UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB





(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, 2007





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 small business issuer as specified in its charter)





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




Tang
      Xing
      Shu Ma Building, Suite 418


Tang
      Xing
      Road


Xian
      High
      Tech Area


Xian,
      Shaanxi Province, China


(Address
      of principal executive offices)




86-29-88323325


(Issuer's
      telephone number)





N/A


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





Check
      whether the issuer (1) 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





Number
      of
      shares of Common Stock outstanding as of May 1, 2007: 24,210,183





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




Transitional
      Small Business Disclosure Format (check one): Yes o
      No x









**CHINA
      NATURAL GAS, INC.**


**Index**





Page
                NumberPART
                I. FINANCIAL INFORMATIONItem
                1. Financial StatementsConsolidated
                Balance Sheet as of March 31, 2007 (unaudited)
            
            F-1Consolidated
                Statements of Income and Other Comprehensive Income for the three
                months
                ended March 31, 2007 and 2006 (unaudited)
            
            F-2Consolidated
                Statements of Cash Flows for the three months ended March 31, 2007
                and
                2006 (unaudited)
            
            F-3Notes
                to Consolidated Financial Statements (unaudited)
            
            F-4Item
                2. Management's Discussion and Analysis or Plan of
                Operations
            
            1Item
                3. Controls and Procedures
            
            15PART
                II. OTHER INFORMATIONItem
                5. Other Information
            
            15Item
                6. Exhibits
            
            16


i


**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





**CHINA
      NATURAL GAS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEET**


**AS
      OF MARCH 31, 2007**


**(Unaudited)**


**ASSETS****CURRENT
                  ASSETS:**Cash
                  & cash equivalents
              
              $
              6,726,294Accounts
                  receivable
              
              
              634,935Other
                  receivable
              
              
              1,016,116Inventory
              
              
              114,902Advances
              
              
              1,431,097Prepaid
                  expense and other current assets
              
              
              110,062**Total
                  current assets**
              
              
              10,033,406**PROPERTY
                  AND EQUIPMENT, net**
              
              
              17,213,323**CONSTRUCTION
                  IN PROGRESS**
              
              
              2,747,472**TOTAL
                  ASSETS**
              
              $
              29,994,201**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES:**Accounts
                  payable & accrued expense
              
              $
              432,321Other
                  payables
              
              
              1,252,482Unearned
                  revenue
              
              
              287,464**Total
                  current liabilities**
              
              
              1,972,267**STOCKHOLDERS'
                  EQUITY:**Preferred
                  stock, $0.0001 per share; authorized 5,000,000 shares; none issuedCommon
                  stock, $0.0001 per share; authorized 30,000,000 shares;issued
                  and outstanding 24,210,183
              
              
              2,421Additional
                  paid-in capital
              
              
              18,223,911Cumulative
                  translation adjustment
              
              
              1,120,856Statutory
                  reserve
              
              
              1,092,746Retained
                  earnings
              
              
              7,582,000**Total
                  stockholders' equity**
              
              
              28,021,934**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              29,994,201




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


F-1


**CHINA
      NATURAL GAS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**


**(Unaudited)**


**Three
                  Months Ended March 31,****2007**
              
              **2006**(unaudited)
              
              (unaudited)**Revenue**Natural
                  gas revenue
              
              $
              4,923,572
              
              $
              864,953Construction
                  / installation revenue
              
              
              1,820,004
              
              
              922,261Total
                  revenue
              
              
              6,743,576
              
              
              1,787,214**Cost
                  of revenue**Natural
                  gas cost
              
              
              2,492,651
              
              
              505,863Construction
                  / installation cost
              
              
              733,566
              
              
              336,6493,226,217
              
              
              842,512**Gross
                  profit**
              
              
              3,517,359
              
              
              944,702**Operating
                  expenses**Selling
                  expenses
              
              
              594,129
              
              
              244,734General
                  and administrative expenses
              
              
              421,379
              
              
              219,702Total
                  operating expenses
              
              
              1,015,508
              
              
              464,436**Income
                  from operations**
              
              
              2,501,851
              
              
              480,266**Non-operating
                  income (expense):**Interest
                  income
              
              
              9,409
              
              
              2,744Other
                  income (expense)
              
              
              383
              
              
              26Total
                  non-operating income (expense)
              
              
              9,792
              
              
              2,770**Income
                  before income tax**
              
              
              2,511,643
              
              
              483,036**Income
                  tax**
              
              
              401,317
              
              
              72,456**Net
                  income**
              
              
              2,110,326
              
              
              410,580**Other
                  comprehensive income**Foreign
                  currency translation gain
              
              
              281,404
              
              
              62,656**Comprehensive
                  Income**
              
              $
              2,391,730
              
              $
              473,236**Weighted
                  average shares outstanding**Basic
              
              
              24,210,183
              
              
              23,422,553Diluted
              
              
              24,210,183
              
              
              23,685,565**Earnings
                  per share**Basic
              
              $
              0.09
              
              $
              0.02Diluted
              
              $
              0.09
              
              $
              0.02Basic
                  and diluted are the same because there is not anti-diluted
                  effectThe
                  accompanying notes are an integral part of these consolidated financial
                  statements


F-2


**CHINA
      NATURAL GAS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**


**(Unaudited)**


**Three
                  Months Ended March 31,****2007**
              
              **2006****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  income
              
              $
              2,110,326
              
              $
              410,580Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities:Loss
                  on disposal of property
              
              
              
              
              
              -Depreciation
                  and amortization
              
              
              352,685
              
              
              163,738(Increase)
                  / decrease in assets:Accounts
                  receivable
              
              
              (59,700
              )
              
              (145,086
              )Other
                  receivable
              
              
              (197,081
              )
              
              (423,129
              )Inventory
              
              
              172,905
              
              
              (1,478
              )Advances
              
              
              246,228
              
              
              (107,933
              )Prepaid
                  expense
              
              
              196,929
              
              
              (218,281
              )Contract
                  in progress
              
              
              -
              
              
              (161,850
              )Increase
                  / (decrease) in current liabilities:Accounts
                  payable & accrued expense
              
              
              21,770
              
              
              254,029Other
                  payables
              
              
              (912,068
              )
              
              148,003Unearned
                  revenue
              
              
              482
              
              
              (56,020
              )Net
                  cash provided by operating activities
              
              
              1,932,476
              
              
              (137,427
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Payment
                  on purchase of property and equipment
              
              
              (192,232
              )
              
              (1,121,178
              )Additions
                  to construction in progress
              
              
              (377,901
              )
              
              5,684Net
                  cash used in investing activities
              
              
              (570,133
              )
              
              (1,115,494
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Stock
                  issued for cash
              
              
              -
              
              
              10,400,000Payment
                  of offering costs
              
              
              -
              
              
              (1,557,147
              )Net
                  cash provided by in financing activities
              
              
              -
              
              
              8,842,853Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              69,738
              
              
              (2,916
              )**NET
                  INCREASE IN CASH & CASH EQUIVALENTS**
              
              
              1,432,081
              
              
              7,587,016**CASH
                  & CASH EQUIVALENTS, BEGINNING OF YEAR**
              
              
              5,294,213
              
              
              675,624**CASH
                  & CASH EQUIVALENTS, END OF YEAR**
              
              $
              6,726,294
              
              $
              8,262,640**SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:**Interest
                  paid
              
              $
              -
              
              $
              -Income
                  taxes paid
              
              $
              -
              
              $
              -


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




F-3




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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





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





The
      unaudited consolidated financial statements have been prepared by China Natural
      Gas, Inc. (the “Company”), pursuant to the rules and regulations of the
      Securities and Exchange Commission. The information furnished herein reflects
      all adjustments (consisting of normal recurring accruals and adjustments) which
      are, in the opinion of management, necessary to fairly present the operating
      results for the respective periods. Certain information and footnote disclosures
      normally present in annual consolidated financial statements prepared in
      accordance with accounting principles generally accepted in the United States
      of
      America have been omitted pursuant to such rules and regulations. These
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and footnotes for the year ended December
      31,
      2006 included in the Company’s Annual Report on Form 10-KSB. The results of the
      three months ended March 31, 2007 are not necessarily indicative of the results
      to be expected for the full year ending December 31, 2007.





Organization
      and Line of Business




Xi’an
      Xilan Natural Gas Co, Ltd. (“XXNGC”) was incorporated on January 8, 2000 in
      Xi’an city in the Shaanxi province, China. The core business of XXNGC is
      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. XXNGC has an exclusive permit to provide gas utility
      service in Lantian County,  Lintong
      and Baqiao District of Xi’an city, China.





On
      December 6, 2005, XXNGC entered into and closed a share purchase agreement
      with
      Coventure International, Inc. (“Coventure”), a public shell in the United States
      of America. Pursuant to the purchase agreement, Coventure acquired all of the
      issued and outstanding capital stock of XXNGC in exchange for 16,000,000
      (post-split) shares of Coventure’s common stock.





Concurrently
      with the closing of the purchase agreement and as a condition thereof, Coventure
      entered into an agreement with John Hromyk, its President and Chief Financial
      Officer, pursuant to which Mr. Hromyk returned 23,884,712 (post-split) shares
      of
      Coventure's common stock for cancellation. Upon completion of the foregoing
      transactions, Coventure had an aggregate of 20,204,088 (post-split) shares
      of
      common stock issued and outstanding.





As
      a
      result of the merger, XXNGC’s stockholders own approximately 80% of the combined
      company and the directors and executive officers of XXNGC became the directors
      and executive officers of the Coventure. Accordingly, the transaction has been
      accounted for as a reverse acquisition of Coventure by XXNGC resulting in a
      recapitalization of XXNGC rather than as a business combination. XXNGC is deemed
      to be the purchaser and surviving company for accounting purposes. Accordingly,
      its assets and liabilities are included in the balance sheet at their historical
      book values and the results of operations of XXNGC have been presented for
      the
      comparative prior period. The historical cost of the net liabilities of
      Coventure that were acquired was $3,378. Pro forma information is not presented
      as the financial statements of
      Coventure are insignificant. In addition, Coventure changed it name to China
      Natural Gas, Inc. (hereafter referred to as the “Company”) and the stockholders
      approved a stock dividend of three shares for each share held, which has been
      accounted for as a four to one forward stock split. All shares and per share
      data have been restated retrospectively.




F-4




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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**




Principles
      of Consolidation





The
      accompanying consolidated financial statements include the accounts of China
      Natural Gas, Inc. and its wholly owned subsidiaries, XXNGC, Shaanxi Natural
      Gas
      Equipment Co., Ltd (incorporated in February 2006) and Shaanxi Jingbian
      Liquefied Natural Gas Co., Ltd (incorporated in October 2006). All inter-company
      accounts and transactions have been eliminated in consolidation.





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; however the
      accompanying consolidated financial statements have been translated and
      presented in United States Dollars ($).





Foreign
      Currency Translation





As
      of
      March 31, 2007 and 2006, the accounts of the Company were maintained, and their
      consolidated financial statements were expressed in the Chinese Yuan Renminbi
      (CNY). Such consolidated financial statements were translated into U.S. Dollars
      (USD) in accordance with Statement of Financial Accounts Standards ("SFAS")
      No.
      52, "Foreign Currency Translation," with the CNY 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 operations 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."





**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.


F-5


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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





Cash
      and Cash Equivalents





Cash
      and
      cash equivalents include cash on hand and cash in bank.





Accounts
      and Other Receivable





Accounts
      and other receivable are recorded at net realizable value consisting of the
      carrying amount less an allowance for uncollectible accounts, as needed. The
      Company 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 determined that all receivables
      are good and there is no need of reserve for bad debts as on March 31,
      2007.





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
      natural gas.





Advances





The
      Company advances to certain vendors (for purchase of its material and equipment)
      and a consultant. The advances are interest free and unsecured.


F-6


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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





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, 2007, the following are the details of the property and
      equipment:





Office
                equipment
            
            $
            82,274Operating
                equipment
            
            
            13,545,427Vehicles
            
            
            1,219,343Buildings
            
            
            4,608,50419,455,548Less
                accumulated depreciation
            
            
            2,242,225$
            17,213,323





Depreciation
      expense for the three months ended March 31, 2007 and 2006 was $351,776 and
      $163,682, respectively.




Long-Lived
      Assets





Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
      144"), which addresses financial accounting and reporting for the impairment
      or
      disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
      the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
      and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
      the Results of Operations for a Disposal of a Segment of a Business." 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, 2007 there were no
      significant impairments of its long-lived assets.


F-7


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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**




Construction
      In Progress





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





Contracts
      In Progress





Contracts
      in progress consist of the cost of constructing pipelines for customers. The
      major cost of construction relates to material, labor and overhead. Revenue
      from
      construction and 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. As of March 31, 2007, the Company
      has
      no contracts in progress.




Fair
      Value of Financial Instruments





Statement
      of financial accounting standard No. 107, Disclosures about fair value of
      financial instruments, requires that the Company disclose estimated fair values
      of financial instruments. The carrying amounts reported in the statements of
      financial position for current assets and current liabilities qualifying as
      financial instruments are a reasonable estimate of fair value.





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 sales is recognized when gas is pumped through
      pipelines to the end users. Revenue from construction and 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.





Unearned
      Revenue





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




F-8


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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





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, 2007 and 2006 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 three months ended March 31, 2007 and 2006. As of March 31, 2007,
      there were no options outstanding.





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, 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.





Local
      PRC Income Tax





Pursuant
      to the tax laws of China, general enterprises are subject to income tax at
      an
      effective rate of 33%. The Company 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, the Company’s income is subject to a reduced tax rate of
      15%.


F-9


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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





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 Three MonthsEnded
                March 31,2007
            
            2006Tax
                provision (credit) at statutory rate
            
            
            34
            %
            
            34
            %Foreign
                tax rate difference
            
            
            (15
            %)
            
            (16
            %)19
            %
            
            18
            %





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”. SFAS No. 128
      superseded Accounting Principles Board Opinion No.15 (APB 15). Net earning
      per
      share for all periods presented has been restated to reflect the adoption of
      SFAS No. 128. Basic net earning per share is based upon the weighted average
      number of common shares outstanding. Diluted net earning per share is based
      on
      the assumption that all dilutive convertible shares and stock options were
      converted or exercised. At March 31, 2007, the Company had outstanding 1,140,286
      warrants. The average stock price for the three month ended March 31, 2007
      was
      less than the exercise price of the warrants; therefore, the warrants are not
      factored into the diluted earning per share calculation as they are
      anti-dilutive.





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. As a result, amounts related to assets and
      liabilities reported on the statement of cash flows will not necessarily agree
      with changes in the corresponding balances on the balance sheet





Segment
      Reporting





Statement
      of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure About
      Segments of an Enterprise and Related Information" requires use of the
      "management approach" model for segment reporting. The management approach
      model
      is based on the way a company's management organizes segments within the company
      for making operating decisions and assessing performance. Reportable segments
      are based on products and services, geography, legal structure, management
      structure, or any other manner in which management disaggregates a company.
      SFAS
      131 has no effect on the Company's consolidated financial statements as the
      Company consists of one reportable business segment. All revenue is from
      customers in People's Republic of China. All of the Company’s assets are located
      in People's Republic of China.




F-10





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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





Recent
      Pronouncements




In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.




In
      September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
      88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
      employer to recognize the overfunded or underfunded status of a defined benefit
      postretirement plan (other than a multiemployer plan) as an asset or liability
      in its statement of financial position and to recognize changes in that funded
      status in the year in which the changes occur through comprehensive income
      of a
      business entity or changes in unrestricted net assets of a not-for-profit
      organization. This Statement also improves financial reporting by requiring
      an
      employer to measure the funded status of a plan as of the date of its year-end
      statement of financial position, with limited exceptions. An employer with
      publicly traded equity securities is required to initially recognize the funded
      status of a defined benefit postretirement plan and to provide the required
      disclosures as of the end of the fiscal year ending after December 15, 2006.
      An
      employer without publicly traded equity securities is required to recognize
      the
      funded status of a defined benefit postretirement plan and to provide the
      required disclosures as of the end of the fiscal year ending after June 15,
      2007. However, an employer without publicly traded equity securities is required
      to disclose the following information in the notes to financial statements
      for a
      fiscal year ending after December 15, 2006, but before June 16, 2007, unless
      it
      has applied the recognition provisions of this Statement in preparing those
      financial statements. The requirement to measure plan assets and benefit
      obligations as of the date of the employer’s fiscal year-end statement of
      financial position is effective for fiscal years ending after December 15,
      2008.
      The management is currently evaluating the effect of this pronouncement on
      financial statements.


F-11


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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**




In
      February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities—Including an amendment of FASB Statement No.
      115.” The statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. The objective is to improve
      financial reporting by providing entities with the opportunity to mitigate
      volatility in reported earnings caused by measuring related assets and
      liabilities differently without having to apply complex hedge accounting
      provisions. The statement is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. The company is analyzing the
      potential accounting treatment.




FASB
      Staff Position on FAS No. 115-1 and FAS No. 124-1 (“the FSP”), “The Meaning of
      Other-Than-Temporary Impairment and Its Application to Certain Investments,” was
      issued in November 2005 and addresses the determination of when an investment
      is
      considered impaired, whether the impairment on an investment is
      other-than-temporary and how to measure an impairment loss. The FSP also
      addresses accounting considerations subsequent to the recognition of
      other-than-temporary impairments on a debt security, and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The FSP replaces the impairment guidance
      on
      Emerging Issues Task Force (EITF) Issue No. 03-1 with references to
      existing authoritative literature concerning other-than-temporary
      determinations. Under the FSP, losses arising from impairment deemed to be
      other-than-temporary, must be recognized in earnings at an amount equal to
      the
      entire difference between the securities cost and its fair value at the
      financial statement date, without considering partial recoveries subsequent
      to
      that date. The FSP also required that an investor recognize other-than-temporary
      impairment losses when a decision to sell a security has been made and the
      investor does not expect the fair value of the security to fully recover prior
      to the expected time of sale. The FSP is effective for reporting periods
      beginning after December 15, 2005. The adoption of this statement will not
      have
      a material impact on our consolidated financial statements.




FASB
      Interpretation 48 prescribes a recognition threshold and a measurement attribute
      for the financial statement recognition and measurement of a tax position taken
      or expected to be taken in a tax return. Benefits from tax positions should
      be
      recognized in the financial statements only when it is more likely than not
      that
      the tax position will be sustained upon examination by the appropriate taxing
      authority that would have full knowledge of all relevant information. The amount
      of tax benefits to be recognized for a tax position that meets the
      more-likely-than-not recognition threshold is measured as the largest amount
      of
      benefit that is greater than fifty percent likely of being realized upon
      ultimate settlement. Tax benefits relating to tax positions that previously
      failed to meet the more-likely-than-not recognition threshold should be
      recognized in the first subsequent financial reporting period in which that
      threshold is met or certain other events have occurred. Previously recognized
      tax benefits relating to tax positions that no longer meet the
      more-likely-than-not recognition threshold should be derecognized in the first
      subsequent financial reporting period in which that threshold is no longer
      met.
      Interpretation 48 also provides guidance on the accounting
      for and disclosure of tax reserves for unrecognized tax benefits, interest
      and
      penalties and accounting in interim periods. Interpretation 48 is effective
      for
      fiscal years beginning after December 15, 2006. The change in net assets as
      a
      result of applying this pronouncement will be a change in accounting principle
      with the cumulative effect of the change required to be treated as an adjustment
      to the opening balance of retained earnings on January 1, 2007, except in
      certain cases involving uncertainties relating to income taxes in purchase
      business combinations. In such instances, the impact of the adoption of
      Interpretation 48 will result in an adjustment to goodwill. The adoption of
      this
      standard had no material impact on the Company’s consolidated financial
      statements.




F-12




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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**




In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements,” (“SAB
      108”),which provides interpretive guidance on the consideration of the effects
      of prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. The Company adopted SAB 108 in the fourth
      quarter of 2006 with no impact on its consolidated financial statements.




**Note
      3 - Other Payables**





Other
      payable consists of the following as of March 31, 2007:





Other
                payables
            
            $
            21,402Welfare
                payable
            
            
            10,498Tax
                payable
            
            
            1,167,451Other
                levies
            
            
            53,131$
            1,252,482





**Note
      4 - Stockholders’ Equity**





Warrants





Following
      is a summary of the warrant activity:





Warrants
              outstanding
            
            Weighted
                Average Exercise Price
            
            Aggregate
                Intrinsic ValueOutstanding,
                December 31, 2006
            
            
            1,140,296
            
            $
            3.60
            
            $
            0Granted
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Outstanding,
                March 31, 2007
            
            
            1,140,286
            
            $
            3.60
            
            $
            0





F-13





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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





Following
      is a summary of the status of warrants outstanding at March 31, 2007:





Outstanding
                Warrants
            
            
            
            Exercisable
                WarrantsExercise
              Price
            
            Number
            
            Average
                Remaining Contractual Life
            
            Average
                Exercise Price
            
            Number$3.60
            
            
            1,140,286
            
            
            1.78
            
            $
            3.60
            
            
            1,140,286





**Note
      5 - Employee Welfare Plan**





The
      Company has established its own employee welfare plan in accordance with Chinese
      law and regulations. The Company makes annual contributions of 14% of all
      employees' salaries to employee welfare plan. The total expense for the above
      plan was $20,132 and $9,875 for the years ended March 31, 2007 and 2006,
      respectively.





**Note
      6 - Statutory Common Welfare Fund**





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:





1.
            Making
                up cumulative prior years’ losses, if
                any;





2.
            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;





3.
            Allocations
                of 5-10% of income after tax, as determined under PRC accounting
                rules and
                regulations, to the Company's “Statutory common welfare fund”, which is
                established for the purpose of providing employee facilities and
                other
                collective benefits to the Company's employees; and





4.
            Allocations
                to the discretionary surplus reserve, if approved in the shareholders’
                general meeting.





The
      Company has appropriated $341,860 and $61,587 as reserve for the statutory
      surplus reserve and welfare fund for the three months ended March 31, 2007
      and
      2006, respectively.




F-14


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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





**Note
      7 - Earnings Per Share**





Earnings
      (loss) per share for the three months ended March 31, 2007 and 2006 is
      determined by dividing net income (loss) 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”.





**Three
                Months Ended March 31,****2007**
            
            **2006****Per**
            
            
            
            
            
            **Per****Income**
            
            **Shares**
            
            **Share**
            
            **Income**
            
            **Shares**
            
            **Share****Basic
                earnings per share**Net
                income
            
            $
            2,110,326
            
            
            
            
            
            
            
            $
            410,580Weighed
                shares outstanding
            
            
            
            
            
            24,210,183
            
            
            
            
            
            
            
            
            23,422,553$
            0.09
            
            
            
            
            
            
            
            $
            0.02**Diluted
                earnings per share**Net
                income
            
            $
            2,110,326
            
            
            
            
            
            
            
            $
            410,580Weighed
                shares outstanding
            
            
            
            
            
            24,210,183
            
            
            
            
            
            
            
            
            23,422,553Effect
                of dilutive securitiesWarrants
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            263,01224,210,183
            
            
            
            
            
            
            
            
            23,685,565$
            0.09
            
            
            
            
            
            
            
            $
            0.02





F-15


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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





**Note
      8 - Current Vulnerability Due to Certain Concentrations**





For
      the
      three months ended March 31, 2007 and 2006, the Company purchased all of the
      natural gas for resale from one vendor, Shaanxi Natural Gas Co., Ltd., a
      government owned enterprise. No amount was owing to this vendor at March 31,
      2007. The Company has had annual agreements with Shaanxi Natural Gas that
      requires the Company to purchase a minimum amount of natural gas. For the three
      months ended March 31, 2007 and 2006 the minimum purchases were 16.9 and 3.8
      million cubic meters, respectively. In the past, contracts were renewed on
      an
      annual basis. However, as the volume of usage has increased, Shaanxi Natural
      Gas
      has revised their policies, and contract terms are now six months and subject
      to
      review prior to renewal. The Company’s management reports that it does not
      expect any issues or difficulty in continuing to renew the supply
      contracts going
      forward. Price points for natural gas are strictly controlled by the government
      and have remained stable over the past 3 years.





For
      the
      three months ended March 31, 2007, two supplier accounts for 27.3% and 17.6%
      of
      the total equipment purchased by the Company and for the three months ended
      March 31, 2006, two supplier accounts for 58% and 27% of the total equipment
      purchased by the Company.





Four
      customers accounted for 46.5%, 18.1%, 7.7% and 6.1% of the Company’s
      installation revenue for the three months ended March 31, 2007 and four
      customers accounted for 31%, 9%, 6%and 5% of the Company’s installation revenue
      for the three months ended March 31, 2006.





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.





F-16


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


**Notes
      to Consolidated Financial Statements**


**For
      the Three Months Ended March 31, 2007 and 2006**





**Note
      9 - Commitments and Contingencies**





The
      Company is obligated to contribute $10,000,000 as registered capital of Xilan
      Natural Gas Equipment Company, a 100% subsidiary of CHNG incorporated under
      the
      laws of PRC in February, 2006.  The Company has already made a capital
      contribution of $6,480,000 and the Company remains obligated to contribute
      the
      additional $3,520,000 by February 2008.





F-17


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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
      the other risks and uncertainties, which are described above under "RISK
      FACTORS". The reader is cautioned that all forward-looking statements are
      necessarily speculative and there are certain risks and uncertainties that
      could
      cause actual events or results to differ materially from those referred to
      in
      such forward-looking statements, including the risk factors discussed in this
      Report. The Company does not have a policy of updating or revising
      forward-looking statements and thus it should not be assumed that silence by
      management of the Company over time means that actual events are bearing out
      as
      estimated in such forward-looking statements.





**OVERVIEW**





We
      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 closed a Share Purchase Agreement with Xian Xilan Natural
      Gas Co., Ltd., a corporation formed under the laws of the People's Republic
      of
      China on January 8, 2000, and the shareholders of Xian Xilan Natural Gas Co.,
      Ltd. Pursuant to the Share Purchase Agreement, we acquired all of the issued
      and
      outstanding capital stock of Xian Xilan Natural Gas Co., Ltd. from the
      shareholders of Xian Xilan Natural Gas Co., Ltd. On December 19, 2005, we
      changed our name to China Natural Gas, Inc.





We
      transport, distribute and sell natural gas to commercial, industrial and
      residential customers in the Xian area, including Lantian County and the
      districts of Lintong and Baqiao, in the Shaanxi Province of The Peoples'
      Republic of China ("China" or the "PRC"). Shaanxi Province is located in central
      China and has a population of approximately 36 million in an area of over
      200,000 square kilometers (about 77,225 square miles). Xian, the capital of
      Shaanxi Province, is located in the southern part of Shaanxi Province and has
      a
      population of approximately 8 million people, with about 5 million people living
      within the urban area.





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 (14 stations
                in service as of March 31, 2007 and three additional stations under
                construction with expected completion by the end of the second quarter
                of
                2007);





·
            Distribution
                and sale of CNG to third party-owned CNG filling stations for hybrid
                (natural gas/gasoline) powered vehicles;
                and




1




·
            Distribution
                and sale of natural gas to residential, commercial and industrial
                customers through Company-owned pipelines. As of March 31, 2007,
                the
                Company distributed and sold natural gas to approximately 75,000
                pipeline
                customers.





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: (1)
      piped
      natural gas; and (ii) CNG.





**CONSOLIDATED
      RESULTS OF OPERATIONS**





**Comparing
      Three Months Ended March 31, 2007 and 2006:**





The
      following table presents certain consolidated statement of operations
      information. Financial information is presented for the three months ended
      March
      31, 2007 and 2006.





March
                31, 2007
            
            March
                31, 2006Revenues
            
            $
            6,743,576
            
            $
            1,787,214Cost
                of Revenues
            
            
            3,226,217
            
            
            842,512Operating
                Expenses
            
            
            1,015,508
            
            
            464,436Income
                from Operations
            
            
            2,501,851
            
            
            480,266Net
                Income
            
            $
            2,110,326
            
            $
            410,580





*Revenues* .
      We
      generated approximately 73% of our revenues in the three months ended March
      31,
      2007 from the sale of natural gas and approximately 27% of our revenues from
      construction and installation fees charged to connect end-user customers to
      our
      natural gas distribution system. Sales of natural gas at the Company-owned
      filling stations accounted for approximately 67.6% of our total revenues in
      the
      three months ended March 31, 2007, or approximately $4,558,657, 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 4.92% of our total revenues in the three months
      ended March 31, 2007, or approximately $331,784, including both natural gas
      sales and construction and installation fees. Sales of natural gas to third
      party-owned filling stations accounted for approximately 0.45% of our total
      revenues in the three months ended March 31, 2007, or approximately $30,346.
      The
      Company expects installation revenues to increase on both an actual basis and
      as
      a percentage of revenue in 2007.





As
      of
      March 31, 2007, the Company had approximately 75,000 pipeline customers an
      increase of approximately 17,000 customers over the same period in 2006, and
      had
      constructed 14 filling stations, an increase of 11 stations over the same period
      in 2006 with an additional three filling stations under construction with
      expected completion by the end of the second quarter of 2007. In 2007, the
      Company expects to add up to 30,000 pipeline customers and construct an
      additional 15 filling stations, which the Company estimates will increase sales
      of natural gas by 80 million cubic meters.





We
      had
      total revenues of $6,743,576 for the three months ended March 31, 2007, an
      increase of $4,956,362 or approximately 277%, compared to $1,787,214 for the
      three months ended March 31, 2006. The increase in revenues was due primarily
      to
      contributions from  Company-owned CNG filling stations completed after the
      first quarter of 2006 as well as an increase in the number of residential,
      commercial and industrial pipeline customers from approximately 58,000 in the
      three months ended March 31, 2006 to approximately 75,000 in the three months
      ended March 31, 2007.





2




New
      pipeline customers pay approximately 60% of the construction 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, 2007, our installation
      revenues increased approximately 97% over the same period in 2006 and our sales
      of natural gas increased approximately 469% over the previous year. Four
      customers accounted for approximately 46.5%, 18.1%, 7.7% and 6.1% of the
      Company's installation revenue for the three months ended March 31,
      2007.





*Cost
      of Revenues* .
      Our
      cost of revenues consists of both the cost of natural gas and the cost of
      construction and 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 construction 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, 2007 was $3,226,217, an increase
      of
      $2,383,705 or approximately 283% over the same period in 2006. Cost of natural
      gas increased by approximately 393% to $2,492,651 in the three months ended
      March 31, 2007, as compared with $505,863 for the same period in 2006. The
      increase in our cost of revenues was primarily related to a material increase
      in
      the amount of gas sold. In addition, our construction and installation costs
      increased in the three months ended March 31, 2007 by approximately 118% to
      $733,566, as compared with $336,649 in the same period in 2006 as a result
      of
      the addition of new pipeline customers. The price that we paid for gas in the
      three months ended March 31, 2007 remained relatively constant compared to
      2006.





*Gross
      profit* .
      The
      Company earned a gross profit of $3,517,359 for the three months ended March
      31,
      2007, an increase of $2,572,657 or approximately 272%, compared to $944,702
      for
      the three months ended March 31, 2006. 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 52% for the
      three months ended March 31, 2007, from approximately 53% for the three months
      ended March 31, 2006. The decrease in gross margin is primarily attributable
      to
      the significant increase in revenues generated from our Company-owned filling
      stations. Construction of our filling stations requires a significant capital
      outlay, approximately $800,000 per station, and involves significant costs
      of
      operations, including value added taxation and employee expenses to operate
      the
      station. As a result, our margins on natural gas sold at filling stations are
      lower than our margins on natural gas sold to end users connected to our
      pipeline system. However, we believe that sales of CNG and LNG provide the
      best
      opportunity for future revenue and profit growth.





*Operating
      expenses* .
      The
      Company incurred operating expenses of $1,015,508 for the three months ended
      March 31, 2007, an increase of $551,072 or approximately 119%, compared to
      $464,436 for the three months ended March 31, 2006. Our operating expenses
      increased primarily as a result of expenses related to the construction and
      operation of three new filling stations in this quarter, as well as continuing
      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, 2007 as we increased our efforts to obtain new residential and commercial
      customers and attract customers to our filling stations.





3




General
      and administrative expenses increased from $219,702 in the three months ended
      March 31, 2006 to $421,379 for the same period in 2007 due to an increase in
      personnel as a result of our growth.





We
      purchase all of our natural gas for resale from the Shaanxi Natural Gas Co.
      Inc., a government-owned entity and other subsidiaries of China National
      Petroleum Corporation. 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. 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, as they have been for the
      last
      3 years (See Note 8), and maintain a stable flow of supply. The government
      has
      undertaken programs to promote the growth of the region in which we are located.
      Therefore, we expect supply and price to continue to be stable in the
      future.





For
      the
      three months ended March 31, 2007, two suppliers accounted for 27.3% and 17.6%
      of the total equipment we purchased for construction 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.





*Net
      Income* .
      Net
      income increased to $2,110,326 for the three months ended March 31, 2007, an
      increase of $1,699,746 or approximately 414% from $410,580 for the three months
      ended March 31, 2006. Increase in net income is attributed to our material
      increase in revenues, partially offset by a higher increase in cost of sales
      and
      operating expenses. The Company expects installation revenues to increase on
      both an actual basis and as a percentage of revenue. In 2007, the Company
      expects to add up to 30,000 pipeline customers and construct an additional
      15
      filling stations, which the Company estimates will increase sales of natural
      gas
      by 80 million cubic meters.





Income
      tax was $401,317 for the three months ended March 31, 2007, as compared to
      $72,456 for the three months ended March 31, 2006. The increase in income tax
      was attributed to the growth of construction and installation fees and the
      sale
      of natural gas.





**Liquidity
      and Capital Resources**





As
      of
      March 31, 2007 the Company had $6,726,294 of cash and cash equivalents on hand
      compared to $8,262,640 of cash and cash equivalents as of March 31,
      2006.





The
      primary source of cash in the three months ended March 31, 2007 was income
      from
      operations. The Company had net cash flows provided by operations of $1,932,476
      for the three months ended March 31, 2007 as compared to net cash used in
      operations of $137,427 in the corresponding period last year. The increase
      in
      net cash flows from operations in the three months ended March 31, 2007 as
      compared to 2006 was mainly due to the increase in net income and an increase
      in
      other payables during the three months ended March 31, 2007 offset by a decrease
      in unearned revenue.





4




Cash
      outflows for investing activities decreased from $1,115,494 in the three months
      ended March 31, 2006 to $570,133 for the same period in 2007 primarily because
      the Company purchased more equipment in 2006 in anticipation of its business
      growth.





The
      Company expects to construct an additional 15 CNG filling stations in 2007.
      The
      Company expects the funds for these investing activities will come from the
      Company's operating cash flow.





The
      Company is obligated to contribute $10 million of registered capital to its
      wholly-owned subsidiary, Xilan Natural Gas Equipment Co. As of March 31, 2007,
      the Company had contributed $6,480,000 of this capital commitment and is
      obligated to contribute the remaining $3,520,000 by February 2008.





The
      Company will also require financing of at least $40 million in order to complete
      its proposed LNG Project.





Based
      on
      past performance and current expectations, we believe our cash and cash
      equivalents, 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 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
      Renminbi ("RMB"), the currency of the People's Republic of China. There is
      no
      assurance that exchange rates between the RMB and the U.S. Dollar will remain
      stable. The Company does not engage in currency hedging. Inflation has not
      had a
      material impact on the Company's business.





**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      do not
      have any 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**





Use
      of
      Estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires us 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 time deposits, certificates
      of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less.





5




Accounts
      and Other Receivable





We
      maintain reserves for potential credit losses on accounts receivable. We review
      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.





Inventory





Inventory
      is stated at the lower of cost, as determined on a first-in, first-out basis,
      or
      market. We compare 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.





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


Construction
      In Progress





Construction
      in progress consists of the cost of constructing building and plant for our
      company's use. The major cost of construction in progress relates to material,
      labor and overhead.





Contracts
      in Progress





Contracts
      in progress consist of the cost of constructing pipelines for customers. The
      major cost of construction relates to material, labor and overhead. Revenue
      from
      construction and 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
      Recognition





Our
      revenue recognition policies are in compliance with Staff accounting bulletin
      (SAB) 104. Revenue is recognized when services are rendered to our customers
      when a formal arrangement exists, the price is fixed or determinable, the
      delivery is completed, no other significant obligations by us 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 construction and 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.




6





Stock-Based
      Compensation





In
      October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
      Compensation". SFAS No. 123 prescribes accounting and reporting standards for
      all stock-based compensation plans, including employee stock options, restricted
      stock, employee stock purchase plans and stock appreciation rights. SFAS No.
      123
      requires compensation expense to be recorded (i) using the new fair value method
      or (ii) using the existing accounting rules prescribed by Accounting Principles
      Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and
      related interpretations with pro forma disclosure of what net income and
      earnings per share would have been had we adopted the new fair value method.
      We
      use the intrinsic value method prescribed by APB 25 and has opted for the
      disclosure provisions of SFAS No.123.





Income
      Taxes





We
      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.





Local
      PRC
      Income Tax





Pursuant
      to the tax laws of China, general enterprises are subject to income tax at
      an
      effective rate of 33%. The Company 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, the Company's income is subject to a reduced tax rate
      of
      15%.





Foreign
      Currency Transactions and Comprehensive Income (Loss)





Accounting
      principles generally require that recognized revenue, expenses, gains and losses
      be included in net income. Certain statements, however, require entities to
      report specific changes in assets and liabilities, such as gain or loss on
      foreign currency translation, as a separate component of the equity section
      of
      the balance sheet. Such items, along with net income, are components of
      comprehensive income. Our transactions occur in Chinese Renminbi. The unit
      of
      Renminbi is in Yuan.





RECENT
      ACCOUNTING PRONOUNCEMENTS





In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
      This statement applies to all voluntary changes in accounting principle and
      requires retrospective application to prior periods' financial statements of
      changes in accounting principle, unless this would be impracticable. This
      statement also makes a distinction between "retrospective application" of an
      accounting principle and the "restatement" of financial statements to reflect
      the correction of an error. This statement is effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005.




7





In
      February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
      Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for all financial instruments acquired
      or issued after the beginning of the Company's first fiscal year that begins
      after September 15, 2006.





In
      December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
      an
      Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
      companies to recognize in the statement of operations the grant- date fair
      value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company's first quarter of fiscal
      2006.





In
      June
      2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
      Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides guidance
      on
      determining the amortization period for leasehold improvements acquired in
      a
      business combination or acquired subsequent to lease inception. The guidance
      in
      EITF 05-6 will be applied prospectively and is effective for periods beginning
      after June 29, 2005. EITF 05-6 is not expected to have a material effect on
      its
      consolidated financial position or results of operations.





We
      believe that the adoption of these standards will have no material impact on
      our
      financial statements.





**RISK
      FACTORS**





We
      are
      subject to various risks that could have a negative effect on the Company and
      its financial condition. You should understand that these risks could cause
      results to differ materially from those expressed in forward looking statements
      contained in this report and in other Company communications. Because there
      is
      no way to determine in advance whether, or to what extent, any present
      uncertainty will ultimately influence our business, you should give equal weight
      to each of the following:





**Risks
      Related To Our Business**




8





**Prices
      of natural gas can be subject to significant fluctuations, which may affect
      our
      ability to provide supplies to our customers.**





We
      obtain
      most of our supplies of natural gas from a government owned entity and our
      supply contracts are subject to review every six months. However, our costs
      for
      natural gas are strictly controlled by the government and have remained stable
      over the past 3 years. Management does not expect any difficulty in continuing
      to renew the supply contracts during the next 12 months. The price of natural
      gas can fluctuate in response to changing national or international market
      forces. Accordingly, price levels of natural gas may rise or fall significantly
      over the short to medium term due to political events, OPEC actions and other
      factors, industry economics over the long term.





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





With
      the
      exception of certain compressed and liquid natural gas supplies, we obtain
      our
      supplies of natural gas from one supplier, which is a government owned entity.
      The ability to deliver our product is dependent on a sufficient supply of
      natural gas and if we are unable to obtain a sufficient natural gas supply,
      it
      could prevent us making deliveries to our customers. While we have supply
      contracts, we do not control the government owned 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
      semi-annual review of our primary supply contract, they will 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.





The
      occurrence of a significant event for which we are not fully insured or
      indemnified, and/or the failure of a party to meet its indemnification
      obligations, could 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 it considers reasonable. To date,
      however, we have maintained adequate coverage at reasonable rates and have
      experienced no material uninsured losses.





**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.




9





**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.**





We
      are
      dependent on the continued efforts of our senior management team. 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. We must raise $40 million in order complete the LNG
      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 if 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.





**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.





10




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





The
      People's Republic of China has adopted currency and capital transfer
      regulations. These regulations may require that we comply with complex
      regulations for the movement of capital. Although we believe that we are
      currently in compliance with these regulations, should these regulations or
      the
      interpretation of them by courts or regulatory agencies change we may not be
      able to remit all income earned and proceeds received in connection with our
      operations or from the sale of our operating subsidiary to the U.S. or to our
      stockholders.





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





The
      value
      of the Renminbi fluctuates and is subject to changes in the People's Republic
      of
      China political and economic conditions. Since July 2005, the conversion of
      Renminbi into foreign currencies, including United States dollars, 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 19, 2007, the exchange
      rate between the Renminbi and the United States dollar was 7.73 Renminbi to
      every one United States dollar.





**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.




11





**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 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 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.




12





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





Provincial
      and central government authorities regulate the natural gas industry for safety
      and ensure that all areas receive natural gas service. However, as a result
      of
      China becoming a member of the World Trade Organization (WTO), restrictions
      on
      foreign investment in the industry may be reduced. With China's need to meet
      growth in natural gas demand and the WTO's requirement for a reduction of
      restrictions on foreign investment as a condition of membership, such events
      could lead to increased competition in the natural gas industry.





**RISKS
      RELATED TO CORPORATE AND STOCK MATTERS**





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





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





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





·
            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.





**Our
      stock is a penny 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.**





Our
      stock
      is a penny stock. 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.




13





**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.





**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.




14





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, for the fiscal year ending December 31,
      2007, 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.





**Item
      3. Controls and Procedures**





The
      Chief
      Executive Officer and Chief Financial Officer conducted an evaluation of the
      effectiveness of the design and operation of the Company's disclosure controls
      and procedures (as defined in Rule 13a-15(e) under the Securities Exchange
      Act
      of 1934, as amended (the Exchange Act)) as of the end of the period covered
      by
      this report. Based on that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that the Company's disclosure controls and
      procedures were effective as of the end of the period covered by this report.
      There were no significant changes in internal control over financial reporting
      (as defined in Rule 13a-15f under the Exchange Act) that occurred during the
      fourth quarter of 2004 that have materially affected, or are reasonably likely
      to materially affect, the Company's internal control over financial
      reporting.





**Part
      II. OTHER INFORMATION**





**ITEM
      5. OTHER INFORMATION**





The
      Board
      of Directors approved a compensation policy for Mr. McManus and Mr. Garner
      as
      independent members of the Board of Directors and chairs of the Company’s Audit
      Committee and Compensation Committee, respectively, which provides for the
      compensation set forth below.




15





Cash
      Compensation .
      During
      fiscal 2007, Messrs. McManus and Garner will each receive a monthly retainer
      of
      $3,000 for serving as members of the Board of Directors and the chairperson
      of
      the Audit and Compensation committees, respectively.




Stock
      Options .
      In
      addition, the Company agreed to grant Messrs. McManus and Garner options
      exercisable for 20,000 shares of the Company’s common stock.





**ITEM
      6. EXHIBITS**





(a)
      Exhibits


Exhibit
                  Number
              
              Description
                  of Exhibit31.1
              
              Certification
                  of Principal Executive Officer pursuant to Rule 13a-14 and Rule
                  15d-14(a),
                  promulgated under the Securities and Exchange
                  Act of 1934, as amended31.2
              
              Certification
                  of Principal Financial Officer pursuant to Rule 13a-14
                  and Rule 15d 14(a), promulgated under the Securities and Exchange
                  Act of 1934, as amended32.1
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                  to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
                  Executive Officer)32.2
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                  to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
                  Financial
                  Officer)


16


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
              15,
              2007
            By:
            /s/ Qinan
              JiQinan
              JiChief
                Executive Officer
              (Principal Executive
                Officer) May
              15,
              2007
            By:
            /s/ Xiaogang
              ZhuXiaogang
              ZhuChief
                Financial Officer
              Principal
                Financial and Accounting
                Officer)


17