**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**


(Mark
      One)





x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934





**For
      the quarterly period ended March 31, 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.)




**19th
        Floor, Building B, Van Metropolis**
 **Tang
        Yan Road, Hi-Tech Zone**
 **Xi’an,
        710065, Shaanxi Province, China**
 (Address
        of principal executive office)
  710065





(zip
      code)




**86-29-88323325**


( 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
                INFORMATIONItem
                1.
            Financial
                StatementsConsolidated
                Balance Sheet as of March 31, 2008 (unaudited) and December 31,
                2007
            2Consolidated
                Statements of Income and Other Comprehensive Income for the three
                months
                ended March 31, 2008 and 2007(unaudited)
            3Consolidated
                Statements of Cash Flows for the three months ended March 31, 2008
                and
                2007 (unaudited)
            4Notes
                to Consolidated Financial Statements (unaudited)
            5Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            21Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            29Item
                4.
            Controls
                and Procedures
            29PART
                II.
            OTHER
                INFORMATION
            29Item
                1.
            Legal
                Proceedings
            29Item
                1A.
            Risk
                Factors
            30Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            40Item
                3.
            Defaults
                Upon Senior Securities
            40Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            40Item
                5.
            Other
                Information
            40Item
                6.
            Exhibits
            40SIGNATURES
            42


1





**China
      Natural Gas, Inc. and Subsidiaries**


**Consolidated
      Balance Sheet**


**As
      of March 31, 2008 and Decenber 31,
      2007**




**March
                31, 2008**
            
            **December
                31, 2007****(Unaudited)****ASSETS****CURRENT
                ASSETS:**Cash
                & cash equivalents
            
            $
            41,254,130
            
            $
            13,291,729Short-term
                investments
            
            
            -
            
            
            238,554Accounts
                receivable
            
            
            486,111
            
            
            306,179Other
                receivable
            
            
            362,187
            
            
            549,820Inventories
            
            
            1,040,612
            
            
            231,339Advances
            
            
            625,893
            
            
            663,041Prepaid
                expense and other current assets
            
            
            586,756
            
            
            109,722Loan
                receivable
            
            
            285,600
            
            
            274,200**Total
                current assets**
            
            
            44,641,289
            
            
            15,664,584**PROPERTY
                AND EQUIPMENT, net**
            
            
            33,827,732
            
            
            32,291,995**CONSTRUCTION
                IN PROGRESS**
            
            
            12,130,620
            
            
            2,210,367**DEFERRED
                OFFERING COSTS**
            
            
            2,054,204
            
            
            -**OTHER
                ASSETS**
            
            
            7,138,669
            
            
            3,123,052**TOTAL
                ASSETS**
            
            $
            99,792,514
            
            $
            53,289,998**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES:**Accounts
                payable
            
            $
            404,121
            
            $
            293,970Other
                payables and accured liabilities
            
            
            175,715
            
            
            249,719Unearned
                revenue
            
            
            364,025
            
            
            327,220Accured
                interest
            
            
            236,111
            
            
            -Taxes
                payable
            
            
            2,047,763
            
            
            1,211,775**Total
                current liabilities**
            
            
            3,227,735
            
            
            2,082,684**LONG
                TERM LIABILITIES:**Notes
                payable, net of $17,254,108 discount
            
            
            22,745,892
            
            
            -Derivative
                liabilities - warrants
            
            
            17,500,000
            
            
            -**Total
                long term liabilities**
            
            
            40,245,892
            
            
            -**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 March 31, 2008and
                December 31, 2007
            
            
            2,920
            
            
            2,920Additional
                paid-in capital
            
            
            32,046,879
            
            
            32,046,879Cumulative
                translation adjustment
            
            
            5,780,027
            
            
            3,477,025Statutory
                reserves
            
            
            2,168,501
            
            
            1,802,735Retained
                earnings
            
            
            16,320,560
            
            
            13,877,755**Total
                stockholders' equity**
            
            
            56,318,887
            
            
            51,207,314**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            99,792,514
            
            $
            53,289,998


The accompanying notes are an integral part of these consolidated financial statements.2**China Natural Gas, Inc. and Subsidiaries****Consolidated Statements of Income and Other Comprehensive Income****For the Three Months Ended March 31, 2008 and 2007****(Unaudited)**


**Three
                months ended****March
                31****2008**
            
            **2007****Revenue**Natural
                gas revenue
            
            $
            11,345,319
            
            $
            4,923,572Installation
                and other
            
            
            2,680,355
            
            
            1,820,004Total
                revenue
            
            
            14,025,674
            
            
            6,743,576**Cost
                of revenue**Natural
                gas cost
            
            
            6,182,274
            
            
            2,492,651Installation
                and other
            
            
            1,754,924
            
            
            733,566Total
                cost of revenue
            
            
            7,937,198
            
            
            3,226,217**Gross
                profit**
            
            
            6,088,476
            
            
            3,517,359**Operating
                expenses**Selling
                expenses
            
            
            1,341,614
            
            
            594,129General
                and administrative expenses
            
            
            939,325
            
            
            421,379Total
                operating expenses
            
            
            2,280,939
            
            
            1,015,508**Income
                from operations**
            
            
            3,807,537
            
            
            2,501,851**Non-operating
                income (expense):**Interest
                income
            
            
            55,285
            
            
            9,409Interest
                expense
            
            
            (156,727
            )
            
            -Amortization
                of discount on senior notes
            
            
            (146,663
            )
            
            -Amortization
                of deferred offering costs
            
            
            (56,270
            )
            
            -Other
                income
            
            
            674
            
            
            383Other
                expense
            
            
            (7,800
            )
            
            -Total
                non-operating income (expense)
            
            
            (311,501
            )
            
            9,792**Income
                before income tax**
            
            
            3,496,036
            
            
            2,511,643**Provision
                for income tax**
            
            
            687,465
            
            
            401,317**Net
                income**
            
            
            2,808,571
            
            
            2,110,326**Other
                comprehensive income**Foreign
                currency translation gain
            
            
            2,303,002
            
            
            281,404**Comprehensive
                Income**
            
            $
            5,111,573
            
            $
            2,391,730**Weighted
                average shares outstanding**Basic
            
            
            29,200,304
            
            
            24,210,183Diluted
            
            
            29,334,084
            
            
            24,210,183**Earnings
                per share**Basic
            
            $
            0.10
            
            $
            0.09Diluted
            
            $
            0.10
            
            $
            0.09





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


3


**China
      Natural Gas, Inc. and Subsidiaries**


**Consolidated
      Statements of Cash Flows**


**For
        the Three Months
        Ended March 31, 2008 and 2007**


(Unaudited)




**Three
                months ended****March
                31****2008**
            
            **2007****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            2,808,571
            
            $
            2,110,326Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
                and amortization
            
            
            656,587
            
            
            352,685Loss
                on disposal of building improvements and equipment
            
            
            11,957
            
            
            -Amortization
                of discount on senior notes
            
            
            146,663
            
            
            -Amortization
                of deferred offering costs
            
            
            56,270
            
            
            -Non-cash
                interest expense
            
            
            156,727
            
            
            -Change
                in assets and liabilities:Accounts
                receivable
            
            
            (163,656
            )
            
            (59,700
            )Other
                receivable
            
            
            205,864
            
            
            (197,081
            )Inventories
            
            
            (782,687
            )
            
            172,905Advances
            
            
            63,341
            
            
            246,228Prepaid
                expense and other current assets
            
            
            (462,880
            )
            
            196,929Accounts
                payable
            
            
            95,847
            
            
            21,770Accrued
                expense
            
            
            (83,010
            )
            
            -Other
                payables
            
            
            1,129
            
            
            (912,068
            )Unearned
                revenue
            
            
            22,709
            
            
            482Taxes
                payable
            
            
            768,939
            
            
            -Net
                cash provided by operating activities
            
            
            3,502,371
            
            
            1,932,476**CASH
                FLOWS FROM INVESTING ACTIVITIES**Purchase
                of property and equipment
            
            
            (555,720
            )
            
            (192,232
            )Proceeds
                from short term investments
            
            
            243,200
            
            
            -Additions
                to construction in progress
            
            
            (9,586,215
            )
            
            (377,901
            )Prepayment
                on long term assets
            
            
            (4,128,711
            )
            
            -Payment
                for land use rights
            
            
            (25,091
            )
            
            -Net
                cash used in investing activities
            
            
            (14,052,537
            )
            
            (570,133
            )**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
            
            
            635,076
            
            
            69,738**NET
                INCREASE IN CASH & CASH EQUIVALENTS**
            
            
            27,962,401
            
            
            1,432,081**CASH
                & CASH EQUIVALENTS, BEGINNING OF PERIOD**
            
            
            13,291,729
            
            
            5,294,213**CASH
                & CASH EQUIVALENTS, END OF PERIOD**
            
            $
            41,254,130
            
            $
            6,726,294**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Interest
                paid
            
            $
            -
            
            $
            -Income
                taxes paid
            
            $
            57,893
            
            $
            -


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


4


**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **March
          31, 2008**
 (Unaudited)


**Note
      1 - Organization and Basis of Presentation**





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 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 established Xi'an Xilan Auto Bodyshop Co., Ltd (“XXABC”) with registered capital
      of $519,200 (RMB 4,000,000) 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. The Company is in the process of obtaining
      the approval and new business license from the PRC government.





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. (“XXNGC”), Shaanxi Jingbian Liquefied Natural Gas Co., Ltd
      (“SJLNG”) 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 FASB
      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 FASB
      Interpretation No. 46R, “Consolidation of Variable Interest Entities.”
The arrangements consist of the following agreements:


5





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.





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 March 31, 2008 are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2008 .





Foreign
      Currency Translation





As
      of
      March 31, 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 March 31, 2008 were
      translated 7.00 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
      three months ended March 31, 2008 and 2007 were 7.15 RMB and 7.75 RMB to $1.00
      USD, respectively.  Translation adjustments resulting from this process of
      $5,780,027 and $3,477,025 as of March 31, 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 three
      months ended March 31, 2008 and 2007, other comprehensive income in the
      consolidated statements of income and other comprehensive income included
      translation gains of $2,302,002 and $281,404, respectively.


6





**Note
      2 – Summary
      of Significant Accounting Policies**





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.





Cash
      and Cash Equivalents





Cash
      and cash equivalents include cash on hand and cash in banks maintained with
      state owned with 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 Unites States. Balances at financial
      institutions or state owned banks within the PRC are not covered by insurance.
      As of March 31, 2008 and December 31, 2007, the Company had deposits in excess
      of federally insured limits total of $40,954,130 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 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 allowance for uncollectible accounts is not significant.





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. The Company’s management has determined that all
      receivables are collectible and there is no need for a reserve for bad debts
      as
      of March 31, 2008 and December 31, 2007.


7





Other
      Receivable





As
      needed for normal business purpose, 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.





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
      March
      31, 2008 and December 31, 2007, the following are the details of the
      inventories:





2008
            
            2007Materials
                and supplies
            
            $
            258,671
            
            $
            109,333Natural
                gas and gasoline
            
            
            781,941
            
            
            122,006$
            1,040,612
            
            $
            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
      March
      31, 2008 and December 31, 2007, the following are the details of the property
      and equipment:





2008
            
            2007Office
                equipment
            
            $
            170,710
            
            $
            163,432Operating
                equipment
            
            
            23,896,744
            
            
            22,413,270Vehicles
            
            
            1,546,627
            
            
            1,484,892Buildings
            
            
            12,708,024
            
            
            11,943,00638,322,105
            
            
            36,004,600Less
                accumulated depreciation
            
            
            (4,494,373
            )
            
            (3,712,605
            )$
            33,827,732
            
            $
            32,291,995


8





Depreciation
      expense for the three months ended March 31, 2008 and 2007 was $656,524 and
      $351,776, respectively.




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 March 31, 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 three months ended March
      31,
      2008and 2007 amounted to $190,648 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
                  1inputs
                  to the valuation methodology are quoted prices (unadjusted) for
                  identical
                  assets or liabilities in active
                  markets.
 
 ·
              Level
                  2inputs
                  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.
  9
 
 ·
              Level
                  3inputs
                  to the valuation methodology are unobservable and significant to
                  the fair
                  value measurement.


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
      March 31, 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
              March 31, 2008
            
            Fair Value Measurements at March 31, 2008
              Using Fair Value HierarchyLevel
                1
            
            
            Level
                2
            
            
            Level
                3LiabilitiesWarrant
                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
      Company entered into a 15 days foreign currency forward contract on March 20,
      2008. As of March 31, 2008, the fair value of the contract is $8,000,000 (or
      788,800,000 Japanese Yen) and is recorded in cash and cash equivalents in the
      accompanying consolidated balance sheets due to the short term nature of the
      investment.





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.


10





The
      Company elected not to apply hedge accounting. For a derivative instrument
      that
      is not designated, as a hedge, the change in fair value is recognized in
      earnings in the period of change. For the period ended March 31, 2008, no gain
      or loss was incurred.





Revenue
      Recognition





The
      Company's 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 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 time. Revenue from repairing and modifying vehicles is recorded when
      service are rendered to and accepted by the customers





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 three months
      ended March 31, 2008 and 2007 were insignificant.





Stock-Based
      Compensation





The
      Company accounts for its stock-based compensation in accordance with Statement
      of Financial Accounting Standards (“SFAS”) No. 123R, "Share-Based Payment, an
      Amendment of Financial Accounting Standards Board (“FASB”) Statement No. 123."
      The Company recognizes in the statement of operations the grant-date fair value
      of stock options and other equity-based compensation issued to employees and
      non-employees. The
      Company did not grant any options and no options were cancelled or exercised
      during the period ended March 31, 2008 and the year ended December 31, 2007.
      As
      of March 31, 2008 and December 31, 2007, there were no options
      outstanding.





The
      Company accounts for non-employee stock-based compensation expense in accordance
      with EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued
      to
      Other Than Employee for Acquiring, or in Conjunction with Selling, Goods or
      Services (“EITF 96-18”). The Company used the Black-Scholes option-pricing model
      as its method of valuation for share-based awards granted. The Company’s
      determination of fair value of share-based payment awards on the date of grant
      using an option-pricing model is affected by the Company’s stock price as well
      as assumptions regarding a number of complex and subjective variables. These
      variables include, but are not limited to, the Company’s expected stock price
      volatility over the term of the awards and the expected term of the
      awards.


11





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 March 31, 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.





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
                the periodEnded
                March 31,2008
            
            2007Tax
                provision (credit) at statutory rate
            
            
            34
            %
            
            34
            %Foreign
                tax rate difference
            
            
            (9
            )%
            
            (1
            )%Effect
                of favorable tax rate
            
            
            (4
            )%
            
            (14
            )%21
            %
            
            19
            %





The
      estimated tax savings for the period ended March 31, 2008 and 2007 amounted
      to
      approximately $402,051 and $481,871, 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 March 31, 2008 and 2007 from $0.10 to $0.08
      and
      $0.09 to $0.07, respectively.


12





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.





Basic
      and Diluted Earning Per Share




Earning
      per share is calculated in accordance with the Statement of Financial Accounting
      Standards No. 128 (“SFAS No. 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“. 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.


13





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.





**Note
      3 –- Other
      Assets**





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





2008
            
            2007Prepaid
                rent –
                natural gas stations
            
            $
            260,951
            
            $
            225,924Prepayment
                for acquiring land use right
            
            
            1,035,300
            
            
            993,975Advances
                on purchasing equipment/construction in progress
            
            
            5,167,031
            
            
            1,501,443Refundable
                security deposits
            
            
            628,320
            
            
            356,460Others
            
            
            47,067
            
            
            45,250Total
            
            $
            7,138,669
            
            $
            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 March 31,
      2008 and December 31, 2007, the Company prepaid $1,035,300 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.


14




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 deposit is monies deposited to one of its major vendor 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
      to the Investor 5.00% Guaranteed Senior Notes due 2014 (the “Senior Notes”) in
      aggregate principal amount of RMB 145,000,000 (approximately $20,000,000),
      (ii)
      agreed to issue to the Investor Senior Notes in aggregate principal amount
      of
      RMB145,000,000 (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 RMB 73,000,000 (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 completed the sale of RMB145,000,000 (or
      approximately $20,000,000) in principal amount of the Senior Notes and the
      issuance of the warrants pursuant to the Purchase Agreement. 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;


·
            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-competition agreement for the benefit of the
      Investor.





The
      Senior Note in the amount of RMB 145,000,000 was 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:


15




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 percentage of the principal
      amount:




Year
            
            Percent of Principal2009
            
            
            108.0%2010
            
            
            106.0%2011
            
            
            104.0%2012
            
            
            102.0%2013
                and thereafter
            
            
            100.0%





Upon
      the
      happening 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.


16




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 the First Option Notes
      for an additional RMB145,000,000 (approximately $20,000,000) in aggregate
      principal amount of Senior Notes. On March 10, 2008, the Company issued Senior
      Notes for an additional aggregate principal amount of RMB145,000,000
      (approximately $20,000,000) representing the First Option Notes for total Senior
      Notes of RMB290,000,000 (approximately $40,000,000).





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 three months ended March 31, 208, the Company
      amortized $56,270 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 three months ended March 31, 2008, the Company amortized $146,663 of the
      aforesaid discounts, net of capitalized of interest.


17





**Note
      5 – Stockholders’ Equity**





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.





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 filling of its certificate of Amendment of
      Articles of Incorporation to increase the authorized number 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
            
            
            -ForfeitedExercisedOutstanding,
                March 31, 2008
            
            
            3,988,484
            
            $
            7.14
            
            
            -





18




Following
      is a summary of the status of warrants outstanding at March 31, 2008:





Outstanding warrants
            
            
            
            Exercisable WarrantsExercise
              Price
            
            Number
            
            Average
              Remaining
              Contractual
              Life
            
            Average
              Exercise Price
            
            Number$                                    3.60
            
            
            321,176
            
            
            0.78
            
            $
            3.60
            
            
            321,176$                                    7.37
            
            
            2,900,000
            
            
            6.83
            
            $
            7.37
            
            
            2,900,000$                                    7.79
            
            
            767,308
            
            
            4.34
            
            $
            7.79
            
            
            767,308$                                    7.14
            
            
            3,988,484
            
            
            5.86
            
            $
            7.14
            
            
            3,988,484





**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 $20,132 for the three months ended
      March 31, 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 $365,766 and $341,860 as reserve for the statutory
      surplus reserve for the three months ended March 31, 2008 and 2007,
      respectively.





**Note
      8 – Earnings Per Share**





Earnings
      per share for the period ended March 31, 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.”





19




The
      following demonstrates the calculation for earnings per share for the period
      ended March 31, 2008 and 2007:




**Three Months Ended March 31,**2008
            
            
            2007**Basic
                earning per share**Net
                income
            
            $
            2,808,571
            
            $
            2,110,326Weighted
                shares outstanding-Basic
            
            
            29,200,304
            
            
            24,210,183Earnings
                per share-Basic
            
            $
            0.10
            
            $
            0.09**Diluted
                earning per share**Net
                income
            
            $
            2,808,571
            
            $
            2,110,326Weighted
                shares outstanding-Basic
            
            
            29,200,304
            
            
            24,210,183Effect
                of diluted securities-Warrants
            
            
            133,780
            
            
            -Weighted
                shares outstanding-Diluted
            
            
            29,334,084
            
            
            24,210,183Earnings
                per share -Diluted
            
            $
            0.10
            
            $
            0.09





At
      March
      31, 2008 and 2007, the Company had outstanding warrants of 3,988,484 and
      1,140,286, respectively. For the three months ended March 31, 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 133,780;
      3,667,308 outstanding warrants were excluded from the diluted earnings per
      share
      calculation as they are anti-dilutive. For the three months ended March 31,
      2007, all outstanding warrants were excluded from the diluted earnings per
      share
      calculation as they are anti-dilutive.




**Note
      9 – Current Vulnerability Due to Certain
      Concentrations**





For
      the
      period ended March 31, 2008 and 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. No amount was owed to these vendors at March 31, 2008. Except
      for Shaanxi Natural Gas Co Ltd, the other two vendors have long-term agreements
      with the Company without minimum purchase requirements. The Company has had
      annual agreements from July 1, 2007 to June 30, 2008 with Shaanxi Natural Gas
      Co
      Ltd to purchase certain amount of natural gas. For the year ending June 30,
      2008, the minimum purchase was 12.93 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
      period ended March 31, 2008, three suppliers accounted for 64.18%of the total
      inventory purchased by the Company and for the period ended March 31, 2007,
      two
      supplier accounts for 90.90% of the total inventory purchased by the
      Company





For
      the
      period ended March 31, 2008, two suppliers accounted for 61.55 %of the total
      equipment purchased by the Company and for the period ended March 31, 2007,
      two
      suppliers accounted for 44.9% of the total equipment purchased by the
      Company.





20




Four
      customers accounted for 7.92 % of the Company’s installation revenue for the
      period ended March 31, 2008 and four customers accounted for 42.6% of the
      Company’s installation revenue for the period ended March 31, 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
      10 – Commitments and Contingencies**





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:




Nine
                months ending December 31, 2008
            
            $
            537,222Year
                ended December 31, 2009
            
            
            716,296Year
                ended December 31, 2010
            
            
            716,296Year
                ended December 31, 2011
            
            
            705,454Year
                ended December 31, 2012
            
            
            650,771Thereafter
            
            
            2,336,584Total
            
            $
            5,662,623




For
      the
      period ended March 31, 2008 and 2007, the land use right and office lease
      expenses were $63,247 and $ 22,723, respectively.





**Note
      11 – Subsequent Event**





On
      April
      8, 2008 ,
      the
      Company has entered into an agreement with the Xi'an Internal Port
      Administrative Committee to participate in the development of both Xi'an
      International Port District and Baliu Ecological Park.





**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.





21




**Overview**





We
      were
      incorporated in the state of Delaware on March 31, 1999, as Bullet Environmental
      Systems, Inc. On May 25, 2000, we changed our name to Liquidpure Corp. and
      on
      February 14, 2002, we changed our name to Coventure International
      Inc.





On
      December 6, 2005, we issued an aggregate of 4 million shares to all of the
      registered shareholders of Xi’an Xilan Natural Gas Co., Ltd., and entered into
      exclusive arrangements with Xi’an Xilan Natural Gas Co., Ltd. and these
      shareholders that give us the ability to substantially influence Xi’an Xilan
      Natural Gas’ daily operations and financial affairs, appoint its senior
      executives and approve all matters requiring shareholder approval. On December
      19, 2005, we changed our name to China Natural Gas, Inc.





On
      February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., (“Xilan
      Equipment”) as a wholly owned foreign enterprise (WOFE). We then, through Xilan
      Equipment, entered into exclusive arrangements with Xi’an Xilan Natural Gas Co.,
      Ltd. and these shareholders that give us the ability to substantially influence
      Xi’an 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 Xi’an Xilan Natural Gas as variable
      interest entity pursuant to FASB Interpretation No. 46R, “Consolidation of
      Variable Interest Entities.”





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 approximately 27 CNG filling stations in Shaanxi and Henan
      Provinces.  As of March 31, 2008, we own and operate 17 CNG filling
      stations in Shaanxi Province and 10 CNG filling stations in Henan
      Province.





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 (27
                  stations
                  as of March 31, 2008);


22


·
              Distribution
                  and sale of piped natural gas to residential, commercial and industrial
                  customers through Company-owned pipelines. The
                  Company distributes and sells natural gas to approximately 90,269
                  homes
                  and businessesas
                  of March 31, 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
      mine 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 security
      purchase agreement with 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.





**CONSOLIDATED
      RESULTS OF OPERATIONS**





**Comparing
      Three Months Ended March 31, 2008 and 2007:**





The
      following table presents certain consolidated statement of operations
      information. Financial information is presented for the three months ended
      March
      31, 2008 and 2007.





March 31,
              2008
            
            March 31,
              2007Revenues
            
            $
            14,025,674
            
            $
            6,743,576Cost
                of Revenues
            
            
            7,937,198
            
            
            3,226,217Operating
                Expenses
            
            
            2,280,939
            
            
            1,015,508Income
                from Operations
            
            
            3,807,537
            
            
            2,501,851Net
                Income
            
            $
            2,808,571
            
            $
            2,110,326





*Revenues:* We
      generated approximately 80.89% of our revenues in the three months ended March
      31, 2008 from the sale of natural gas and approximately 19.11% of our revenues
      from installation fees, conversion fees, and other sources. Sales of natural
      gas
      at the Company-owned filling stations accounted for approximately 77.30% of
      our
      total revenues in the three months ended March 31, 2008, or approximately
      $10,842,155 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 11.89% of our total revenues in the three months
      ended March 31, 2008, or approximately $1,667,929, including both natural gas
      sales and installation fees. The Company expects natural gas revenues to
      increase on both an actual basis and as a percentage of revenue in
      2008.





23




As
      of
      March 31, 2008, the Company had approximately 90,269 pipeline customers, an
      increase of approximately 15,269 customers over the same period in 2007, and
      had
      constructed and acquired 27 filling stations, an increase of 13 stations over
      the same period in 2007. In the second quarter of 2008, the Company expects
      to
      add up to 4,500 pipeline customers and 5 additional filling stations, which
      the
      Company estimates will increase sales of natural gas by 37.7 million cubic
      meters.





We
      had
      total revenues of $14,025,674 for the three months ended March 31, 2008, an
      increase of $7,282,098 or 107.99%, compared to $6,743,576 for the three months
      ended March 31, 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
      approximately 75,000 in the three months ended March 31, 2007 to approximately
      90,269 in the three months ended March 31, 2008.





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 March 31, 2008, our installation
      revenues decreased approximately 41.66% over the same period in 2007 and our
      sales of natural gas increased approximately 130.43% over the previous year.
      Two
      customers accounted for approximately 6.87% of the Company's installation
      revenue for the three months ended March 31, 2008.





*Cost
      of Revenues* :
      Our
      cost of revenues consists of both the cost of natural gas and the cost of
      installation. 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 connection includes certain installation
      costs related to connecting customers to our pipeline system that are generally
      expensed when incurred.





Cost
      of
      revenues in the three months ended March 31, 2008 was $7,937,198, an increase
      of
      $4,710,981 or approximately 146.02% over the same period in 2007. Cost of
      natural gas increased by approximately 148.02% to $6,182,274 in the three months
      ended March 31, 2008, as compared with $2,492,651 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. In addition, our installation costs
      decreased in the three months ended March 31, 2008 by approximately 46.26%
      to
      $394,231, as compared with $733,566 in the same period in 2007 as a result
      of
      the decrease in new pipeline customers.





We
      purchase all of our 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. 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 ¥0.4/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.





24




*Gross
      profit* :
      The
      Company earned a gross profit of $6,088,476 for the three months ended March
      31,
      2008, an increase of $2,571,117 or approximately 73.10%, compared to $3,517,359
      for the three months ended March 31, 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 43.41% for
      the
      three months ended March 31, 2008, from approximately 52.16% for the three
      months ended March 31, 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 . In
      addition, Auto Conversion division, which did not exist in the first quarter
      in
      2007, is another factor contributed to lower margin in the three months period
      ended March 31, 2008.





*Operating
      expenses:* The
      Company incurred operating expenses of $2,280,939 for the three months ended
      March 31, 2008, an increase of $1,265,431, or approximately 124.61%, compared
      to
      $1,015,508 for the three months ended March 31, 2007. Our operating expenses
      increased primarily as a result of expenses related to the operation of 13
      newly
      added CNG stations since March 31, 2007, 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
      March
      31, 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 March 31, 2008, two suppliers accounted for 91.25% 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 $687,465 for the three months ended March 31, 2008, as compared to
      $401,317 for the three months ended March 31, 2007. The increase in income
      tax
      was attributed to the growth of installation fees and the sale of natural
      gas.




*Net
      Income* :
      Net
      income increased to $2,808,571 for the three months ended March 31, 2008, an
      increase of $698,245 or approximately 33.09% from $2,110,326 for the three
      months ended March 31, 2007. The increased net income reflects the Company’s
      strong and steady profit generating ability. The Company expects natural gas
      revenues continue to increase on both an actual basis and as a percentage of
      revenue. In the second quarter of 2008, the Company expects to add up to 4,500
      pipeline customers and add additional 5 filling stations, which the Company
      estimates will increase sales of natural gas by 37.7 million cubic
      meters.





**Liquidity
      and Capital Resources**





As
      of
      March 31, 2008, the Company had $41,254,130 of cash and cash equivalents on
      hand
      compared to $13,291,729 of cash and cash equivalents as of December 31,
      2007.





25




Cash
      flows provided by operating activities was $3,502,371 for the three months
      ended
      March 31, 2008 compared to net cash provided by operations of $1,932,476 in
      the
      corresponding period last year. The primary reason for the change is attributed
      to the income generated from revenue, decrease in other receivables and increase
      in taxes payable.





Cash
      outflows for investing activities increased from $570,133 in the three months
      ended March 31, 2007 to $14,052,537 for the same period in 2008 primarily
      because of the prepayment to equipment suppliers of the LNG plant and additions
      to construction in progress, as well as purchasing other long term assets and
      payment for land use rights.





Cash
      inflow for financing activities was $37,877,491 for the three months ended
      March
      31, 2008, compared to zero in the corresponding previous year. The financing
      cash flow comes from the sale of senior notes to Abax Lotus, partially offset
      by
      the offering cost.





The
      Company expects to add 5 additional CNG filling stations in the second quarter
      of 2008. The Company expects to invest between $4.0 million and $6.0 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
      equipments as well as consulting fees. The Company expects to pay the LNG
      related fees 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 LNG Project and 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**





We
      entered in to a foreign currency forward contract in March 2008 and please
      refer
      to footnote under “Derivative Accounting” for more details. We also entered into
      series of long term lease agreements with outside parties to lease land use
      right to the self-built natural gas filling stations located in the PRC, and
      please refer to footnote 4 to the financial statements for details. We have
      purchase agreements with several natural gas suppliers and please see
      footnote 9 for more explanations. We do not have any other off-balance
      sheet arrangements that have or are reasonably likely to have a current or
      future effect on our financial condition, changes in financial condition,
      revenues or expenses, results of operations, liquidity, capital expenditures
      or
      capital resources that are material to our investors.





**CRITICAL
      ACCOUNTING POLICIES**





In
      presenting our financial statements in conformity with accounting principles
      generally accepted in the United States, 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.





26




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 time. Revenue from
      repairing and modifying vehicles is recorded when service are rendered to and
      accepted by the customers.





27




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.




28




**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 satisfactory subject to the following:




·
            Inadequate
                US GAAP expertise - The current staff in the accounting department
                is
                inexperienced and they was primarily engaged in ensuring compliance
                with
                PRC accounting and reporting requirement for our operating subsidiaries
                and was not required to meet or apply U.S. GAAP requirements.  They
                need substantial training so as to meet with the higher demands of
                being a
                U.S. public company. The accounting skills and understanding necessary
                to
                fulfill the requirements of US GAAP-based reporting, including the
                skills
                of subsidiary financial statements consolidation, are
                inadequate.




We
      have
      engaged Pickard & Green, CPAs, a Certified Public Accounting firm in
      Valencia, CA, to serve as our accountant.  They are mainly engaged to
      perform our financial statements consolidation and to prepare our financial
      statements.  In particular, we are seeking accountants experienced in
      several key areas of accounting, including persons with experience in Chinese
      and U.S. GAAP, U.S. GAAP consolidation requirements,and SEC financial reporting
      requirements.




In
      addition, we plan to allocate additional resources to train our existing
      accounting staff and continue this effort in the future.




**Part
      II.****OTHER
      INFORMATION**




**Item
      1.**  **Legal
      Proceedings**





None





29




**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 has 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 government owned entities. 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.





30




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.




31




**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.





**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’s any change in this
      favorable policy, though not currently expected, it could adversely affect
      our
      earnings results.





32




**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 March 31, 2008, the exchange rate between the RMB
      and
      the United States dollar was 7.00 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.





**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.





33




**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.





34




**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:




35




·
            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





·
            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.





36




**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
      March
      13, 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:


37





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





·
            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.





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.


38





**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.





**We
      may be exposed to potential risks relating to our internal controls over
      financial reporting and our ability to have the operating effectiveness of
      our
      internal controls attested to by our independent auditors.**





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.


39


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





None
      that
      were not reported on a Form 8-K.




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**3.1
            
            Certificate
                of Amendment to the Certificate of Incorporation (incorporated by
                reference to Exhibit 3.2 to the Company’s Form SB-2 filed on November 2,
                2007)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
                amended


40





31.2
            
            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)


41




**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.May
                19, 2008
            By:
            /s/ Qinan
                JiQinan
                Ji
              Chief
                Executive OfficerMay
                19, 2008
            By:
            /s/ Lihong
                GuoLihong
                Guo
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)




42