**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 June
      30 ,
      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 August 10,
      2007:
      28,888,655


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


(Mark
      One)







**China
      Natural Gas, Inc.**


**Index**









PART
                I.
            FINANCIAL
                INFORMATION
            2Item
                1.
            Financial
                Statements
            2Consolidated
                Balance Sheet as of June 30, 2007 (unaudited)
            2Consolidated
                Statements of Operations for thethree
                and six months ended June 30, 2007 and 2006 (unaudited)
            3Consolidated
                Statements of Cash Flows for thesix
                months ended June 30, 2007 and 2006 (unaudited)
            4Notes
                to Consolidated Financial Statements (unaudited)
            5Item
                2.
            Management's
                Discussion and Analysis or Plan of Operations
            18Item
                3.
            Controls
                and Procedures
            36PART
                II.
            OTHER
                INFORMATION
            37Item
                1.
            Legal
                Proceedings
            37Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            37Item
                3.
            Defaults
                Upon Senior Securities
            37Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            37Item
                5.
            Other
                Information
            37Item
                6.
            Exhibits
            37SIGNATURES
            38




1




PART
      I. FINANCIAL INFORMATION




Item
      1. Financial Statements






CHINA
                NATURAL GAS INC. AND SUBSIDIARIESCONSOLIDATED
                BALANCE SHEETAS
                OF JUNE 30, 2007A
                S S E T SJune
                30,2007(Unaudited)CURRENT
                ASSETS:Cash
                & cash equivalents
            
            
            
            
            
            $
            7,601,358Accounts
                receivable, trade
            
            
            
            
            
            
            709,328Other
                receivables
            
            
            
            
            
            
            1,433,695Inventories
            
            
            
            
            
            
            133,962Advances
                to suppliers
            
            
            
            
            
            
            1,493,755Prepaid
                expense and other current assets
            
            
            
            
            
            
            111,477Total
                current assets
            
            
            
            
            
            
            
            
            
            
            
            11,483,575PLANT
                AND EQUIPMENT, net
            
            
            
            
            20,164,004CONSTRUCTION
                IN PROGRESS
            
            
            
            
            2,396,447Total
                assets
            
            
            
            
            
            
            
            
            
            
            $
            34,044,026L
                I A B I L I T I E S  A N D  S H A R E H O L D E R S'  E Q U
                I T YCURRENT
                LIABILITIES:Accounts
                payable and accrued expense
            
            
            
            
            
            $
            795,359Other
                payables
            
            
            
            
            
            
            107,741Unearned
                revenue
            
            
            
            
            
            
            350,672Taxes
                payable
            
            
            
            
            
            
            1,568,003Total
                current liabilities
            
            
            
            
            
            
            
            
            
            
            
            2,821,775SHAREHOLDERS'
                EQUITY:Preferred
                stock, $0.0001 par value, 5,000,000 shares authorized,
              none
                outstanding as of June 30, 2007
            
            
            
            
            
            
            -Common
                stock, $0.0001 par value, 30,000,000 shares authorized,
              24,210,183
                shares issued and outstanding as of June 30, 2007
            
            
            
            
            
            
            2,421Additional
                paid in capital
            
            
            
            
            
            
            18,223,911Statutory
                reserves
            
            
            
            
            
            
            1,245,269Retained
                earnings
            
            
            
            
            
            
            10,174,486Accumulated
                other comprehensive income
            
            
            
            
            
            
            1,576,164Total
                shareholders' equity
            
            
            
            
            
            
            
            
            
            
            
            31,222,251Total
                liabilities and shareholders' equity
            
            
            
            
            
            
            
            
            
            
            $
            34,044,026


The
        accompanying notes are an integral part of these consolidated financial
        statements.
  2


CHINA
                NATURAL GAS INC. AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF INCOME ANDOTHER
                COMPREHENSIVE INCOMEFOR
                THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2007 AND
                2006(UNAUDITED)Three
                Months Ended June 30
            
            Six
                months Ended June 302007
            
            2006
            
            2007
            
            2006REVENUESNatural
                gas revenue
            
            
            
            
            $
            6,765,265
            
            $
            2,504,449
            
            $
            11,688,837
            
            $
            3,369,402Construction/installation
                revenue
            
            
            
            
            
            1,508,044
            
            
            1,219,734
            
            
            3,328,048
            
            
            2,141,995Total
                revenue
            
            
            
            
            
            8,273,309
            
            
            3,724,183
            
            
            15,016,885
            
            
            5,511,397COST
                OF GOODS SOLDNatural
                gas revenue
            
            
            
            
            
            3,463,242
            
            
            1,603,745
            
            
            5,955,893
            
            
            2,109,608Construction/installation
                revenue
            
            
            
            
            
            666,957
            
            
            505,884
            
            
            1,400,523
            
            
            842,533Total
                Cost goods sold
            
            
            
            
            
            4,130,199
            
            
            2,109,629
            
            
            7,356,416
            
            
            2,952,141GROSS
                PROFIT
            
            
            
            
            
            4,143,110
            
            
            1,614,554
            
            
            7,660,469
            
            
            2,559,256OPERATING
                EXPENSESelling
                expenses
            
            
            
            
            
            682,423
            
            
            312,610
            
            
            1,276,552
            
            
            557,344General
                and administrative expenses
            
            
            
            
            
            260,883
            
            
            203,408
            
            
            682,262
            
            
            423,110Total
                operating expense
            
            
            
            
            
            943,306
            
            
            516,018
            
            
            1,958,814
            
            
            980,454INCOME
                FROM OPERATIONS
            
            
            
            
            
            3,199,804
            
            
            1,098,536
            
            
            5,701,655
            
            
            1,578,802OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            
            
            
            8,330
            
            
            2,033
            
            
            17,739
            
            
            4,777Other
                income(expense)
            
            
            
            
            
            7,973
            
            
            (5,977
            )
            
            8,356
            
            
            (5,951
            )Total
                other income (expense)
            
            
            
            
            
            16,303
            
            
            (3,944
            )
            
            26,095
            
            
            (1,174
            )INCOME
                BEFORE INCOME TAXES
            
            
            
            
            
            3,216,107
            
            
            1,094,592
            
            
            5,727,750
            
            
            1,577,628PROVISION
                FOR INCOME TAXES
            
            
            
            
            
            471,098
            
            
            167,323
            
            
            872,415
            
            
            239,779NET
                INCOME
            
            
            
            
            
            2,745,009
            
            
            927,269
            
            
            4,855,335
            
            
            1,337,849OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation gain (loss)
            
            
            
            
            
            455,308
            
            
            (29,439
            )
            
            736,712
            
            
            33,217COMPREHENSIVE
                INCOME
            
            
            
            
            $
            3,200,317
            
            $
            897,830
            
            $
            5,592,047
            
            $
            1,371,066NET
                INCOME PER SHARE-BASIC
            
            
            
            
            $
            0.11
            
            $
            0.04
            
            $
            0.20
            
            $
            0.06BASIC
                WEIGHTED AVERAGE NUMBER OF SHARES
            
            24,210,183
            
            
            23,918,956
            
            
            24,210,183
            
            
            23,776,062NET
                INCOME PER SHARE-DILUTED
            
            
            
            
            $
            0.11
            
            $
            0.04
            
            $
            0.20
            
            $
            0.06DILUTED
                WEIGHTED AVERAGE NUMBER OF SHARES
            
            24,210,183
            
            
            23,918,956
            
            
            24,210,183
            
            
            23,776,062




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


3





CHINA
                NATURAL GAS INC. AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF CASH FLOWSFOR
                THE SIX MONTHS ENDED JUNE 30, 2007 AND 20062007
            
            
            
            2006(Unaudited)
            
            
            
            (Unaudited)CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            
            
            
            
            $
            4,855,335
            
            
            
            
            $
            1,337,849Adjustments
                to reconcile net income to cashprovided
                by (used in) operating activities:Depreciation
                and amortization
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            726,256
            
            
            
            
            
            312,407Exchange
                gains
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (102,032
            )Change
                in operating assets and liabilities:(Increase)
                decrease in assets:Accounts
                receivable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (123,663
            )
            
            
            
            
            (317,954
            )Other
                receivables
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (608,070
            )
            
            
            
            
            (634,763
            )Inventories
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            156,897
            
            
            
            
            
            (82,697
            )Advance
                to suppliers
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            207,903
            
            
            
            
            
            (430,503
            )Prepaid
                expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            199,307
            
            
            
            
            
            (263,019
            )Increase
                (decrease) in liabilities:Accounts
                payable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            358,550
            
            
            
            
            
            15,914Other
                payables
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (161,022
            )
            
            
            
            
            (292,443
            )Taxes
                payables
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (343,379
            )
            
            
            
            
            215,267Unearned
                revenue
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            58,409
            
            
            
            
            
            (55,975
            )Net
                cash provided by operating activities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,326,523
            
            
            
            
            
            (297,947
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property and equipment
            
            
            
            
            
            
            (3,203,009
            )
            
            
            
            
            (2,113,842
            )Net
                cash used in investing activities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,203,009
            )
            
            
            
            
            (2,113,842
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Issuance
                of common stock
            
            
            
            
            
            
            -
            
            
            
            
            
            10,400,000Payment
                of offering costs
            
            
            
            
            
            
            -
            
            
            
            
            
            (1,557,147
            )Net
                cash provided by financing activities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            
            
            8,842,853EFFECT
                OF EXCHANGE RATE ON CASH
            
            
            
            
            183,631
            
            
            
            
            
            36,164INCREASE
                IN CASH
            
            
            
            
            2,307,145
            
            
            
            
            
            6,467,228CASH,
                beginning of period
            
            
            
            
            5,294,213
            
            
            
            
            
            675,624CASH,
                end of period
            
            
            
            $
            7,601,358
            
            
            
            
            $
            7,142,852




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


4




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**




**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
      six months ended June 30, 2007 are not necessarily indicative of the results
      to
      be expected for the full year ending December 31, 2007.





Organization
      and Line of Business


China
        Natural Gas, Inc. (formerly Coventure International, Inc.) was incorporated
        in
        Delaware on March 31, 1999 as Bullet Environmental Systems, Inc. and on May
        25,
        2000 the Company changed its name to Liquidpure Corp. On February 14, 2002,
        the
        Company changed its name to Coventure International, Inc.




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. In addition, Coventure changed its
      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.


However,
        this merger acquisition was not able
        to
        be approved under
        the certain laws of the People’s Republic of China (“PRC”). PRC law currently
        has limits on foreign ownership of companies in certain industries. To comply
        with these foreign ownership restrictions, the Company established its wholly
        owned subsidiary, Xilan Natural Gas Equipment Ltd., (XNGE) a limited liability
        company organized under the PRC law on February 21, 2006. The Company through
        XNGE entered into exclusive arrangements with XXNGC. Through these arrangements,
        the Company has the ability to substantially influence XXNGC’s daily operations
        and financial affairs, appoint its senior executives and approve all matters
        requiring shareholder approval. These arrangements were formalized on August
        17,
        2007, and made retroactive to March 8, 2006. As a result, XXNGC became a
        VIE
        effective on March 8, 2006.




5




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**




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




Principles
      of Consolidation





The
      accompanying consolidated financial statements include the accounts of China
      Natural Gas, Inc. and its wholly owned subsidiaries, Shaanxi Natural Gas
      Equipment Co., Ltd (incorporated in February 2006) and
      its
      100% variable interest entity (‘VIE”) Xi’an Xilan Natural Gas Co. Ltd.Shaanxi Jingbian Liquefied Natural Gas Co., Ltd (incorporated in October
      2006) and Xian Xilan Auto Bodyshop (incorporated in May, 2007). All
      inter-company accounts and transactions have been eliminated in
      consolidation.


Consolidation
        of Variable Interest Entity
 
 In
        accordance with Financial Interpretation No. 46R, Consolidation of Variable
        Interest Entities ("FIN 46R"), VIEs are generally entities that lack sufficient
        equity to finance their activities without additional financial support from
        other parties or whose equity holders lack adequate decision making ability.
        All
        VIEs with which the Company is involved must be evaluated to determine the
        primary beneficiary of the risks and rewards of the VIE. The primary beneficiary
        is required to consolidate the VIE for financial reporting
        purposes.
 
 On
        August
        17, 2007 and made retroactive to March 8, 2006, t he
        Company through XNGE entered into exclusive arrangements with XXNGC. These
        arrangements obligate the Company to absorb a majority of the risk of loss
        from
        XXNGC’s activities and enable the Company to receive a majority of XXNGC’s
        expected residual returns. As a result, the Company accounts for XXNGC as
        a VIE
        under FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable
        Interest Entities.” The arrangements consist of the following
        agreements:
  a.
              XXNGC
                  holds the licenses and approvals necessary to operate its natural
                  gas
                  business in China,
 b.
              XNGE
                  provides exclusive technology consulting and other general business
                  operation services to XXNGC in return for a consulting services
                  fee which
                  is equal to XXNGC’s revenue.
 c.
              XXNGC’s
                  shareholders have pledged their equity interests in XXNGC to the
                  Company.
 d.
              Irrevocably
                  granted the Company an exclusive option to purchase, to the extent
                  permitted under PRC law, all or part of the equity interests in
                  XXNGC and
                  agreed to entrust all the rights to exercise their voting power
                  to the
                  person appointed by the
                  Company


Basis
      of Presentation





The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America.
      The Company’s functional currency is the Chinese Renminbi; however the
      accompanying consolidated financial statements have been translated and
      presented in United States Dollars ($).





Reclassifications





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





Foreign
      Currency Translation





As
      of
      June 30, 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."





Translation
      adjustments resulting from this process amounted to $1,576,164 and $839,452
      as
      of June 30, 2007 and December 31, 2006, respectively. The balance sheet amounts
      with the exception of equity at June 30, 2007 were translated 7.60 RMB to $1.00
      USD as compared to 7.80 RMB at December 31, 2006. The equity accounts were
      stated at their historical rate. The average translation rates applied to income
      statement accounts for the periods ended June 30, 2007 and 2006 were 7.73 RMB
      and 8.04 RMB to $1.00 USD, respectively.




6




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**




Use
      of
      Estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Actual results could differ from those estimates.





Cash
      and Cash Equivalents





Cash
      and
      cash equivalents include cash on hand and cash in 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 for a bad debt reserve as of June 30,
      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.





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:




7




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**


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








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




Office
                  equipment
              
              $
              83,972Operating
                  equipment
              
              
              15,397,856Vehicles
              
              
              1,238,366Buildings
              
              
              6,056,25222,776,446Less
                  accumulated depreciation
              
              
              2,612,442$
              20,164,004






Depreciation
      expense for the six months ended June 30, 2007 and 2006 was $726,139 and
      $312,295, 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 June 30, 2007, there were no significant impairments of its
      long-lived assets.





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.




8




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**


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 June 30, 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 .





Advertising
      Costs





The
      Company expenses the cost of advertising as incurred or, as appropriate, the
      first time the advertising takes place. Advertising costs for the six months
      ended June 30, 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 six months ended June 30, 2007 and 2006.
      As of
      June 30, 2007, there were no options outstanding.




9


**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**


Income
      Taxes





The
      Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
      the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized. At June 30, 2007, there was no significant book to
      tax
      differences. There is no difference between book depreciation and tax
      depreciation as the Company uses the same method for both book and tax. The
      Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
      Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
      benefit only if it is “more likely than not” that the tax position would be
      sustained in a tax examination, with a tax examination being presumed to occur.
      The amount recognized is the largest amount of tax benefit that is greater
      than
      50% likely of being realized on examination. For tax positions not meeting
      the
“more likely than not” test, no tax benefit is recorded. The adoption had no
      affect on the Company’s financial statements.





Local
      PRC Income Tax





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%.





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 Six MonthsEnded
                June 30,2007
            
            2006Tax
                provision (credit) at statutory rate
            
            34%
            
            34%Foreign
                tax rate difference
            
            (19%)
            
            (19%)15%
            
            15%




10




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


**Notes
      to Consolidated Financial Statements**


**For
      the Six Months Ended June 30, 2007 and 2006**


**(unaudited)**






The
      estimated tax savings for the six months ended June 30, 2007 amounted to
      $1,042,675.The net effect on earnings per share had the income tax been applied
      would decrease basic and diluted earnings per share from $0.20 to
      $0.16.





Beginning
      January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law will replace
      the existing laws for Domestic Enterprises (“DES”) and Foreign Invested
      Enterprises (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate
      currently applicable to both DES and FIEs. The two years tax exemption, three
      years 50% tax reduction tax holiday for production-oriented FIEs will be
      eliminated.





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 June 30, 2007, the Company had outstanding 1,140,286
      warrants. The average stock price for the six months ended June 30, 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.




11




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**


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.





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.




12


**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**




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.




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 - Stockholders’ Equity**


Warrants


Following
      is a summary of the warrant activity:





Warrants
              outstanding
            
            Weighted
                Average
              Exercise
              Price
            
            Aggregate
                Intrinsic
              ValueOutstanding,
                December 31, 2006
            
            
            1,140,286
            
            $
            3.60
            
            $
            0Granted
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Outstanding,
                June 30, 2007
            
            
            1,140,286
            
            $
            3.60
            
            $
            0




13




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**


Following
      is a summary of the status of warrants outstanding at June 30, 2007:





Outstanding
                  Warrants
              
              Exercisable
                  WarrantsExercise
                Price
              Number
              Average
                Remaining
                Contractual
                Life
              
              Average
                Exercise
                Price
              Number$3.60
              1,140,286
              1.53
              
              $3.60
              1,140,286





**Note
      4 - 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 $54,992 and $22,774 for the six months and $10,981 and $4,881 for
      the
      three months ended June 30, 2007 and 2006, respectively.





**Note
      5 - 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:




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





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





iii.
            Allocations
                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





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





The
      Company has appropriated $494,383 and $203,812 as reserve for the statutory
      surplus reserve and welfare fund for the six months ended June 30, 2007 and
      2006, respectively.




14




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**




**Note
      7 - Supplemental disclosure of cash flow information**





Income
      taxes paid amounted to $1,473,635 and $128,908 for the six months ended June
      30
      2007 and 2006 and for the three months ended June 30, 2007 and 2006 amounted
      to
      $384,794 and $25,753, respectively.





**Note
      8 - Earnings Per Share**





Earnings
      (loss) per share for the six months ended June 30, 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”.





The
      following demonstrates the calculation for earnings per share for the six months
      and three months ended June 30, 2007 and 2006:




Six
                  months ended June 302007
              
              2006(Unaudited)
              
              (Unaudited)Net
                  income for basic earnings per share
              
              $
              4,855,335
              
              $
              1,337,849Weighted
                  average shares used in basic computation
              
              
              24,210,183
              
              
              23,918,956Diluted
                  effect of warrants
              
              
              -
              
              
              104,158Weighted
                  average shares used in diluted computation
              
              
              24,210,183
              
              
              23,776,062Earnings
                  per shareBasic
              
              $
              0.20
              
              $
              0.06Diluted
              
              $
              0.20
              
              $
              0.06




Three
                  months ended June 302007
              
              2006(Unaudited)
              
              (Unaudited)Net
                  income for basic earnings per share
              
              $
              2,745,009
              
              $
              927,269Weighted
                  average shares used in basic computation
              
              
              24,210,183
              
              
              23,918,956Diluted
                  effect of warrants
              
              
              -Weighted
                  average shares used in diluted computation
              
              
              24,210,183
              
              
              23,918,956Earnings
                  per shareBasic
              
              $
              0.11
              
              $
              0.04Diluted
              
              $
              0.11
              
              $
              0.04




15




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**






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





For
      the
      six months ended June 30, 2007 and 2006, the Company purchased all of the
      natural gas for resale from three vendors, PetroChina Changqing Oilfield
      Company, Shaanxi Natural Gas Co Ltd, and Jingcheng city Mingshi Coal Bed Methane
      Exploitage Ltd. No amount was owing to these vendors at June 30, 2007.Except
      for
      Shaanxi Natural Gas Co Ltd, the other two vendors have long-term agreements
      with
      the Company without minimum purchases requirement. The Company has had annual
      agreements with Shaanxi Natural Gas Co Ltd that require the Company to purchase
      a minimum amount of natural gas. For the years ended December 31, 2006 and
      2005
      the minimum purchases were 2.36 million and 1.60 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 with these vendors going
      forward. Price points for natural gas are strictly controlled by the government
      and have remained stable over the past 3 years.





For
      the
      six months ended June 30, 2007, two suppliers account for 23.97% and 14.28%
      of
      the total equipment purchased by the Company and for the six months ended June
      30, 2006, two suppliers account for 48.2% and 24.1% of the total equipment
      purchased by the Company. Payables to those two suppliers accounted for 17%
      of
      the total account payables at June 30, 2007.





Four
      customers accounted for 46%, 28%, 7% and 1% of the Company’s installation
      revenue for the six months ended June 30, 2007 and one customer accounted for
      32%of the Company’s construction revenue for the six months ended June 30, 2006.
      Receivables from one customer accounted for 51% of the total account receivables
      at June 30, 2007.





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





**Note
      10 - 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.




16




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **For
        the Six Months Ended June 30, 2007 and 2006**
 **(unaudited)**


**Note
      11 - Subsequent event**




On
      August
      2, 2007, the Company entered into a Securities Purchase Agreement with investors
      named therein (the "Investors") to sell in a private placement to the Investors
      4,615,385 shares of the Company's common stock, par value $0.0001 per share
      (the
      "Common Stock") for $3.25 per share (the "Shares") and warrants to purchase
      up
      to 692,308 shares of Common Stock exercisable for a period of five years at
      an
      exercise price of $7.79 per share (the "Investor Warrants"), for an aggregate
      purchase price of $15,000,000. The Company issued the Shares on the same day
      and
      will issue the Investor Warrants upon the effective filing of the Certificate
      of
      Amendment of Articles of Incorporation with the Secretary of State of the State
      of Delaware to increase its total authorized Common Stock.






The
      Company also entered into a Registration Rights Agreement with the Investors,
      pursuant to which the Company is obligated to file a registration statement
      registering the resale of the Shares and Common Stock issuable upon the exercise
      of the Investor Warrants.






Brean
      Murray, Carret & Co., LLC acted as the sole placement agent in the
      transaction, and received a fee of $1,049,999.97 (7% of the gross proceeds)
      and
      will receive a warrant to purchase 75,000 shares of Common Stock (the "Placement
      Agent Warrant"). The Placement Agent Warrant is identical to the Investor
      Warrants.




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.


However,
        this merger acquisition was not able
        to
        be approved under
        the certain laws of the People’s Republic of China (“PRC”). PRC law currently
        has limits on foreign ownership of companies in certain industries. To comply
        with these foreign ownership restrictions, the Company established its wholly
        owned subsidiary, Xilan Natural Gas Equipment Ltd., (XNGE) a limited liability
        company organized under the PRC law on February 21, 2006. The Company through
        XNGE entered into exclusive arrangements with XXNGC. Through these arrangements,
        the Company has the ability to substantially influence XXNGC’s daily operations
        and financial affairs, appoint its senior executives and approve all matters
        requiring shareholder approval. These arrangements were formalized on August
        17,
        2007, and made retroactive to March 8, 2006. As a result, XXNGC became a
        VIE
        effective on March 8, 2006.


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 (17
                  stations
                  in service as of June 30, 2007 and we expect to add three additional
                  stations by the end of third quarter of
                  2007);





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




18




·
              Distribution
                  and sale of natural gas to residential, commercial and industrial
                  customers through Company-owned pipelines. As of June 30, 2007,
                  the
                  Company distributed and sold natural gas to approximately 78,216
                  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 June 30, 2007 and 2006:**





The
      following table presents certain consolidated statement of operations
      information. Financial information is presented for the three months ended
      June
      30, 2007 and 2006.





June
                30, 2007
            
            June
                30, 2006Revenues
            
            $
            8,273,309
            
            $
            3,724,183Cost
                of Revenues
            
            
            4,130,199
            
            
            2,109,629Operating
                Expenses
            
            
            943,306
            
            
            516,018Income
                from Operations
            
            
            3,199,804
            
            
            1,098,536Net
                Income
            
            $
            2,745,009
            
            $
            927,269





*Revenues:* We
      generated approximately 83% of our revenues in the three months ended June
      30,
      2007 from the sale of natural gas and approximately 17% 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 77.53% of our total revenues in
      the
      three months ended June 30, 2007, or approximately $6,413,970, 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 22.21% of our total revenues in the three months
      ended June 30, 2007, or approximately $1,837,502, including both natural gas
      sales and construction and installation fees. Sales of natural gas to third
      party-owned filling stations accounted for approximately 0.26 %
      of our
      total revenues in the three months ended June 30, 2007, or approximately
      $21,511. The Company expects installation revenues to increase on both an actual
      basis and as a percentage of revenue in 2007.





As
      of
      June 30, 2007, the Company had approximately 78,216 pipeline customers, an
      increase of approximately 15,661 customers over the same period in 2006,
      and had constructed 17 filling stations, an increase of 13 stations over the
      same period in 2006 with additional two filling stations under construction
      with
      expected completion by the end of the third quarter of 2007. In
      the
      third quarter of 2007, the Company expects to add up to 5,000 pipeline customers
      and 3 additional filling stations, which the Company estimates will increase
      sales of natural gas by 2 million cubic meters.




We
      had
      total revenues of $8,273,309 for the three months ended June 30, 2007, an
      increase of $4,549,126 or 122%, compared to $3,724,183 for the three months
      ended June 30, 2006. The increase in revenues was due primarily to contributions
      from Company-owned CNG filling stations completed after the second quarter
      of 2006 as well as an increase in the number of residential, commercial and
      industrial pipeline customers from approximately 62,555 in the three months
      ended June 30, 2006 to approximately 78,216 in the three months ended June
      30, 2007.




19




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 June 30, 2007, our installation
      revenues increased approximately 23.6% over the same period in 2006 and our
      sales of natural gas increased approximately 170% over the previous year. Four
      customers accounted for approximately 61%, 1.57%, 1.17% and 0.01% of the
      Company's installation revenue for the three months ended June 30,
      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 June 30, 2007 was $4,130,199, an increase
      of
      $2,020,570 or approximately 96% over the same period in 2006. Cost of natural
      gas increased by approximately 116% to $3,463,242 in the three months ended
      June
      30, 2007, as compared with $1,603,745 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 June 30, 2007 by approximately 32% to
      $666,957, as compared with $505,884 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 June 30, 2007 remained relatively constant compared to
      2006.





*Gross
      profit* :
      The
      Company earned a gross profit of $4,143,110 for the three months ended June
      30,
      2007, an increase of $2,528,556 or approximately 157%, compared to $1,614,554
      for the three months ended June 30, 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, increased to approximately 50% for the
      three months ended June 30, 2007, from approximately 43% for the three months
      ended June 30, 2006. The increase in gross margin is primarily due to increased
      portion of the total gross profit represented by CNG filing stations as
      compared to the same period in 2006.





*Operating
      expenses:* The
      Company incurred operating expenses of $943,306 for the three months ended
      June
      30, 2007, an increase of $432,688 or approximately 83%, compared to $516,018
      for
      the three months ended June 30, 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 June 30, 2007 as we increased our
      efforts to obtain new residential and commercial customers and attract customers
      to our filling stations.




20


The
        Company purchases all of the natural gas for resale from three vendors,
        PetroChina Changqing Oilfield Company, Shaanxi Natural Gas Co Ltd, and Jingcheng
        city Mingshi Coal Bed Methane Exploitage Ltd. Except for Shaanxi Natural
        Gas Co
        Ltd, the other two vendors have long-term agreements with the Company without
        minimum purchases requirement. The Company has had annual agreements with
        Shaanxi Natural Gas Co Ltd that require the Company to purchase a minimum
        amount
        of natural gas. For the years ended December 31, 2006 and 2005 the minimum
        purchases were 2.36 million and 1.60 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 with these vendors going forward.
        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 been for the past 3 years, 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 June 30, 2007, two suppliers accounted for 40% and 27% 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.





Income
      tax was $471,098 for the three months ended June 30, 2007, as compared to
      $167,323 for the three months ended June 30, 2006. The increase in income tax
      was attributed to the growth of construction and installation fees and the
      sale
      of natural gas.





*Net
      Income* :
      Net
      income increased to $2,745,009 for the three months ended June 30, 2007, an
      increase of $1,817,740 or approximately 196% from $927,269 for the three months
      ended June 30, 2006. Increase in net income is attributed to our significant
      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
      the
      third quarter of 2007, the Company expects to add up to 5,000 pipeline customers
      and add additional 3 filling stations, which the Company estimates will increase
      sales of natural gas by 2 million cubic meters.








**Comparing
      six Months Ended June 30, 2007 and 2006:**





The
      following table presents certain consolidated statement of operations
      information. Financial information is presented for the six months ended June
      30, 2007 and 2006.





June
                30, 2007
            
            June
                30, 2006Revenues
            
            $
            15,016,885
            
            $
            5,551,397Cost
                of Revenues
            
            
            7,356,416
            
            
            2,952,141Operating
                Expenses
            
            
            1,958,814
            
            
            980,454Income
                from Operations
            
            
            5,701,655
            
            
            1,578,802Net
                Income
            
            $
            4,855,335
            
            $
            1,337,849





*Revenues:*  We
      generated approximately 78% of our revenues in the six months ended June 30,
      2007 from the sale of natural gas and approximately 22% 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 72.95% of our total revenues in
      the
      six months ended June 30, 2007, or approximately $10,954,818, 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 26.69% of our total revenues in the six months
      ended
      June 30, 2007, or approximately $4,008,007, including both natural gas sales
      and
      construction and installation fees. Sales of natural gas to third party-owned
      filling stations accounted for approximately 0.36% of our total revenues in
      the
      six months ended June 30, 2007, or approximately $54,061. The Company expects
      installation revenues to increase on both an actual basis and as a percentage
      of
      revenue in 2007.




21




As
      of
      June 30, 2007, the Company had approximately 78,216 pipeline customers, an
      increase of approximately 15,661 customers over the same period in 2006, and
      had
      constructed 17 filling stations, an increase of 13 stations over the same period
      in 2006 with additional two filling stations under construction with expected
      completion by the end of the third quarter of 2007. In the
      third quarter of 2007, the Company expects to add up to 5,000 pipeline customers
      and add additional 3 filling stations, which the Company estimates will increase
      sales of natural gas by 2 million cubic meters.





We
      had
      total revenues of $15,016,885 for the six months ended June 30, 2007, an
      increase of $9,505,488 or approximately 172%, compared to $5,511,397 for the
      six
      months ended June 30, 2006. The increase in revenues was due primarily to
      contributions from Company-owned CNG filling stations completed after the second
      quarter of 2006 as well as an increase in the number of residential, commercial
      and industrial pipeline customers from approximately 62,555 in the
      six months ended June 30, 2006 to approximately 78,216 in the six months ended
      June 30, 2007.





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 six months ended June 30, 2007, our installation
      revenues increased approximately 55% over the same period in 2006 and our sales
      of natural gas increased approximately 247% over the previous year. Four
      customers accounted for approximately 46%, 28%, 7% and 1% of the Company's
      installation revenue for the six months ended June 30, 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 six months ended June 30, 2007 was $7,356,416, an increase
      of
      $4,404,275 or approximately 149% over the same period in 2006. Cost of natural
      gas increased by approximately 182% to $5,955,893 in the six months ended June
      30, 2007, as compared with $2,109,608 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 six months ended June 30, 2007 by approximately 66% to
      $1,400,523, as compared with $842,533 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
      six months ended June 30, 2007 remained relatively constant compared to
      2006.





*Gross
      profit* :
      The
      Company earned a gross profit of $7,660,469 for the six months ended June 30,
      2007, an increase of $5,101,213 or approximately 199%, compared to $2,559,256
      for the six months ended June 30, 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.




22




*Gross
      margin* :
      Gross
      margin, as a percentage of revenues, increased to approximately 51% for the
      six
      months ended June 30, 2007, from approximately 46% for the six months ended
      June
      30, 2006. The increase in gross margin is primarily due to increased portion
      of
      the total gross profit represented by CNG filing stations as compared to
      the same period in 2006.





*Operating
      expenses:* The
      Company incurred operating expenses of $1,958,814 for the six months ended
      June
      30, 2007, an increase of $978,360 or approximately 100%, compared to $980,454
      for the six months ended June 30, 2006. Our operating expenses increased
      primarily as a result of expenses related to the construction and operation
      of
      13 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 six months ended June 30, 2007 as we increased
      our efforts to obtain new residential and commercial customers and attract
      customers to our filling stations.





We
      purchase all of our natural gas for resale from three vendors,
      PetroChina Changqing Oilfield Company, Shaanxi Natural Gas Co Ltd, and Jingcheng
      city Mingshi Coal Bed Methane Exploitage Ltd. As the government owns all land
      in
      China, the government controls and owns all the natural resources coming from
      the ground, thus the government controls the price and flow of the natural
      gas.
      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, 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
      six months ended June 30, 2007, two suppliers accounted for 23.97% and 14.28%
      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.





Income
      tax was $872,415 for the six months ended June 30, 2007, as compared to $239,779
      for the six months ended June 30, 2006. The increase in income tax was
      attributed to the growth of construction and installation fees and the sale
      of
      natural gas.





*Net
      Income* :
      Net
      income increased to $4,855,335 for the six months ended June 30, 2007, an
      increase of $3,517,486 or approximately 263% from $1,337,849 for the six months
      ended June 30, 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
      the
      third quarter of 2007, the Company expects to add up to 5,000 pipeline customers
      and add additional 3 filling stations, which the Company estimates will increase
      sales of natural gas by 2 million cubic meters.






**Liquidity
      and Capital Resources**





As
      of
      June 30, 2007, the Company had $7,601,358 of cash and cash equivalents on hand
      compared to $7,142,852 of cash and cash equivalents as of June 30,
      2006.




23




The
      primary source of cash in the six months ended June 30, 2007 was income from
      operations. The Company had net cash flows provided by operations of $5,326,523
      for the six months ended June 30, 2007 as compared to net cash used in
      operations of $297,948 in the corresponding period last year.





Cash
      outflows for investing activities increased from $2,113,842 in the six months
      ended June 30, 2006 to $3,203,009 for the same period in 2007 primarily because
      the Company purchased more equipment in 2007 in anticipation of its business
      growth.





The
      Company expects to add 3
      additional CNG filling stations by the end of third quarter of 2007. The Company
      expects the funds for these investing activities will primarily come from the
      Company's operating and financing cash flows.





The
      Company is obligated to contribute $10 million of registered capital to its
      wholly-owned subsidiary, Xilan Natural Gas Equipment Co. As of June 30, 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 expects to require financing of $40 million to $80 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 acquisition of other filling stations) and other
      liquidity requirements associated with our operations for at least the next
      12
      months.





The
      majority of the Company's revenues and expenses were denominated primarily
      in
      RMB, the currency of the People's Republic of China. There is no assurance
      that
      exchange rates between the RMB and the USD will remain stable. 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 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.




24




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 for a bad debt reserve as of June 30,
      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.





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





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 June 30, 2007 there were no significant impairments of its
      long-lived assets.




25




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 June 30, 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.




26




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 .





Advertising
      Costs





The
      Company expenses the cost of advertising as incurred or, as appropriate, the
      first time the advertising takes place. Advertising costs for the six months
      ended June 30, 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 six months ended June 30, 2007 and 2006.
      As of
      June 30, 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 June 30, 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%.





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 June 30, 2007, the Company had outstanding 1,140,286
      warrants. The average stock price for the six month ended June 30, 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.




27




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





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.




28




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.





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.




29




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.





**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**





**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.




30




**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.




**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.




31




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.





**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 RMB may indirectly affect our financial condition
      by
      affecting the volume of cross-border money flow.**




32




The
      value
      of the RMB fluctuates and is subject to changes in the People's Republic of
      China political and economic conditions. Since July 2005, the conversion of
      RMB
      into foreign currencies, including USD, has been based on rates set by the
      People's Bank of China which are set based upon the interbank foreign exchange
      market rates and current exchange rates of a basket of currencies on the world
      financial markets. As of June 30, 2007, the exchange rate between the RMB and
      the United States dollar was 7.60 RMB to every one USD.





**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.





**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.**




33




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.





**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.




34




**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.




**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.




35




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





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




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




36




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





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





None





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





None





I **tem
      3.**  **Defaults
      Upon Senior Securities**





None.





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





Not
      applicable





**Item
      5.**  **Other
      Information**





None





**Item
      6.**  **Exhibits**





(a)
            Exhibits





**Exhibit
                Number**
            **Description
                of Exhibit**10.1
            Form
                of Consulting Services Agreement;10.2
            Form of Operating Agreement;10.3
            Form of Equity Pledge Agreement;10.4
            Form of Option Agreement; and10.5
            Form of Proxy Agreement31.1
            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)




37




**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.August
                20, 2007
            By:
            /s/ Qinan
                JiQinan
                Ji
              Chief
                Executive Officer (Principal
              Executive
                Officer)




August
                20,
                2007
            By:
            /s/ Xiaogang
              ZhuXiaogang
                Zhu
              Chief
                Financial Officer
              (Principal
                Financial and Accounting
              Officer)






38