,988,484 and
1,140,286, respectively. For the six months ended June 30, 2008, the average
stock price was greater than the exercise prices of the 321,176 warrants which
resulted in additional weighted average common stock equivalents of 129,429;
3,667,308 outstanding warrants were excluded from the diluted earnings per share
calculation as they are anti-dilutive. For the three months ended June 30, 2008,
the average stock price was greater than the exercise prices of the 321,176
warrants which resulted in additional weighted average common stock equivalents
of 123,191; 3,667,308 outstanding warrants were excluded from the diluted
earnings per share calculation as they are anti-dilutive. For the six and three
months ended June, 2007, all outstanding warrants were excluded from the diluted
earnings per share calculation as they are anti-dilutive.




Note 10 - Current Vulnerability Due
to Certain Concentrations





For the
six months ended June 30, 2007, the Company purchased all of the natural gas for
resale from three vendors, PetroChina Changqing Oilfield Company, Shaanxi
Natural Gas Co Ltd, and Jingcheng city Mingshi Coal Bed Methane Exploitage Ltd.
For the six months ended June 30, 2008, the Company purchased all of the natural
gas for resale from four vendors, PetroChina Changqing Oilfield Company, Shaanxi
Natural Gas Co Ltd, Jingcheng city Mingshi Coal Bed Methane Exploitage Ltd., and
Jiyuan Yuhai Fuel Gas Company. As of June 30, 2008, XXNGC has payable of $69,759
to Shaanxi Natural Gas Co Ltd. No amount was owed to other three vendors at June
30, 2008. Except for Shaanxi Natural Gas Co Ltd, the other three vendors have
long-term agreements with the Company without minimum purchase requirements. The
Company has had annual agreements from December 31, 2007 to December 31, 2008
with Shaanxi Natural Gas Co Ltd to purchase certain amount of natural gas. For
the year ending December 31, 2008, the minimum purchase was 25.58 million cubic
meters. Contracts are renewed on an annual basis. The Company’s management
reports that it does not expect any issues or difficulty in continuing to renew
the supply contracts with these vendors going forward. Price points for natural
gas are strictly controlled by the government and have remained stable over the
past 3 years.





For the
six months ended June 30, 2008, four suppliers accounted for 99.0% of the total
inventory purchased by the Company and for the six months ended June 30, 2007,
three supplier accounts for 96.0% of the total inventory purchased by the
Company. For the three months ended June 30, 2008, four suppliers accounted for
99.0% of the total inventory purchased by the Company and for the three months
ended June 30, 2007, three supplier accounts for 99.9% of the total inventory
purchased by the Company.


23




For the
six months ended June 30, 2008, three suppliers accounted for 75.8 % of the
total equipment purchased by the Company and for the six months ended June 30,
2007, two suppliers accounted for 38.3% of the total equipment purchased by the
Company. For the three months ended June 30, 2008, four suppliers accounted for
84.0 % of the total equipment purchased by the Company and for the three months
ended June 30, 2007, three suppliers accounted for 91.5% of the total equipment
purchased by the Company.





Five
customers accounted for 92.3 % of the Company’s installation revenue for the six
months ended June 30, 2008 and four customers accounted for 82% of the Company’s
installation revenue for the six months ended June 30, 2007. Three customers
accounted for 65.1 % of the Company’s installation revenue for the three months
ended June 30, 2008 and three customers accounted for 95% of the Company’s
installation revenue for the three months ended June 30, 2007.




The
Company's operations are carried out in the People’s Republic of China.
Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environments
in the People’s Republic of China, by the general state of the People’s Republic
of China‘s economy. The Company's business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.





Note 11 - Commitments and
Contingencies





(a) Lease
Commitments





The
Company recognizes lease expense on a straight line basis over the term of the
lease in accordance to SFAS 13, “Accounting for leases.” The
Company entered into series of long term lease agreements with outside parties
to lease land use right to the self-built Natural Gas filing stations located in
the PRC. The agreements have terms ranging from 10 to 30 years. The Company
makes annual prepayment for most lease agreements. The Company also entered into
two office leases in Xian, PRC and New York, NY. The minimum future payment for
leasing land use rights and offices is as follows:




Six
      months ending December 31, 2008
            $
            429,797Year
      ended December 31, 2009
            
            836,999Year
      ended December 31, 2010
            
            829,468Year
      ended December 31, 2011
            
            818,391Year
      ended December 31, 2012
            
            762,521Thereafter
            
            3,801,836Total
            $
            7,479,012




24


For the
six months ended June 30, 2008 and 2007, the land use right and office lease
expenses were $373,945 and $ 74,444, respectively. For the three months ended
June 30, 2008 and 2007, the land use right and office lease expenses were
$310,698 and $ 51,721, respectively.





(b)
Property and Equipment





In
January 2008, the Company entered into a contract with Chemtex International
Inc. to purchase equipment supply for LNG plant and LNG storage tank located in
Jingbian county, Shannxi Province China, in the total amount of $13,700,000. On
May 16, 2008, SJLNG entered into an agreement with Hebei Tongchan Import and
Export Co. Ltd. (Hebei) and agreed that Hebei will act as the trade agency for
SJLNG. On June 16, 2008, the Company entered into an equipment supply contract
with Chemtex Internaitonal Inc. to supply imported equipment for a LNG plant and
a storage tank to be built by Jingbian Xilan LNG Co. Ltd. As of June 30, 2008,
the Company advanced $2,740,000 to the trade agency and the future commitment
for equipment is $10,960,000.





(c) Legal
Proceedings





A former
member of the board of directors has filed a lawsuit against the Company in New
York State Supreme Court, Nassau County, in which he is seeking, among other
things; to recover a portion of his monthly compensation plus 20,000 options
that he alleges are due to him pursuant to a written agreement.  The
Company has denied any liability to the plaintiff and has moved to dismiss the
complaint.  With regard to the former director’s claim for monthly
compensation, the Company has asserted that the agreement was terminated as of
December 31, 2007, and, further, that the former director, who was formally
terminated from the board as of August 3, 2008, has been paid in full through
his last date of service to the Company.  With regard to the former
director’s claim for stock options, the Company has asserted that it did not
breach the written agreement and, further, that the agreement is unenforceable
for various reasons, including lack of definiteness and lack of
consideration.  The Company has been advised by legal counsel that the
former director’s other claims are without merit. The Company is attempting to
negotiate a settlement with the former director and, if unsuccessful, will
vigorously defend its position.  The ultimate outcome of this litigation,
however, cannot presently be determined.  Regardless of the outcome, the
Company believes that any liability it would incur will not have a materially
adverse effect on its financial condition or its results of operations, and,
accordingly, this matter has not been reflected on the Company’s financial
statements.


25


Item
2.Management's Discussion and Analysis of Financial Condition and Results of
Operations


CAUTIONARY
STATEMENT





The
following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto included in
this Report. Unless otherwise noted, all amounts are expressed in U.S. dollars.
The following discussion regarding the Company and its business and operations
contains forward-looking statements that consist of any statement other than a
recitation of historical fact and can be identified by the use of
forward-looking terminology such as "may," "expect," "anticipate," "estimate" or
"continue" or the negative thereof or other variations thereon or comparable
terminology. In particular, these include statements relating to our expectation
that we will continue to have adequate liquidity from cash flow from operations
and the other risks and uncertainties, which are described below under "RISK
FACTORS." The reader is cautioned that all forward-looking statements are
necessarily speculative and there are certain risks and uncertainties that could
cause actual events or results to differ materially from those referred to in
such forward-looking statements, including the risk factors discussed in this
Report. The Company does not have a policy of updating or revising
forward-looking statements and thus it should not be assumed that silence by
management of the Company over time means that actual events are bearing out as
estimated in such forward-looking statements.




Overview


We
transport, distribute and sell natural gas to commercial, industrial and
residential customers in the Xi’an area, including Lantian County and the
districts of Lintong and Baqiao, in the Shaanxi Province of The People's
Republic of China ("China" or the "PRC") through a network of 120km high
pressure pipelines. We also distribute and sell CNG as vehicular fuel through a
network of 32 CNG filling stations in Shaanxi and Henan Provinces.  During
the three months ended June 30 2008, the pipeline’s average daily throughput
capacity is 29,490 cubic meters, compared to 20,158 cubic meters during the same
period of 2007. As of June 30, 2008, we own and operate 20 CNG filling stations
in Shaanxi Province and 12 CNG filling stations in Henan
Province.  During the three months ended June 30 2008, we had sold
compressed natural gas of 37,560,494 cubic meters through our fueling stations,
comparing to 20,951,721 cubic meters during the same period of
2007.





We
operate three primary business lines:





·
            Distribution
      and sale of compressed natural gas (CNG) through Company-owned CNG filling
      stations for hybrid (natural gas/gasoline) powered
    vehicles;





·
            Distribution
      and sale of piped natural gas to residential, commercial and industrial
      customers through Company-owned pipelines(91,967
      homes and businesses as of June 30, 2008);
      and





·
            Conversion
      of gasoline-fueled vehicles to hybrid (natural gas/gasoline) powered
      vehicles at our Auto Conversion
Division.




We buy
all of the natural gas that we sell and distribute to our customers. We do not explore
for or
produce any of our own natural gas and have no plans to do so during the next 12
months. The natural gas that we buy is available in two forms: (i) piped natural
gas; and (ii) CNG.





On
October 24, 2006, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary,
Shaanxi Jingbian Liquified Natural Gas Co., Ltd., for the purpose of
constructing a liquefied natural gas facility to be located in Jingbian, Shaanxi
Province. We plan to invest approximately $40 million to construct this
facility, and we have secured such funding for this project through the sale
of senior note to Abax
Lotus Ltd. The LNG plant is under construction and is expected to start
operation in late 2009. Once completed, the plant has LNG processing capacity of
500,000 cubic meters per day, or approximately 150 million cubic meters on an
annual basis.




26


CONSOLIDATED RESULTS OF
OPERATIONS





Comparing Three Months Ended June 30,
2008 and 2007:





The
following table presents certain consolidated statement of operations
information. Financial information is presented for the three months ended June
30, 2008 and 2007.





June
      30,
              2008
            
            June
      30,
              2007Revenues
            
            $
            16,890,486
            
            $
            8,273,309Cost
      of Revenues
            
            
            9,224,723
            
            
            4,130,199Operating
      Expenses
            
            
            2,608,674
            
            
            943,306Income
      from Operations
            
            
            5,057,089
            
            
            3,199,804Net
      Income
            
            $
            3,512,892
            
            $
            2,745,009





Revenues: We
generated approximately 81.67% of our revenues during the three months ended
June 30, 2008 from the sale of natural gas and approximately 18.33% of our
revenues from installation fees, conversion fees, and other sources. Sales of
natural gas at the Company-owned filling stations accounted for approximately
78.04% of our total revenues in the three months ended June 30, 2008, or
$13,181,335, which was the largest contribution of our three business
lines.





Sales of
natural gas to end-user customers connected to our pipeline distribution system
accounted for approximately 11.29% of our total revenues during the three months
ended June 30, 2008, or $1,906,660 ,
including both natural gas sales and installation fees. Sales of natural
gas to third-party-owned filling stations accounted for approximately 0.01% of
our total revenues during the three months ended June 30, 2008, or $2,377. The
Company expects natural gas revenues to increase on both an actual basis and as
a percentage of revenue in 2008.





As of
June 30, 2008, the Company had 91,967 pipeline customers, an increase of 13,751
customers over the same period in 2007, and has constructed and acquired 32
filling stations, an increase of 15 stations over the same period in 2007. In
the third quarter of 2008, the Company expects to add up to 3,000 pipeline
customers and 3 additional filling stations, which the Company estimates will
increase sales of natural gas by 3 million cubic meters.





We had
total revenues of $16,890,486 for the three months ended June 30, 2008, an
increase of $8,617,177 or 104.16%, compared to $8,273,309 for the three months
ended June 30, 2007. The increase in revenues was primarily due to the material
increase in the number of company-owned filling stations as well as an increase
in the number of residential, commercial and industrial pipeline customers from
78,216 during the three months ended June 30, 2007 to 91,967 during the three
months ended June 30, 2008.




27


New
pipeline customers pay approximately 60% of the installation costs to connect to
our pipeline system up front and the balance is payable as part of their monthly
natural gas bill. During the three months ended June 30, 2008, our installation
and other revenues increased approximately 105.27% over the same period in 2007
and our sales of natural gas increased approximately 103.91% over the previous
year. Two customers accounted for approximately 77.18% of the Company's
installation revenue for the three months ended June 30,
2008.




During
the three months ended June 30 2008, we had sold compressed natural gas
of 37,560,494 cubic meters, compared to 20,951,721 cubic meters
in the same period of 2007 through Company-owned fueling stations. In terms of
average station sales value and volume, in the three months ended June 30 2008,
we had sold approximately $433,000 and 1,237,000 cubic meters of
compressed natural gas per station, compared to approximately $ 436,000 and
1,400,000 cubic meters in the same period of 2007. The reason for the lower
average sales per station is due to the fact that we had more stations in Henan
in the second quarter of 2008 than in 2007, and the average sales per
station in Henan is lower than that in Shaanxi. In
addition, revenues were favorably impacted in the three months ended June 30,
2008 due to a higher average unit selling price for compressed natural
gas.  The increase in average unit selling price is mainly due to the
higher selling price in Henan than in Shannxi and the higher number of stations
in Henan in the second quarter of 2008 than the same period of
2007. As for
our natural gas pipeline business, in the three months ended June 30 2008, we
had sold 2,683,613 cubic meters, compared to 1,834,408 cubic meters in the
same period of 2007 through our pipeline network.


Cost of
Revenues: Our
cost of revenues consists of both the cost of natural gas and the cost of
installation and other. Cost of natural gas consists primarily of the cost that
we pay for natural gas purchased from our supplier, together with transportation
costs and depreciation of equipment. Cost of installation and other includes
certain connection costs related to connecting customers to our pipeline system
that are generally expensed when incurred and vehicle conversion cost related to
converting gasoline-fueled vehicles into natural gas hybrid
vehicles.





Cost of
revenues during the three months ended June 30, 2008 was $9,224,723, an increase
of $5,094,524 or approximately 123.35% over the same period in 2007. Cost of
natural gas increased by approximately 108.32% to $7,214,469 during the three
months ended June 30, 2008, as compared with $3,463,242 for the same period in
2007. The increase in our cost of revenues was primarily related to a material
increase in the amount of gas sold. The opening cost per station during the
three months ended June 30, 2008 is approximately $1,200,000, compared to
approximately $900,000 in the same period of 2007. In the three months ended
June 30,2008, the transportation cost per million cubic meters is approximately
$6,500. In addition, our installation and other costs increased during the
three months ended June 30, 2008 by approximately 201.41% to $2,010,254, as
compared with $666,957 in the same period in 2007 as a result of the increase of
pipeline customers and vehicle conversion sales. We had sold natural gas of
39,811,003 cubic meters in the three months ended June 30, 2008, compared to
22,786,130 cubic meters in the same period of 2007.





We
purchase all of our natural gas for resale mainly from three vendors, PetroChina
Changqing Oilfield Company, Jiyuan Yuhai Natural Gas Co Ltd, and Jingcheng city
Mingshi Coal Bed Methane Exploitage Ltd. As the government owns all land in
China, the government controls and owns all the natural resources coming from
the ground, thus the government controls the price and flow of the natural gas.
Due to the soaring crude oil price and ever increasing demand for energy
consumption, the National Development and Reform Commission, which regulates the
energy price in China, adjusted the upstream natural gas price for industrial
users and vehicular CNG distributors upward by RMB0.4/CM, or 35% in November,
2007. The retail price for vehicular CNG was adjusted upward at a ratio of
0.75:1 to the retail price of #90 gasoline at November, 2007. Many large cities
see dramatic increase in retail vehicular CNG price, for example 66% in Shanghai
and 21% (taxi) and 38% (bus) in Tianjin. However, natural gas price for
residential customers is not adjusted. As China shifts from a centrally planned
economy to a market economy, we believe that it is in the government's best
interest to keep prices stable, and maintain a stable flow of supply. The
government has also undertaken programs to promote the economy growth of the
region in which we are located. Therefore, we expect supply and price to
continue to be stable in the future.





Gross profit : The
Company earned a gross profit of $7,665,763 for the three months ended June 30,
2008, an increase of $3,522,653 or approximately 85.02%, compared to $4,143,110
for the three months ended June 30, 2007. The increase in gross profit is due to
a material increase in gas sales and installation revenues in this quarter,
partially offset by an increase in cost of sales.





Gross margin : Gross
margin, as a percentage of revenues, decreased to approximately 45.39% for the
three months ended June 30, 2008, from approximately 50.08% for the three months
ended June 30, 2007. The decrease in gross margin is primarily due to the lower
margin from CNG stations in Henan region than Xi’an city, and the proportion of
natural gas sold in Henan is higher during the three months ended June 30 2008
than the same period of 2007.





28


Operating
expenses: The
Company incurred operating expenses of $2,608,674 for the three months ended
June 30,  2008, an
increase of $1,665,368, or approximately 176.55%, compared to $943,306 for the
three months ended June 30, 2007. Our operating expenses increased primarily as
a result of expenses related to the operation of 15 newly added CNG stations
since June 30, 2007, the depreciation of more equipment, the recruitment of more
employees as well as the on-going expenses related to the identification of
possible locations for additional filling stations and the governmental
licensing and approval process. In addition, sales and marketing costs increased
in the three months ended June 30, 2008 as we increased our efforts to obtain
new residential and commercial customers and attract customers to our filling
stations by hiring more sales persons, purchasing more tankers and using more
utilities.





For the
three months ended June 30, 2008, two suppliers accounted for 59.64% of the
total equipment we purchased for installation activities. We believe that as a
result of our relationships within the construction industry and the
construction equipment vendor community and the availability of other vendors to
supply the construction equipment and materials, the loss of any one of these
two vendors would not have a material adverse effect on our
operations.





Income
tax was $862,673 for the three months ended June 30, 2008, as compared to
$471,098 for the three months ended June 30, 2007. The increase in income tax
was attributed to the growth of installation (and other) sale and the sale of
natural gas.





Net Income : Net
income increased to $  3,512,892
for the three months ended June 30, 2008, an increase of $767,883 or
approximately 27.97% from $2,745,009 for the three months ended June 30, 2007.
The increased net income reflects the Company’s strong and steady profit
generating ability, offset by the increase of interest expense and amortization
expenses, as evidenced by the 58.04% increase in operating income, from
$ 3,199,804
in the three months ended June 30, 2007 to $5,057,089 in the corresponding
period in 2008 .





Comparing Six Months Ended June 30,
2008 and 2007:





The
following table presents certain consolidated statement of operations
information. Financial information is presented for the six months ended
June 30, 2008 and 2007.





June
      30,
              2008
            
            June
      30,
              2007Revenues
            
            $
            30,916,160
            
            $
            15,016,885Cost
      of Revenues
            
            
            17,161,921
            
            
            7,356,416Operating
      Expenses
            
            
            4,889,613
            
            
            1,958,814Income
      from Operations
            
            
            8,864,626
            
            
            5,701,655Net
      Income
            
            $
            6,321,463
            
            $
            4,855,335





Revenues: We
generated approximately 81.32% of our revenues during the six months ended June
30, 2008 from the sale of natural gas and approximately 18.68% of our revenues
from installation fees, conversion fees, and other sources. Sales of natural gas
at the Company-owned filling stations accounted for approximately 76.45 % of our
total revenues during the six months ended June 30, 2008, or $23,634,946 which
was the largest contribution of our three business lines.





29


Sales of
natural gas to end-user customers connected to our pipeline distribution system
accounted for approximately 11.56% of our total revenues during the six months
ended June 30, 2008, or $3,574,589, including both natural gas sales
and installation fees. Sales of natural gas to third-party-owned filling
stations accounted for approximately 0.07% of our total revenues during the six
months ended June 30, 2008, or $20,665. The Company expects natural gas revenues
to increase on both an actual basis and as a percentage of revenue in
2008.





As of
June 30, 2008, the Company had 91,967 pipeline customers, an increase of 13,751
customers over the same period in 2007, and had constructed and acquired 32
filling stations, an increase of 15 stations over the same period in 2007. In
the third quarter of 2008, the Company expects to add up to 3,000 pipeline
customers and 3 additional filling stations, which the Company estimates will
increase sales of natural gas by 3.0 million cubic meters.





We had
total revenues of $30,916,160 for the six months ended June 30, 2008, an
increase of $15,899,275 or 105.88%, compared to $15,016,885 for the six months
ended June 30, 2007. The increase in revenues was primarily due to the material
increase in the number of company owned filling stations as well as an increase
in the number of residential, commercial and industrial pipeline customers from
78,216 as of June 30, 2007 to 91,967 as of June 30, 2008.





During
the six months ended June 30, 2008, our installation and other revenues
increased approximately 73.55% over the same period in 2007 and our sales of
natural gas increased approximately 115.08% over the previous year. Five
customers accounted for approximately 92.3% of the Company's installation
revenue for the six months ended June 30, 2008.




During
the six months ended June 30 2008, we had sold compressed natural gas
of  68,829,721 cubic meters, compared to 36,075,784 cubic meters
in the same period of 2007 through Company-owned fueling stations. In terms of
average station sales value and volume, in the six months ended June 30 2008, we
had sold approximately $872,000 and 2,503,000 cubic meters of compressed natural
gas per station, compared to approximately $830,000 and  2,656,000 
cubic meters in the same period of 2007. The reason for the higher average unit
selling price is due to the fact that the selling price in Henan is higher and
we have more stations in Henan in the six months ended June 30th 2008
than in 2007. As for natural gas pipeline business, in the six months ended
June 30 2008, we had sold 5,413,513 cubic meters, compared to 3,640,538 cubic
meters in the same period of 2007 through our pipeline network.


Cost of Revenues : Our
cost of revenues consists of both the cost of natural gas and the cost of
installation and other. Cost of natural gas consists primarily of the cost that
we pay for natural gas purchased from our supplier, together with transportation
costs and depreciation of equipment. Cost of installation includes certain
connection costs related to connecting customers to our pipeline system that are
generally expensed when incurred and vehicle conversion cost related to
converting gasoline-fueled vehicles into natural gas hybrid
vehicles.





Cost of
revenues during the six months ended June 30, 2008 was $17,161,921, an increase
of $9,805,505 or approximately 133.29% over the same period in 2007. Cost of
natural gas increased by approximately 124.93% to $13,396,743 during the six
months ended June 30, 2008, as compared with $5,955,893 for the same period in
2007. The increase in our cost of revenues was primarily related to a material
increase in the amount of gas sold. The opening cost per station during the six
months ended June 30, 2008 is approximately $1,200,000, compared to
approximately $900,000 in the same period of 2007. In the six months ended June
30,2008, the transportation cost per million cubic meters is approximately
$6,000. In addition, our installation and other costs increased during the
six months ended June 30, 2008 by approximately 168.84% to $3,765,178, as
compared with $1,400,523 in the same period in 2007 as a result of the increase
of pipeline customers and vehicle conversion sales. We had sold natural gas of
74,243,234 cubic meters in the six months ended June 30, 2008, compared to
39,716,323 cubic meters in the same period of 2007.





We
purchase all of our natural gas for resale mainly from four vendors, PetroChina
Changqing Oilfield Company, Jingcheng city Mingshi Coal Bed Methane Exploitage
Ltd, Jiyuan Yuhai Natural Gas Co Ltd, and Shaanxi Natural Gas Co Ltd. As the
government owns all land in China, the government controls and owns all the
natural resources coming from the ground, thus the government controls the price
and flow of the natural gas. Due to the soaring crude oil price and ever
increasing demand for energy consumption, the National Development and Reform
Commission, which regulates the energy price in China, adjusted the upstream
natural gas price for industrial users and vehicular CNG distributors upward by
RMB0.4/CM, or 35% in November, 2007. The retail price for vehicular CNG was
adjusted upward at a ratio of 0.75:1 to the retail price of #90 gasoline at
November, 2007. Many large cities see dramatic increase in retail vehicular CNG
price, for example 66% in Shanghai and 21% (taxi) and 38% (bus) in Tianjin.
However, natural gas price for residential customers is not adjusted. As China
shifts from a centrally-planned economy to a market economy, we believe that it
is in the government's best interest to keep prices stable, and maintain a
stable flow of supply. The government has also undertaken programs to promote
the economic growth of the region in which we are located. Therefore, we expect
supply and price to continue to be stable in the future.





30


Gross profit : The
Company earned a gross profit of $13,754,239 for the six months ended June 30,
2008, an increase of $6,093,770 or approximately 79.55%, compared to $7,660,469
for the six months ended June 30, 2007. The increase in gross profit is due to a
material increase in natural gas sales and installation (and other) revenues in
this period, partially offset by an increase in cost of sales.





Gross margin : Gross
margin, as a percentage of revenues, decreased to approximately 44.49% for the
six months ended June 30, 2008, from approximately 51.01% for the six months
ended June 30, 2007. The decrease in gross margin is primarily due to the lower
margin from CNG stations in Henan region which contribute larger portion of
total gross profit than those from the same period in 2007 .





Operating
expenses: The
Company incurred operating expenses of $4,889,613 for the six months ended June
30, 2008, an increase of $2,930,799, or approximately 149.62%, compared to
$1,958,814 for the six months ended June 30, 2007. Our operating expenses
increased primarily as a result of expenses related to the operation of 15 newly
added CNG stations since June 30, 2007, the depreciation of more equipment, the
recruitment of more employees as well as the on-going expenses related to the
identification of possible locations for additional filling stations and the
governmental licensing and approval process. In addition, sales and marketing
costs increased during the six months ended June 30, 2008 as we increased our
efforts to obtain new residential and commercial customers and attract customers
to our filling stations by hiring more sales persons, purchasing more tankers
and using more utilities.





For the
six months ended June 30, 2008, three suppliers accounted for 75.80% of the
total equipment we purchased for installation activities. We believe that as a
result of our relationships within the construction industry and the
construction equipment vendor community and the availability of other vendors to
supply the construction equipment and materials, the loss of any one of these
three vendors would not have a material adverse effect on our
operations.





Income
tax was $1,550,138 for the six months ended June 30, 2008, as compared to
$872,415 for the six months ended June 30, 2007. The increase in income tax was
attributed to the growth of installation (and other) sales and the sale of
natural gas.





Net Income : Net
income increased to $6,321,463 for the six months ended June 30, 2008, an
increase of $1,466,128 or approximately 30.20% from $4,855,335 for the six
months ended June 30, 2007. The increased net income reflects the Company’s
strong and steady profit-generating ability, offset by the increase of non-cash
interest expense and amortization expenses, as evidenced by the 55.47% increase
in operating income, from $5,701,655 in the first half of 2007 to $8,864,626 in the corresponding period
in 2008 .





31


Liquidity and Capital
Resources





As of
June 30, 2008, the Company had $29,180,315 of cash and cash equivalents on hand
compared to $7,601,358 of cash and cash equivalents as of June 30,
2007.





Cash
flows provided by operating activities was $8,126,132 for the six months ended
June 30, 2008 compared to net cash provided by operations of $5,326,523 in the
corresponding period last year. The primary reason for the change is attributed
to the income generated from revenue, collections of other receivables and
increase in unearned revenue and taxes payable.





Cash
outflows for investing activities increased from $3,203,009 during the six
months ended June 30, 2007 to $30,394,475 for the same period in 2008 primarily
because of the prepayment to equipment suppliers of the LNG plant and additions
to construction in progress, the construction and acquisition of filling
stations as well as the loan to our stockholder.





Cash
inflow for financing activities was $37,877,491 for the six months ended June
30, 2008, compared to zero in the corresponding previous period. The financing
cash inflow comes from the sale of senior notes to Abax Lotus.





The
Company expects to add 3 additional CNG filling stations in the third quarter of
2008. The Company expects to invest between $2.5 million and $4.5 million in new
stations, and the funds for these investing activities will primarily come from
the Company's operating and financing cash flows.





The
Company paid $9.5 million for the LNG processing plant as a prepayment on
equipment as well as consulting fees in the first quarter of 2008 and approximately
$3.4 million for the
LNG related fee in the second quarter of 2008. The Company expects to continue
to invest in LNG project in the subsequent quarters with funds already secured
and internally generated cash flows.




Based on
past performance and current expectations, we believe our existing cash combined
with cash generated from operations, as well as future possible cash
investments, will satisfy our working capital needs, capital expenditures (other
than the acquisition of other filling stations) and other liquidity requirements
associated with our operations for at least the next 12 months.





The
majority of the Company's revenues and expenses were denominated primarily in
RMB, the currency of the People's Republic of China. There is no assurance that
exchange rates between the RMB and the USD will remain stable. Inflation has not
had a material impact on the Company's business.





OFF-BALANCE SHEET
ARRANGEMENTS





None.





CRITICAL ACCOUNTING
POLICIES





In
presenting our financial statements in conformity with accounting principles
generally accepted in the United States of America, we are required to make
estimates and assumptions that affect the amounts reported therein. Several of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. However, events that are
outside of our control cannot be predicted and, as such, they cannot be
contemplated in evaluating such estimates and assumptions. If there is a
significant unfavorable change to current conditions, it will likely result in a
material adverse impact to our consolidated results of operations, financial
position and in liquidity. We believe that the estimates and assumptions we used
when preparing our financial statements were the most appropriate at that time.
Presented below are those accounting policies that we believe require subjective
and complex judgments that could potentially affect reported
results.





32


Use of
Estimates





Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to impairment of long-lived assets, and allowance for doubtful accounts.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions; however,
we believe that our estimates, including those for the above-described items,
are reasonable.




Areas
that require estimates and assumptions include valuation of accounts receivable
and determination of useful lives of property and equipment.





Long-Lived
Assets




We
periodically assess potential impairments to our long-lived assets in accordance
with the provisions of SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” SFAS No. 144 requires, among other things,
that an entity perform an impairment review whenever events or changes in
circumstances indicate that the carrying value may not be fully recoverable.
Factors considered by us include, but are not limited to: significant
underperformance relative to expected historical or projected future operating
results; significant changes in the manner of use of the acquired assets or the
strategy for our overall business; and significant negative industry or economic
trends. When we determine that the carrying value of a long-lived asset may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we estimate the future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future undiscounted cash flows and eventual disposition is less than
the carrying amount of the asset, we recognize an impairment loss. An impairment
loss is reflected as the amount by which the carrying amount of the asset
exceeds the fair market value of the asset, based on the fair market value if
available, or discounted cash flows. To date, there has been no impairment of
long-lived assets.





Revenue
Recognition





Our
revenue recognition policies are in compliance with Staff Accounting Bulletin
(SAB) 104. 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
collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue. Revenue from gas sales is recognized when gas is pumped through
pipelines to the end users. Revenue from installation of pipelines is recorded
when the contract is completed and accepted by the customers. The construction
contracts are usually completed within one to two months. Revenue from repairing
and modifying vehicles is recorded when service are rendered to and accepted by
the customers.





33


Unearned
Revenue





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





Recent
Pronouncements





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities“. This Statement permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company chose not to elect the option to
measure the fair value of eligible financial assets and
liabilities.





In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
Management is currently evaluating the effect of this pronouncement on financial
statements.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS No. 141
(Revised 2007) requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value,
with limited exceptions, and applies to a wider range of transactions or events.
SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
after December 15, 2008 and early adoption and retrospective application is
prohibited. The Company is currently evaluating the impact that adopting SFAS
No. 141R will have on its financial statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51.  This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.





34


In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - An Amendment of SFAS
No. 133” (“SFAS 161”). SFAS 161 seeks to improve financial reporting for
derivative instruments and hedging activities by requiring enhanced disclosures
regarding the impact on financial position, financial performance, and cash
flows. To achieve this increased transparency, SFAS 161 requires (1) the
disclosure of the fair value of derivative instruments and gains and losses in a
tabular format; (2) the disclosure of derivative features that are credit
risk-related; and (3) cross-referencing within the footnotes. SFAS 161 is
effective on January 1, 2009. The Company is in the process of evaluating
the new disclosure requirements under SFAS 161.





In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("FAS 162"). FAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. FAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The Company is in the
process of evaluating the impact of adoption of this statement on the results of
operations, financial position or cash flows.





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
The standard triggers liability accounting on all options and warrants
exercisable at strike prices denominated in any currency other than the
functional currency in China (Renminbi). The Company is currently evaluating the
impact of adoption of EITF No. 07-5 on the Company’s consolidated financial
statements.




Item 3. Quantitative and Qualitative
Disclosures About Market Risk





Not
required





Item 4.  Controls and
Procedures





Evaluation of Disclosure
Controls and Procedures




The
Company's management has evaluated, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, the effectiveness of the design and operations of the Company's
disclosure controls and procedures (as defined in Securities Exchange Act Rule
13a-15(e)), as of the end of the period covered by this quarterly report. Based
on that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that the evaluation of the effectiveness of our
disclosure controls and procedures was completed; our disclosure controls and
procedures were effective.




35




Part II.  OTHER
INFORMATION





Item 1.  Legal Proceedings





A former
member of the board of directors has filed a lawsuit against the Company in New
York State Supreme Court, Nassau County, in which he is seeking, among other
things; to recover a portion of his monthly compensation plus 20,000 options
that he alleges are due to him pursuant to a written agreement.  The
Company has denied any liability to the plaintiff and has moved to dismiss the
complaint.




With
regard to the former director’s claim for monthly compensation, the Company has
asserted that the agreement was terminated as of December 31, 2007, and,
further, that the former director, who was formally terminated from the board as
of August 3, 2008, has been paid in full through his last date of service to the
Company.




With
regard to the former director’s claim for stock options, the Company has
asserted that it did not breach the written agreement and, further, that the
agreement is unenforceable for various reasons, including lack of definiteness
and lack of consideration.




The
Company has been advised by legal counsel that the former director’s other
claims are also without merit.




The
Company is attempting to negotiate a settlement with the former director and, if
unsuccessful, will vigorously defend its position.  The ultimate outcome of
this litigation, however, cannot presently be determined.  Regardless of
the outcome, the Company believes that any liability it would incur will not
have a materially adverse effect on its financial condition or its results of
operations, and, accordingly, this matter has not been reflected on the
Company’s financial statements.





36


Item 1 A. Risk
Factors





An
investment in our common stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this report, including the
consolidated financial statements and notes thereto of our Company, before
deciding to invest in our common stock. The risks described below are not the
only ones facing our Company. Additional risks not presently known to us or that
we presently consider immaterial may also adversely affect our Company. If any
of the following risks occur, our business, financial condition and results of
operations and the value of our common stock could be materially and adversely
affected.





RISKS RELATED TO OUR
BUSINESS





Prices of natural gas can be subject
to significant fluctuations, which may affect and bring uncertainty to our
business and financial condition.





We obtain
most of our natural gas from government owned entities and our supply contracts
are subject to review every six months. The supply price for natural gas is
strictly controlled by the PRC government and have remained stable over the past
three years. We do not expect any difficulty in renewing our supply contracts
during the next 12 months, nor do we expect any significant change to natural
gas supply price in China during the same period. However, the price level of
natural gas could fluctuate in response to changing national or international
market forces, to political events, OPEC actions and other factors over the
short to medium term, and to industry economics over the long term. Accordingly,
the PRC government may adjust its controlled price limit and our suppliers may
be able to increase or decrease their supply price to us. This would bring
uncertainty to our business and may affect our financial condition.




We are dependent on supplies of
natural gas to deliver to our customers.





With the
exception of certain compressed and liquid natural gas supplies, we obtain our
supplies of natural gas from one supplier which is a government owned entity.
The ability to deliver our product is dependent on a sufficient supply of
natural gas and if we are unable to obtain a sufficient natural gas supply, it
could prevent us making deliveries to our customers. While we have supply
contracts, we do not control the government owned suppliers or other suppliers,
nor are we able to control the amount of time and effort they put forth on our
behalf. It is possible that our suppliers will not perform as expected, and that
they may breach or terminate their agreements with us. It is also possible that,
after a regular semi-annual review of our primary supply contract, they choose
to provide services to a competitor. Any failure to obtain supplies of natural
gas could prevent us from delivering such to our customers and could have a
material adverse affect on our business and financial condition.




Our business operations are subject
to a high degree of risk and insurance may not be adequate to cover liabilities
resulting from accidents or injuries that may occur.





Our
operations are subject to potential hazards incident to the gathering,
processing, separation and storage of natural gas, such as explosions, product
spills, leaks, emissions and fires. These hazards can cause personal injury and
loss of life, severe damage to and destruction of property and equipment, and
pollution or other environmental damage, and may result in curtailment or
suspension of our operations.





37


We have
maintained adequate coverage at reasonable rates and have experienced no
material uninsured losses. However, the occurrence of an unexpected while
significant event for which we are not fully insured or indemnified, and/or the
failure of a party to meet its indemnification obligations, may result in our
incurring substantial costs and materially and adversely affect our operations
and financial condition. Moreover, no assurance can be given that we will be
able to maintain adequate insurance in the future at rates considered as
reasonable.





Changes in the regulatory atmosphere
could adversely affect our business.





The
distribution of natural gas and operations of filling stations are highly
regulated requiring registrations for the issuance of licenses required by
various governing authorities in China. In addition, various standards must be
met for filling stations including handling and storage of natural gas, tanker
handling, and compressor operation which are regulated. The costs of complying
with regulations in the future may harm our business. Furthermore, future
changes in environmental laws and regulations could result in stricter standards
and enforcement, larger fines and liability, and increased capital expenditures
and operating costs, any of which could have a material adverse effect on our
financial condition or results of operations.


We depend on our senior management's
experience and knowledge of the industry and would be adversely affected by the
loss of any of our senior managers.





Our
future success depends heavily upon the continuing services of the members of
our senior management team, particularly Mr.Ji, who is the founder, Chief
Executive Officer, Chairman of the Board, and a major shareholder of our
company. We rely on Mr.Ji’s expertise in our business operations and on his
personal relationships with the relevant regulatory authorities, customers and
suppliers. We do not currently have employment contracts with our senior
executives. If, for any reason, our senior executives do not continue to be
active in management, our business, or the financial condition of our Company,
our results of operations could be adversely affected. In addition, we do not
maintain life insurance on our senior executives and other key
employees.





We may need to raise capital to fund
our operations, and our failure to obtain funding when needed may force us to
delay, reduce or eliminate acquisitions and business development
plans.





If in the
future, we are not capable of generating sufficient revenues from operations and
our capital resources are insufficient to meet future requirements, we may have
to raise funds to continue the development, commercialization and marketing of
our business. The projects we are currently pursuing include the LNG project,
the Xi'an International Port District project, and Baliu Ecological Park
project.




We cannot
be certain that funding will be available. To the extent that we raise
additional funds by issuing equity securities, our stockholders may experience
significant dilution. Any debt financing, if available, may involve restrictive
covenants that impact our ability to conduct our business. If we are unable to
raise additional capital when required or on acceptable terms, we may have to
delay, scale back, discontinue our planned acquisitions or business development
plans or obtain funds by entering into agreements on unattractive
terms.




38


Our strategy of geographic expansion
and our effort of acquiring additional filling stations may fail.




As part
of our business strategy, we continue to expand our operations into more regions
in China as we address growth in our natural gas user base and market
opportunities. We are constructing new CNG filling stations and acquiring
existing stations in those regions. These actions may require a significant
amount of capital investment, and involve uncertainties and risks. We might not
be as familiar with the local markets as we are in Henan Province and in our
home market Shaanxi Province. Our effort of geographic expansion may fail
resulting in loss of investment, competitive edge, and the opportunity to enter
into those markets in the near future.




We may not be able to manage our
expanding operations effectively.




To manage
the potential growth of our operations and personnel, as well as geographically
dispersed CNG filling stations, we will be required to improve operational and
financial systems, procedures and controls, and expand, train and manage our
growing employee base, including staff from acquired CNG filling stations. This
requires significant time and resource commitments from us and our senior
management, who will also be required to maintain and expand our relationships
with local governments. We cannot assure you that our current and planned
personnel, systems, procedures and controls will be adequate to support our
future operations. Our failure to manage growth and operate efficiently could
harm our business and adversely affect our financial conditions.





RISKS RELATED TO THE PEOPLE'S
REPUBLIC OF CHINA





China's economic policies could
affect our business.





Substantially
all of our assets are located in China and substantially all of our revenue is
derived from our operations in China. Accordingly, our results of operations and
prospects are subject, to a significant extent, to the economic, political and
legal developments in China.





While
China's economy has experienced a significant growth in the past twenty years,
growth has been irregular, both geographically and among various sectors of the
economy. The Chinese government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall economy of China, but may also have a negative effect on us.
For example, our operating results and financial condition may be adversely
affected by the government control over capital investments or changes in tax
regulations.





The
economy of China has been transitioning from a planned economy to a more
market-oriented economy. In recent years the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform and
the reduction of state ownership of productive assets and the establishment of
corporate governance in business enterprises; however, a substantial portion of
productive assets in China are still owned by the Chinese government. In
addition, the Chinese government continues to play a significant role in
regulating industry development by imposing industrial policies. It also
exercises significant control over China's economic growth through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies.





39


China’s Tax Policies could affect our
earnings results.





The PRC
government currently grants companies in the natural gas industry a reduced tax
rate to encourage the development of the industry. Our variable interest entity,
XXNGC, enjoys the reduced tax rate of 15%. If there i s any
change in this favorable policy, though not currently expected, it could
adversely affect our earnings results.





Capital outflow policies in The
People's Republic of China may hamper our ability to remit income to the United
States.





The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, on the remittance of currency outside of the
PRC. We receive substantially all of our revenues in Renminbi. Under our current
structure, our income is primarily derived from payments from Xi’an Xilan
Natural Gas Co. Shortages in the availability of foreign currency may restrict
the ability of Xi’an Xilan Natural Gas to remit sufficient foreign currency to
pay dividends, if any, or other payments to us, or otherwise satisfy its foreign
currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be made
in foreign currencies without prior approval from the PRC State Administration
of Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required in those cases in
which Renminbi is to be converted into foreign currency and remitted out of the
PRC to pay capital expenses, such as the repayment of bank loans denominated in
foreign currencies. The PRC government also may at its discretion restrict
access in the future to foreign currencies for current account transactions. If
the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to pay
dividends, if any, in foreign currencies to our shareholders.





Although we do not import goods into
or export goods out of The People's Republic of China, fluctuation of the RMB
may indirectly affect our financial condition by affecting the volume of
cross-border money flow.




The value
of the RMB fluctuates and is subject to changes in the People's Republic of
China political and economic conditions. Since July 2005, the conversion of RMB
into foreign currencies, including USD, has been based on rates set by the
People's Bank of China which are set based upon the interbank foreign exchange
market rates and current exchange rates of a basket of currencies on the world
financial markets. As of June 30, 2008, the exchange rate between the RMB and
the United States dollar was 6.850 RMB to every one USD (middle
price).




We may face obstacles from the
communist system in The People's Republic of China.





Foreign
companies conducting operations in The People's Republic of China face
significant political, economic and legal risks. The Communist regime in The
People's Republic of China, including a stifling bureaucracy , may
hinder Western investment.





40


We may have difficulty establishing
adequate management, legal and financial controls in The People's Republic of
China.





The
People's Republic of China historically has been deficient in Western style
management and financial reporting concepts and practices, as well as in modern
banking, computer and other control systems. We may have difficulty in hiring
and retaining a sufficient number of qualified employees to work in The People's
Republic of China. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.





Because our assets and operations are
located in China, you may have difficulty enforcing any civil liabilities
against us under the securities and other laws of the United States or any
state.





We are a
holding company, and all of our assets are located in the Republic of China. In
addition, our directors and officers are non-residents of the United States, and
all or a substantial portion of the assets of these non-residents are located
outside the United States. As a result, it may be difficult for investors to
effect service of process within the United States upon these non-residents, or
to enforce against them judgments obtained in United States courts, including
judgments based upon the civil liability provisions of the securities laws of
the United States or any state.





There is
uncertainty as to whether courts of the People’s Republic of China would
enforce:





·
            Judgments
      of United States courts obtained against us or these non-residents based
      on the civil liability provisions of the securities laws of the United
      States or any state; or





·
            In
      original actions brought in the People’s Republic of China, liabilities
      against us or non-residents predicated upon the securities laws of the
      United States or any state. Enforcement of a foreign judgment in the
      Republic of China also may be limited or otherwise affected by applicable
      bankruptcy, insolvency, liquidation, arrangement, moratorium or similar
      laws relating to or affecting creditors' rights generally and will be
      subject to a statutory limitation of time within which proceedings may be
      brought.





The PRC legal system embodies
uncertainties, which could limit law enforcement
availability.




The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, decided legal cases have little precedence. In 1979, the PRC government
began to promulgate a comprehensive system of laws and regulations governing
economic matters in general. The overall effect of legislation over the past 27
years has significantly enhanced the protections afforded to various forms of
foreign investment in China. Each of our PRC operating subsidiaries and
affiliates is subject to PRC laws and regulations. However, these laws and
regulations change frequently and the interpretation and enforcement involve
uncertainties. For instance, we may have to resort to administrative and court
proceedings to enforce the legal protection that we are entitled to by law or
contract. However, since PRC administrative and court authorities have
significant discretion in interpreting statutory and contractual terms, it may
be difficult to evaluate the outcome of administrative court proceedings and the
level of law enforcement that we would receive in more developed legal systems.
Such uncertainties, including the inability to enforce our contracts, could
affect our business and operation. In addition, intellectual property rights and
confidentiality protections in China may not be as effective as in the United
States or other countries. Accordingly, we cannot predict the effect of future
developments in the PRC legal system, particularly with regard to the industries
in which we operate, including the promulgation of new laws. This may include
changes to existing laws or the interpretation or enforcement thereof, or the
preemption of local regulations by national laws. These uncertainties could
limit the availability of law enforcement, including our ability to enforce our
agreements with the government entities and other foreign
investors.





41


The admission of China into the World
Trade Organization could lead to increased foreign
competition.





China
officially entered the WTO on December 11, 2001. As the country follows its
timetable in the WTO accession agreements to release restrictions on
international trade and to improve the investment environment, countries with
large natural gas reserves including Saudi Arabia may gain more access to
China’s natural gas market, and foreign investments may be allowed to invest in
natural gas industry. Such events could lead to increased competition in the
natural gas industry in China.





PRC laws and regulations governing
our businesses and the validity of certain of our contractual arrangements are
uncertain. If we are found to be in violation, we could be subject to sanctions.
In addition, changes in such PRC laws and regulations may materially and
adversely affect our business.




There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our VIE, Xian Xilan Natural Gas, and its shareholders. We are
considered a foreign person or foreign invested enterprise under PRC law. As a
result, we are subject to PRC law limitations on foreign ownership of Chinese
companies. These laws and regulations are relatively new and may be subject to
change, and their official interpretation and enforcement may involve
substantial uncertainty. The effectiveness of newly enacted laws, regulations or
amendments may be delayed, resulting in detrimental reliance by foreign
investors. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively.




The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you that our current ownership and operating structure would not
be found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.




We may be adversely affected by
complexity, uncertainties and changes in PRC regulation of natural gas business
and companies, including limitations on our ability to own key assets.




The PRC
government regulates the natural gas industry including foreign ownership of,
and the licensing and permit requirements pertaining to, companies in the
natural gas industry. These laws and regulations are relatively new and
evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be a violation of
applicable laws and regulations. Issues, risks and uncertainties relating to PRC
government regulation of the natural gas industry include, but are not limited
to, the following:





·
            We
      only have contractual control over Xian Xilan Natural Gas. We do not own
      it due to the restriction of foreign investment in Chinese businesses;
      and





42


·
            Uncertainties
      relating to the regulation of the natural gas business in China, including
      evolving licensing practices, means that permits, licenses or operations
      at our company may be subject to challenge. This may disrupt our business,
      or subject us to sanctions, requirements to increase capital or other
      conditions or enforcement, or compromise enforceability of related
      contractual arrangements, or have other harmful effects on
    us.





The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, natural gas businesses in China,
including our business.




In order to comply with PRC laws
limiting foreign ownership of Chinese companies, we conduct our natural gas
business through Xian Xilan Natural Gas by means of contractual arrangements. If
the PRC government determines that these contractual arrangements do not comply
with applicable regulations, our business could be adversely affected.




The PRC
government restricts foreign investment in natural gas businesses in China.
Accordingly, we operate our business in China through Xian Xilan Natural Gas.
Xian Xilan Natural Gas holds the licenses and approvals necessary to operate our
natural gas business in China. We have contractual arrangements with Xian Xilan
Natural Gas and its shareholders that allow us to substantially control Xian
Xilan Natural Gas. We cannot assure you, however, that we will be able to
enforce these contracts.




Although
we believe we comply with current PRC regulations, we cannot assure you that the
PRC government would agree that these operating arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If the PRC
government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we may
not be able to comply, impose restrictions on our business operations or on our
customers, or take other regulatory or enforcement actions against us that could
be harmful to our business.




Our contractual arrangements with
Xian Xilan Natural Gas and its shareholders may not be as effective in providing
control over these entities as direct ownership.




Since PRC
law limits foreign equity ownership in natural gas companies in China, we
operate our business through Xian Xilan Natural Gas. We have no equity ownership
interest in Xian Xilan Natural Gas and rely on contractual arrangements to
control and operate such businesses. These contractual arrangements may not be
as effective in providing control over Xian Xilan Natural Gas as direct
ownership. For example, Xian Xilan Natural Gas could fail to take actions
required for our business despite its contractual obligation to do so. If Xian
Xilan Natural Gas fails to perform under their agreements with us, we may have
to incur substantial costs and resources to enforce such arrangements and may
have to rely on legal remedies under PRC law, which may not be effective. In
addition, we cannot assure you that Xian Xilan Natural Gas’s shareholders would
always act in our best interests.





43


RISKS RELATED TO CORPORATE AND STOCK
MATTERS





Our largest stockholder has
significant influence over our management and affairs and could exercise this
influence against your best interests.





At June
30, 2008, Mr. Qinan Ji, our founder, Chairman of the Board and Chief Executive
Officer and our largest stockholder, beneficially owned approximately 20.3% of
our outstanding shares of common stock. As a result, pursuant to our Bylaws and
applicable laws and regulations, our controlling shareholder and our other
executive officers and directors are able to exercise significant influence over
our Company, including, but not limited to, any stockholder approvals for the
election of our directors and, indirectly, the selection of our senior
management, the amount of dividend payments, if any, our annual budget,
increases or decreases in our share capital, new securities issuance, mergers
and acquisitions and any amendments to our Bylaws. Furthermore, this
concentration of ownership may delay or prevent a change of control or
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of us, which could decrease the market price of our
shares. The limited prior public market and trading market may cause volatility
in the market price of our common stock.





We have incurred and will continue to
incur increased costs as a result of being a public company.





As a
public company, we have incurred and will continue to incur significant legal,
accounting and other expenses that we did not incur as a private company. We
have incurred and will continue to incur costs associated with our public
company reporting and compliance requirements, including corporate governance
requirements under the Sarbanes-Oxley Act of 2002 and rules implemented by the
Securities and Exchange Commission, or the SEC. We expect these rules and
regulations to increase our legal and financial compliance costs and to make
certain activities more time-consuming and costly.




We may have exposure to greater than
anticipated tax liabilities.




We are
subject to income tax, business tax and other taxes in many provinces and cities
in China and our tax structure is subject to review by various local tax
authorities. The determination of our provision for income tax and other tax
liabilities requires significant judgment and in the ordinary course of our
business, there are many transactions and calculations where the ultimate tax
determination is uncertain. Although we believe our estimates are reasonable,
the ultimate decisions by the relevant tax authorities may differ from the
amounts recorded in our financial statements and may materially affect our
financial results in the period or periods for which such determination is made.




The limited prior public market and
trading market may cause volatility in the market price of our common
stock.





Our
common stock is currently traded on a limited basis on the OTCBB under the
symbol, "CHNG.OB" The quotation of our common stock on the OTCBB does not assure
that a meaningful, consistent and liquid trading market currently exists, and in
recent years, such market has experienced extreme price and volume fluctuations
that have particularly affected the market prices of many smaller companies like
us. Our common stock is thus subject to volatility. In the absence of an active
trading market:





·
            investors
      may have difficulty buying and selling or obtaining market quotations;





44


·
            market
      visibility for our common stock may be limited;
  and





·
            a
      lack of visibility for our common stock may have a depressive effect on
      the market for our common stock.





Trading of our stock may be
restricted by the SEC's penny stock regulations which may limit a stockholder's
ability to buy and sell our stock if our stock trades below $5.00 per
share.





The SEC
has adopted Rule 15g-9 which generally defines "penny stock" to be any equity
security that has a market price (as defined) less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions. Our
securities are covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other than
established customers and "accredited investors". The term "accredited investor"
refers generally to institutions with assets in excess of $5,000,000 or
individuals with a net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.




NASD sales practice requirements may
also limit a stockholder's ability to buy and sell our
stock.





Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document
before effecting any transaction in a penny stock for the investor's
account.





45


Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii)reasonably determine, based
on that information, that transactions in penny stocks are suitable for the
investor and that the investor has sufficient knowledge and experience as to be
reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.





Shares eligible for future sale may
adversely affect the market price of our Common stock, as the future sale of a
substantial amount of our restricted stock in the public marketplace could
reduce the price of our common stock.





From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act ("Rule
144"), subject to certain limitations. In general, pursuant to Rule 144, a
stockholder (or stockholders whose shares are aggregated) who has satisfied a
one-year holding period may, under certain circumstances, sell within any
three-month period a number of securities which does not exceed the greater of
1% of the then outstanding shares of common stock or the average weekly trading
-volume of the class during the four calendar weeks prior to such sale. Rule 144
also permits, under certain circumstances, the sale of securities, without any
limitations, by a non-affiliate of our company that has satisfied a two-year
holding period. Any substantial sale of common stock pursuant to Rule 144 or
pursuant to any resale prospectus may have an adverse effect on the market price
of our securities.




If we or
our independent registered public accountants cannot attest our adequacy in the
internal control measures over our financial reporting, as required by Section
404 of the U.S. Sarbanes-Oxley Act, we may be adversely affected.





As a
public company, we are subject to report our internal control structure and
procedures for financial reporting in our annual reports on Form 10-KSB, as a
requirement of Section 404 of the U.S. Sarbanes-Oxley Act of 2002 by the U.S.
Securities and Exchange Commission (the "SEC"). The report must contain an
assessment by management about the effectiveness of our internal controls over
financial reporting. Moreover, the independent registered public accountants of
our Company must attest to and report on management's assessment of the same.
Even if our management attests to our internal control measures to be effective,
our independent registered public accountants may not be satisfied with our
internal control structure and procedures. We cannot guarantee the outcome of
the report and it could result in an adverse impact on us in the financial
marketplace due to the loss of investor confidence in the reliability of our
financial statements, which could negative influence to our stock market
price.





Stockholders should have no
expectation of any dividends.





The
holders of our common stock are entitled to receive dividends when declared by
the Board of Directors out of funds available. To date, we have not declared nor
paid any cash dividends. The Board of Directors does not intend to declare any
dividends in the near future, but instead intends to retain all earnings, if
any, for use in our business operations.





46





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





None.





I tem 3.  Defaults Upon Senior
Securities





None.





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





Not
applicable





Item 5.  Other Information





None





Item 6.  Exhibits





(a)Exhibits




Exhibit
      Number
            
            Description of
      Exhibit




31.1
            
            Certification
      of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended31.2
            
            Certification
      of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
      promulgated under the Securities and Exchange Act of 1934, as
      amended32.1
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)32.2
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 (Chief Financial
  Officer)




47





SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.


China
      Natural Gas, Inc.December
      23, 2008
            By:
            /s/ Qinan
      JiQinan
      Ji
              Chief
      Executive Officer
              (Principal
      Executive Officer)


December
      23, 2008
              By:
              /s/ Richard
      Peidong WuRichard
      Peidong WuChief
      Financial Officer(Principal
      Financial and Accounting
Officer)




48