**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 September 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 November 13, 2007:
29,200,304




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


Yes o No x




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


(Mark
      One)









**China
      Natural Gas, Inc.**


**Index**


PART
                  I.
              
              FINANCIAL
                  INFORMATION
              
              1Item
                  1.
              
              Financial
                  Statements
              
              1Consolidated
                  Balance Sheet as of September 30, 2007 (unaudited)
              
              1Consolidated
                  Statements of Income and Other Comprehensive Income for the three
                  and nine
                  months ended September 30, 2007 and 2006 (unaudited)
              
              2Consolidated
                  Statements of Cash Flows for the nine months ended September 30,
                  2007 and
                  2006 (unaudited)
              
              3Notes
                  to Consolidated Financial Statements (unaudited)
              
              4Item
                  2.
              
              Management's
                  Discussion and Analysis or Plan of Operations
              
              20Item
                  3.
              
              Controls
                  and Procedures
              
              38PART
                  II.
              
              OTHER
                  INFORMATION
              
              38Item
                  1.
              
              Legal
                  Proceedings
              
              38Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              38Item
                  3.
              
              Defaults
                  Upon Senior Securities
              
              38Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              38Item
                  5.
              
              Other
                  Information
              
              38Item
                  6.
              
              Exhibits
              
              38SIGNATURES
              
              40








**PART
                I.****FINANCIAL
                INFORMATION**
              
              **Item
                1.****Financial
                Statements****CHINA
                NATURAL GAS, INC. AND SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEET****AS
                OF SEPTEMBER 30, 2007**(unaudited)**ASSETS****CURRENT
                ASSETS:**Cash
                & cash equivalents
            
            $
            20,677,432Accounts
                receivable
            
            
            329,686Other
                receivable
            
            
            438,349Inventories
            
            
            70,314Advances
            
            
            1,213,868Prepaid
                expense and other current assets
            
            
            118,041**Total
                current assets**
            
            
            22,847,690**PROPERTY
                AND EQUIPMENT, net**
            
            
            23,514,129**CONSTRUCTION
                IN PROGRESS**
            
            
            1,650,232**OTHER
                ASSETS**
            
            
            1,672,942**TOTAL
                ASSETS**
            
            $
            49,684,993**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES:**Accounts
                payable & accrued expense
            
            $
            622,482Other
                payables
            
            
            82,033Unearned
                revenue
            
            
            487,324Taxes
                Payable
            
            
            901,608**Total
                current liabilities**
            
            
            2,093,447**STOCKHOLDERS'
                EQUITY:**Preferred
                stock, $0.0001 per share; authorized 5,000,000 shares; none issuedCommon
                stock, $0.0001 per share; 30,000,000 authorized shares;
            
            
            –29,145,839
                shares issued and outstanding
            
            
            2,915Additional
                paid-in capital
            
            
            32,046,884Cumulative
                translation adjustment
            
            
            2,160,330Statutory
                reserve
            
            
            1,477,671Retained
                earnings
            
            
            11,903,746**Total
                stockholders' equity**
            
            
            47,591,546**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            49,684,993




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




1


**CHINA
                NATURAL GAS, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF INCOME AND OTHER COMPREHENSIVE
                INCOME****FOR
                THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
                2006**
              (unaudited)**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**(unaudited)
            
            (unaudited)
            
            (unaudited)
            
            (unaudited)**Revenue**Natural
                gas revenue
            
            $
            7,442,109
            
            $
            5,210,834
            
            $
            19,243,968
            
            $
            8,580,236Installation
                and other
            
            
            1,635,979
            
            
            1,303,457
            
            
            4,851,006
            
            
            3,445,452Total
                revenue
            
            
            9,078,088
            
            
            6,514,291
            
            
            24,094,974
            
            
            12,025,688**Cost
                of revenue**Natural
                gas cost
            
            
            4,020,039
            
            
            2,752,594
            
            
            9,975,932
            
            
            4,862,202Installation
                and other
            
            
            738,211
            
            
            526,292
            
            
            2,138,734
            
            
            1,368,8254,758,250
            
            
            3,278,886
            
            
            12,114,666
            
            
            6,231,027**Gross
                profit**
            
            
            4,319,838
            
            
            3,235,405
            
            
            11,980,308
            
            
            5,794,661**Operating
                expenses**Selling
                expenses
            
            
            939,496
            
            
            366,616
            
            
            2,216,048
            
            
            923,960General
                and administrative expenses
            
            
            1,028,104
            
            
            270,031
            
            
            1,710,459
            
            
            693,141Total
                operating expenses
            
            
            1,967,600
            
            
            636,647
            
            
            3,926,507
            
            
            1,617,101**Income
                from operations**
            
            
            2,352,238
            
            
            2,598,758
            
            
            8,053,801
            
            
            4,177,560**Non-operating
                income (expense):**Interest
                income
            
            
            24,429
            
            
            2,485
            
            
            41,570
            
            
            7,262Other
                income (expense)
            
            
            30,458
            
            
            (4,231
            )
            
            39,504
            
            
            (10,182
            )Total
                non-operating income (expense)
            
            
            54,887
            
            
            (1,746
            )
            
            81,074
            
            
            (2,920
            )**Income
                before income tax**
            
            
            2,407,125
            
            
            2,597,012
            
            
            8,134,875
            
            
            4,174,640**Provision
                for income tax**
            
            
            445,463
            
            
            393,226
            
            
            1,317,878
            
            
            633,005**Net
                income**
            
            
            1,961,662
            
            
            2,203,786
            
            
            6,816,997
            
            
            3,541,635**Other
                comprehensive income**Foreign
                currency translation gain
            
            
            584,166
            
            
            258,640
            
            
            1,320,878
            
            
            291,857**Comprehensive
                Income**
            
            $
            2,545,828
            
            $
            2,462,426
            
            $
            8,137,875
            
            $
            3,833,492**Weighted
                average shares outstanding**Basic
            
            
            27,122,196
            
            
            23,931,197
            
            
            25,191,521
            
            
            23,759,285Diluted
            
            
            27,286,286
            
            
            23,931,197
            
            
            25,223,465
            
            
            23,759,285**Earnings
                per share**Basic
            
            $
            0.07
            
            $
            0.09
            
            $
            0.27
            
            $
            0.15Diluted
            
            $
            0.07
            
            $
            0.09
            
            $
            0.27
            
            $
            0.15




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




2


**CHINA
                NATURAL GAS, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENT OF CASH FLOWS****FOR
                THE NINE MONTHS ENDED SEPTEMBER 2007 AND 2006**
              (unaudited)**Nine
                Months Ended**
              **September
                30,****2007**
            
            **2006****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            6,816,997
            
            $
            3,541,635Adjustments
                to reconcile net income to net cashprovided
                by (used in) operating activities:Depreciation
                and amortization
            
            
            1,146,247
            
            
            497,072Exchange
                Gain
            
            
            -
            
            
            (457,976
            )(Increase)
                / decrease in assets:Accounts
                receivable
            
            
            257,002
            
            
            (306,677
            )Other
                receivable
            
            
            400,049
            
            
            (1,258,975
            )Inventory
            
            
            222,112
            
            
            (248,642
            )Advances
            
            
            (31,464
            )
            
            (3,068,491
            )Prepaid
                expense
            
            
            195,740
            
            
            (147,525
            )Contract
                in progress
            
            
            -
            
            
            (413,237
            )Other
                assets
            
            
            (135,885
            )
            
            -Increase
                / (decrease) in current liabilities:Accounts
                payable & accrued expense
            
            
            195,660
            
            
            183,632Other
                payables
            
            
            (204,215
            )
            
            549,701Unearned
                revenue
            
            
            187,825
            
            
            206,537Taxes
                payable
            
            
            (1,019,262
            )
            
            -Net
                cash provided by (used in) operating activities
            
            
            8,030,806
            
            
            (922,946
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Payment
                on purchase of property and equipment
            
            
            (5,871,571
            )
            
            (4,170,589
            )Additions
                to construction in progress
            
            
            -
            
            
            (498,676
            )Payment
                for land use rights
            
            
            (967,150
            )
            
            -Net
                cash used in investing activities
            
            
            (6,838,721
            )
            
            (4,669,265
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Stock
                issued for cash
            
            
            15,000,000
            
            
            10,400,000Proceeds
                from exercise of warrants
            
            
            -
            
            
            1,050,001Payment
                of offering costs
            
            
            (1,176,533
            )
            
            (1,557,147
            )Net
                cash provided by financing activities
            
            
            13,823,467
            
            
            9,892,854Effect
                of exchange rate changes on cash and cash equivalents
            
            
            367,667
            
            
            55,724**NET
                INCREASE IN CASH & CASH EQUIVALENTS**
            
            
            15,383,219
            
            
            4,356,367**CASH
                & CASH EQUIVALENTS, BEGINNING OF PERIOD**
            
            
            5,294,213
            
            
            675,624**CASH
                & CASH EQUIVALENTS, END OF PERIOD**
            
            $
            20,677,432
            
            $
            5,031,991




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




3


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(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/A. The results
      of
      the nine months ended September 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 Coverture International Inc.) was incorporated
        in
        the state of 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 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 Conventure’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 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 value 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, Conventure 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 for 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 variable interest
        entity effective on March 8, 2006







4


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      1 - Organization and Basis of Presentation (continued)**





Basis
      of Presentation





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





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 entities (“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 the consolidation.





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, the Company through Xilan
      Equipment entered into exclusive arrangements with Xian Xilan Natural Gas.
      These
      arrangements obligate the Company to absorb a majority of the risk of loss
      from
      Xian Xilan Natural Gas’s activities and enable the Company to receive a majority
      of Xian Xilan Natural Gas’s expected residual returns. As a result, the Company
      accounts for Xian Xilan Natural Gas as a VIE under FASB Interpretation No.
      46R
      (“FIN 46R”), “Consolidation of Variable Interest Entities.” The arrangements
      consist of the following agreements:




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




5




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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      1 - Organization and Basis of Presentation (continued)**





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





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





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





Foreign
      Currency Translation





As
      of
      September 30, 2007 and 2006, the accounts of the Company were maintained, and
      their consolidated financial statements were expressed in RMB. Such consolidated
      financial statements were translated into USD in accordance with Statement
      of
      Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation,"
      with the RMB as the functional currency. According to the Statement, all assets
      and liabilities were translated at the exchange rate on the balance sheet date,
      stockholder's equity are translated at the historical rates and statement of
      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 $2,160,330 and $839,452
      as
      of September 30, 2007 and December 31, 2006, respectively. The balance sheet
      amounts with the exception of equity at September 30, 2007 were translated
      7.50
      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 and statement of cash flows accounts for the nine
      months ended September 30, 2007 and 2006 were 7.65 RMB and 8.01 RMB to $1.00
      USD, and for the three months ended September 30, 2007 and 2006 were RMB 7.55
      and RMB 7.98 to $1.00 USD, respectively.





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





Use
      of
      Estimates





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




6


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      2 - Summary of Significant Accounting Policies (continued)**





Cash
      and Cash Equivalents





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





Certain
      financial instruments, which subject the Company to concentration of credit
      risk, consist of cash. The Company maintains balances at financial institutions
      which, from time to time, may exceed Federal Deposit Insurance Corporation
      insured limits for the banks located in the Unites States. Balances at financial
      institutions or state owned banks within the PRC are not covered by insurance.
      As of September 30, 2007, the Company had deposits in excess of federally
      insured limits total of $20,508,709. The Company has not experienced any losses
      in such accounts and believes it is not exposed to any significant risks on
      its
      cash in bank accounts.





Accounts
      Receivable





Accounts
      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 September 30,
      2007.





Other
      Receivables





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





Inventories





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.




7


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      2 - Summary of Significant Accounting Policies (continued)**





Advances





The
      Company advances to vendors for purchasing of materials. The advances are
      interest free and unsecured.





Prepaid
      expense





The
      Company’s prepaid expenses are prepaid land use rights for its natural gas
      filling stations located in the PRC. Generally, the Company is required to
      pay
      one year lease in advance. The Company is using straight-line method to amortize
      prepaid lease monthly. See Note 10 for further disclosure.





Property
      and Equipment





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





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





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





Office
                equipment
            
            $
            115,595Operating
                equipment
            
            
            17,558,497Vehicles
            
            
            1,256,259Buildings
            
            
            7,700,42226,630,773Less
                accumulated depreciation
            
            
            (3,116,644
            )$
            23,514,129





Depreciation
      expense for the nine months ended September 30, 2007 and 2006 was $1,146,247
      and
      $495,967, respectively. For the three months ended September 30, 2007 and 2006,
      depreciation expense amounted to $419,991 and $183,560,
      respectively.




8


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      2 - Summary of Significant Accounting Policies (continued)**





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





Construction
      In Progress




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





Contracts
      In Progress





Contracts
      in progress consist of the cost of installingpipelines for customers. The major cost of construction relates to
      material, labor and overhead. Revenue from installation of pipelines is
      recorded when the contract is completed and accepted by the customers. The
      installationcontracts are usually completed within one to two months time. As of
      September 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.




9


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      2 - Summary of Significant Accounting Policies (continued)**





Derivative
      Accounting





The
      Company entered into a short term foreign currency forward contract in September
      2007. The Company elects not to apply the hedge accounting, therefore, any
      gain
      or loss related to this forward contract is recognized in earnings in the period
      of change. For the nine months ended September 30, 2007, no gain or loss was
      incurred.





Revenue
      Recognition





The
      Company's revenue recognition policies are in compliance with Staff Accounting
      Bulletin (SAB) 104. Revenue is recognized when services are rendered to
      customers, when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectibility is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue. Revenue from gas sales is recognized when gas is pumped through
      pipelines to the end users. Revenue from installation of pipelines is recorded
      when the contract is completed and accepted by the customers. The construction
      contracts are usually completed within one to two months time. Revenue from
      repairing and modifying vehicles is recorded when service are rendered to and
      accepted by the customers.





Unearned
      Revenue





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





Advertising
      Costs





The
      Company expenses the cost of advertising as incurred or, as appropriate, the
      first time the advertising takes place. Advertising costs for the nine months
      ended September 30, 2007 and 2006 were $22,702 and $8,183, respectively. For
      the
      three months ended September 30, 2007 and 2006, advertising costs amounted
      to
      $13,908 and $2,761, respectively.





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 nine months ended September 30, 2007 and
      2006.
      As of September 30, 2007, there were no options outstanding.




10


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      2 - Summary of Significant Accounting Policies (continued)**





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 September 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’s variable interest entity XXNGC is in the
      natural gas industry whose development is encouraged by the government.
      According to the income tax regulation, any company engaged in the natural
      gas
      industry enjoys a favorable tax rate. Accordingly, except for income from Xian
      Xilan Auto Bodyshop, which subjects to 33% PRC income tax rate, 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 Nine MonthsEnded
                September 30,2007
            
            2006Tax
                provision (credit) at statutory rate
            
            
            34
            %
            
            34
            %Foreign
                tax rate difference
            
            
            (18
            %)
            
            (19
            %)16
            %
            
            15
            %





11


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      2 - Summary of Significant Accounting Policies (continued)**





The
      estimated tax savings for the nine months and three months ended September
      30,
      2007 amounted to approximately $1,448,000 and $372,960, respectively. The net
      effect on earnings per share had the income tax been applied would decrease
      basic and diluted earnings per share for the nine months ended September 30,
      2007 from $0.27 to $0.21, and for the three months ended September 30, 2007
      from
      $0.07 to $0.06, respectively.





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. Since
      the detailed guidelines of the new tax law is not publicized yet, the Company
      has not determined what the new tax rate will be applicable to the Company’s
      subsidiary and variable interest entities in the natural gas
      industry.





Value
      added tax





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





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





Basic
      and Diluted Earning Per Share





Earning
      per share is calculated in accordance with the Statement of Financial Accounting
      Standards No. 128 (“SFAS No. 128”), “Earnings per share”. 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 September 30, 2007, the Company had outstanding
      1,199,245 warrants. For the three months and nine months ended September 30,
      2007 164,090 and 31,944 warrants, respectively were factored into the diluted
      earning per share calculation.





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.




12


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      2 - Summary of Significant Accounting Policies (continued)**





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.





Reclassifications





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





Recent
      Pronouncements





In
      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.




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.




13


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      2 - Summary of Significant Accounting Policies
      (continued)**




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





**Note
      3 - Other Assets**





Other
      assets at September 30, 2007 consisted of the following,





Prepayment
                for acquiring land use right
            
            $
            967,150Advance
                on purchasing equipment/construction in progress
            
            
            552,943Refundable
                security deposit
            
            
            106,720Others
            
            
            46,129Total
            
            $
            1,672,942





All
      land
      in the People’s Republic of China is government owned and cannot be sold to any
      individual or company. However, the government grants the user a land use right
      to use the land. As of September 30, 2007, the Company prepaid $967,150 to
      the
      PRC local government to purchase land use right. The Company is in the process
      of negotiating the final purchase price with the local government and the land
      use rights has not been granted to the Company. Therefore, the Company did
      not
      amortize the prepaid land use right.





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





The
      Company paid $106,720 to one of its largest vendor as a security deposit and
      this amount will be returned to the Company if they terminate the business
      relationship.




14


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      4 - Stockholders’ Equity**





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





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





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





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





Following
      is a summary of the warrant activity:





Warrants
              Outstanding
            
            Weighted
                Average
              Exercise
                Price
            
            Aggregate
                Intrinsic ValueOutstanding,
                December 31, 2006
            
            
            1,140,558
            
            $
            3.60
            
            $
            0Granted
            
            
            767,308
            
            $
            7.79
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (708,621
            )
            $
            3.60
            
            
            -Outstanding,
                September 30, 2007
            
            
            1,199,245
            
            $
            6.28
            
            $
            1,425,392





15


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      4 - Stockholders’ Equity**  **(continued)**





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








Outstanding
                warrants
            
            
            
            Exercisable
                WarrantsExercise
                Price
            
            Number
            
            Average
                Remaining
              Contractual
                Life
            
            Average
                Exercise Price
            
            Number$3.60
            
            
            431,937
            
            
            1.28
            
            $
            3.60
            
            
            431,937$7.79
            
            
            767,308
            
            
            5.00
            
            $
            7.79
            
            
            767,3081,199,245
            
            
            4.38
            
            $
            6.28
            
            
            1,199,245





**Note
      5 - Employee Welfare Plan**





The
      Company has established its own employee welfare plan in accordance with Chinese
      law and regulations. The Company makes annual contributions of 14% of all
      employees' salaries to employee welfare plan. The total expense for the above
      plan was $88,024 and $34,919  for
      the
      nine months, and was $41,063 and $11,867 for the three months ended September
      30, 2007 and 2006, respectively.





**Note
      6 - Statutory Common Welfare Fund**





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




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 $726,785 and $538,054 to the reserve for the statutory
      surplus reserve and welfare fund for the nine months ended September 30, 2007
      and 2006, respectively.




16


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





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





Income
      taxes paid amounted to $1,955,424 and $154,830 for the nine months ended
      September 30 2007 and 2006 and for the three months ended September 30, 2007
      and
      2006 amounted to $477,789 and $25,694, respectively.





**Note
      8 - Earnings Per Share**





Earnings
      (loss) per share for the nine months ended September 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 three
      and
      nine months ended September 30, 2007 and 2006:





**Three
                Months Ended**
              **September
                30,**2007
            
            2006**Basic
                earning per share**Net
                income
            
            $
            1,961,662
            
            $
            2,203,786Weighted
                shares outstanding-Basic
            
            
            27,122,196
            
            
            23,931,197Earnings
                per share-Basic
            
            $
            0.07
            
            $
            0.09**Diluted
                earning per share**Net
                income
            
            $
            1,961,662
            
            $
            2,203,786Weighted
                shares outstanding-Basic
            
            
            27,122,196
            
            
            23,931,197Effect
                of diluted securities-Warrants
            
            
            164,090
            
            
            -Weighted
                shares outstanding-Diluted
            
            
            27,286,286
            
            
            23,931,197Earnings
                per share -Diluted
            
            $
            0.07
            
            $
            0.09





17


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      8 - Earnings Per Share**  **(continued)**





**Nine
                Months Ended**
              **September
                30,**2007
            
            2006**Basic
                earning per share**Net
                income
            
            $
            6,816,997
            
            $
            3,541,635Weighted
                shares outstanding-Basic
            
            
            25,191,521
            
            
            23,759,285Earnings
                per share-Basic
            
            $
            0.27
            
            $
            0.15**Diluted
                earning per share**Net
                income
            
            $
            6,816,997
            
            $
            3,541,635Weighted
                shares outstanding-Basic
            
            
            25,191,521
            
            
            23,759,285Effect
                of diluted securities-Warrants
            
            
            31,944
            
            
            -Weighted
                shares outstanding-Diluted
            
            
            25,223,465
            
            
            23,759,285Earnings
                per share -Diluted
            
            $
            0.27
            
            $
            0.15





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





For
      the
      nine months ended September 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 owed to these vendors at September 30, 2007.
      Except for Shaanxi Natural Gas Co Ltd, the other two vendors have long-term
      agreements with the Company without minimum purchase requirements. The Company
      has had annual agreements with Shaanxi Natural Gas Co Ltd to purchase certain
      amount of natural gas. For the year ended December 31, 2007, the minimum
      purchase was 12.93 million cubic meters. Contracts are renewed on an annual
      basis. The Company’s management reports that it does not expect any issues or
      difficulty in continuing to renew the supply contracts with these vendors going
      forward. Price points for natural gas are strictly controlled by the government
      and have remained stable over the past 3 years.





For
      the
      nine months ended September 30, 2007, two suppliers account for 16.7% and 8.7%
      of the total equipment purchased by the Company, and for the nine months ended
      September 30, 2006, two suppliers account for 42.2% and 17.0% of the total
      equipment purchased by the Company. Payables to those two suppliers accounted for
      2.6
      % of the
      total Payables at September 30, 2007.




18


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


**NOTES
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**


**AS
      OF SEPTEMBER 30, 2007**


(UNAUDITED)





**Note
      9 - Current Vulnerability Due to Certain Concentrations
      (continued)**





Four
      customers accounted for 35%, 21%, 12% and 12% of the Company’s installation
      revenue for the nine months ended September 30, 2007 and one customer accounted
      for 36.1% of the Company’s construction revenue for the nine months ended
      September 30, 2006. Receivables from one customer accounted for 29.8% of the
      total account receivables at September 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 entered into series of long term lease agreements with outside parties
      to lease land use right to the self-built Natural Gas filing stations located
      in
      the PRC. The agreements have terms ranging from 10 to 30 years. The Company
      makes annual prepayment for most lease agreements. The minimum future payments
      for leasing land use rights is as follows,




Three
                months ended December 31, 2007
            
            $
            0Year
                ended December 31, 2008
            
            
            129,440Year
                ended December 31, 2009
            
            
            107,307Year
                ended December 31, 2010
            
            
            129,440Year
                ended December 31, 2011
            
            
            107,307Thereafter
            
            
            1,272,506Total
            
            $
            1,746,000




For
      the
      nine months ended September 30, 2007 and 2006, the land use right lease expenses
      were $142,579 and $44,376, respectively, and the land use right lease expense
      amounted to $75,044 and $16,827 for the three months ended September 30, 2007
      and 2006, respectively.




19


**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**




China
        Natural Gas, Inc. (formerly Coverture International Inc.) was incorporated
        in
        the state of 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 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 Conventure’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 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 value 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, Conventure 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 for 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 variable interest
        entity 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.




20





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 (20 stations
                in service as of September 30, 2007 and three additional stations
                are
                expected to be completed by the end of fourth quarter of
                2007);





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





·
            Distribution
                and sale of natural gas to residential, commercial and industrial
                customers through Company-owned pipelines. As of September 30, 2007,
                the
                Company distributed and sold natural gas to approximately 83,979
                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: (i)
      piped
      natural gas; and (ii) CNG.





**CONSOLIDATED
      RESULTS OF OPERATIONS**





**Comparing
      Three Months Ended September 30, 2007 and 2006:**





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





September
                30,
              2007
            
            September
                30,
              2006Revenues
            
            $
            9,078,088
            
            $
            6,514,291Cost
                of Revenues
            
            
            4,758,250
            
            
            3,278,886Operating
                Expenses
            
            
            1,967,600
            
            
            636,647Income
                from Operations
            
            
            2,352,238
            
            
            2,598,758Net
                Income
            
            $
            1,961,662
            
            $
            2,203,786





*Revenues:* We
      generated approximately 82% of our revenues in the three months ended September
      30, 2007 from the sale of natural gas and approximately 18% of our revenues
      from
      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 79.4% of our total revenues in the three months
      ended September 30, 2007, or approximately $7,211,085, 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 15.4% of our total revenues in the three months
      ended September 30, 2007, or approximately $1,393,207, including both natural
      gas sales and installation fees. Sales of natural gas to third party owned
      filling stations accounted for approximately 0.28 %
      of our
      total revenues in the three months ended September 30, 2007, or approximately
      $25,168. The Company expects installation revenues to increase on both an actual
      basis and as a percentage of revenue in 2007.




21





As
      of
      September 30, 2007, the Company had approximately 83,979 pipeline customers,
      an
      increase of approximately 16,074 customers over the same period in 2006, and
      had
      constructed 20 filling stations, an increase of 9 stations over the same period
      in 2006. In
      the
      fourth quarter of 2007, the Company expects to add up to 10,000 pipeline
      customers and 3 additional filling stations, which the Company estimates will
      increase sales of natural gas by 4.1 million cubic meters.





We
      had
      total revenues of $9,078,088 for the three months ended September 30, 2007,
      an
      increase of $2,563,797 or 39.4%, compared to $6,514,291 for the three months
      ended September 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 67,905 in the three months
      ended September 30, 2006 to approximately 83,979 in the three months ended
      September 30, 2007.





New
      pipeline customers pay approximately 60% of the installation costs to connect
      to
      our pipeline system up front and the balance is payable as part of their monthly
      natural gas bill. During the three months ended September 30, 2007, our
      installation revenues increased approximately 25.5% over the same period in
      2006
      and our sales of natural gas increased approximately 42.8% over the previous
      year. Four customers accounted for approximately 93.7 % of the Company's
      installation revenue for the three months ended September 30, 2007.





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





Cost
      of
      revenues in the three months ended September 30, 2007 was $4,758,250, an
      increase of $1,479,364 or approximately 45% over the same period in 2006. Cost
      of natural gas increased by approximately 46% to $4,020,039 in the three months
      ended September 30, 2007, as compared with $2,752,594 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 installation costs
      increased in the three months ended September 30, 2007 by approximately 40%
      to
      $738,211, as compared with $526,292 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 September 30, 2007 remained relatively constant compared
      to
      2006.





*Gross
      profit* :
      The
      Company earned a gross profit of $4,319,838 for the three months ended September
      30, 2007, an increase of $1,084,433 or approximately 33.5%, compared to
      $3,235,405 for the three months ended September 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, decreased to approximately 48% for the
      three months ended September 30, 2007, from approximately 50% for the three
      months ended September 30, 2006. The decrease in gross margin is primarily
      due
      to a decreased portion of the total gross margin represented by CNG filing
      stations as compared to the same period in 2006.




22





*Operating
      expenses:* The
      Company incurred operating expenses of $1,967,600 for the three months ended
      September 30, 2007, an increase of $1,330,953 or approximately 209%, compared
      to
      $636,647 for the three months ended September 30, 2006. Our operating expenses
      increased primarily as a result of expenses related to the operation of three
      new filling stations in this quarter, initial cost of liquefied
      natural gas (“LNG”) project, consulting cost in relation to fund raising,
      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 September 30, 2007 as we increased our efforts to obtain new
      residential and commercial customers and attract customers to our filling
      stations by hiring more sales persons, purchasing more tankers and using more
      utilities.





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
      three months ended September 30, 2007, two suppliers accounted for 28.4% of
      the
      total equipment we purchased for installation activities. We believe that as
      a
      result of our relationships within the construction industry and the
      construction equipment vendor community, and the availability of other vendors
      to supply the construction equipment and materials, the loss of any one of
      these
      two vendors would not have a material adverse effect on our operations.





Income
      tax was $445,463 for the three months ended September 30, 2007, as compared
      to
      $393,226 for the three months ended September 30, 2006. The increase in income
      tax was attributed to the growth of installation fees and the sale of natural
      gas.





*Net
      Income* :
      Net
      income decreased to $1,961,662 for the three months ended September 30, 2007,
      a
      decrease of $242,124 or approximately 11% from $2,203,786 for the three months
      ended September 30, 2006. Decrease in net income is attributed to increased
      operating expenses. The Company expects installation revenues to increase on
      both an actual basis and as a percentage of revenue. In
      the
      fourth quarter of 2007, the Company expects to add up to 10,000 pipeline
      customers and add additional 3 filling stations, which the Company estimates
      will increase sales of natural gas by 4.1 million cubic meters.





23





**Comparing
      nine months ended September 30, 2007 and 2006:**





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





September
                30,
              2007
            
            September
                30,
              2006Revenues
            
            $
            24,094,974
            
            $
            12,025,688Cost
                of Revenues
            
            
            12,114,666
            
            
            6,231,027Operating
                Expenses
            
            
            3,926,507
            
            
            1,617,101Income
                from Operations
            
            
            8,053,801
            
            
            4,177,560Net
                Income
            
            $
            6,816,997
            
            $
            3,541,635





*Revenues:*  We
      generated approximately 80% of our revenues in the nine months ended September
      30, 2007 from the sale of natural gas and approximately 20% of our revenues
      from
      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 75.6% of our total revenues in the nine months
      ended
      September 30, 2007, or approximately $18,358,743, 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 22.3% of our total revenues in the nine months
      ended
      September 30, 2007, or approximately $5,411,225, including both natural gas
      sales and installation fees. Sales of natural gas to third party-owned filling
      stations accounted for approximately 0.32% of our total revenues in the nine
      months ended September 30, 2007, or approximately $78,580. The Company expects
      installation revenues to increase on both an actual basis and as a percentage
      of
      revenue in 2007.





As
      of
      September 30, 2007, the Company had approximately 83,979 pipeline customers,
      an
      increase of approximately 16,074 customers over the same period in 2006, and
      had
      constructed 20 filling stations, an increase of 9 stations over the same period
      in 2006. In the
      fourth quarter of 2007, the Company expects to add up to 10,000 pipeline
      customers and add additional 3 filling stations, which the Company estimates
      will increase sales of natural gas by 4.1 million cubic meters.





We
      had
      total revenues of $24,094,974 for the nine months ended September 30, 2007,
      an
      increase of $12,069,286 or approximately 100%, compared to $12,025,688 for
      the
      nine months ended September 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 67,905 in the
      nine months ended September 30, 2006 to approximately 83,979 in the nine months
      ended September 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 nine months ended September 30, 2007, our
      installation revenues increased approximately 41% over the same period in 2006
      and our sales of natural gas increased approximately 124% over the previous
      year. Four customers accounted for approximately 80.3% of the Company's
      installation revenue for the nine months ended September 30, 2007.




24





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





Cost
      of
      revenues in the nine months ended September 30, 2007 was $12,114,666, an
      increase of $5,883,639 or approximately 94% over the same period in 2006. Cost
      of natural gas increased by approximately 105% to $9,975,932 in the nine months
      ended September 30, 2007, as compared with $4,862,202 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 installation costs
      increased in the nine months ended September 30, 2007 by approximately 56%
      to
      $2,138,734, as compared with $1,368,825 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
      nine months ended September 30, 2007 remained relatively constant compared
      to
      2006.





*Gross
      profit* :
      The
      Company earned a gross profit of $11,980,308 for the nine months ended September
      30, 2007, an increase of $6,185,647 or approximately 107%, compared to
      $5,794,661 for the nine months ended September 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
      nine
      months ended September 30, 2007, from approximately 48% for the nine months
      ended September 30, 2006. The increase in gross margin is primarily due to
      increased portion of the total gross margin represented by CNG filing stations
      as compared to the same period in 2006.





*Operating
      expenses:* The
      Company incurred operating expenses of $3,926,507 for the nine months ended
      September 30, 2007, an increase of $2,309,406 or approximately 143%, compared
      to
      $1,617,101 for the nine months ended September 30, 2006. Our operating expenses
      increased primarily as a result of expenses related to the 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 nine months ended September 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
      nine months ended September 30, 2007, two suppliers accounted for 16.7% and
      8.7%
      of the total equipment we purchased for installation activities. We believe
      that as a result of our relationships within the construction industry and
      the
      construction equipment vendor community, and the availability of other vendors
      to supply the construction equipment and materials, the loss of any one of
      these
      two vendors would not have a material adverse effect on our operations.




25





Income
      tax was $1,317,878 for the nine months ended September 30, 2007, as compared
      to
      $633,005 for the nine months ended September 30, 2006. The increase in income
      tax was attributed to the growth of installation fees and the sale of natural
      gas.





*Net
      Income* :
      Net
      income increased to $6,816,997 for the nine months ended September 30, 2007,
      an
      increase of $3,275,362 or approximately 93% from $3,541,635 for the nine months
      ended September 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 10,000 pipeline
      customers and add additional 3 filling stations, which the Company estimates
      will increase sales of natural gas by 4.1 million cubic meters.





**Liquidity
      and Capital Resources**





As
      of
      September 30, 2007, the Company had $20,677,432 of cash and cash equivalents
      on
      hand compared to $5,031,991 of cash and cash equivalents as of September 30,
      2006.





Cash
      flows provided by operating activities was $8,030,806 for the nine months ended
      September 30, 2007 compared to net cash used in operations of $922,946 in the
      corresponding period last year. The primary reason for the change is attributed
      to the increase in net income of 6,816,997.





Cash
      outflows for investing activities increased from $4,669,265 in the nine months
      ended September 30, 2006 to $6,838,721 for the same period in 2007 primarily
      because the Company purchased more equipment in 2007 in anticipation of its
      business growth.





Cash
      inflows for financing activities increased from $9,892,854 in the nine months
      ended September 30, 2006 to $13,823,467 for the same period in 2007 primarily
      because the Company issued 4,615,385 shares of stock for $15,000,000 and paid
      $1,176,533 in offering costs.





The
      Company expects to add 3
      additional CNG filling stations by the end of fourth quarter of 2007. The
      Company expects to invest between $2.5 million and $3.0 million in new stations,
      and the funds for these investing activities will primarily come from the
      Company's operating and financing cash flows.





On
      August
      2, 2007, the Company entered into a Securities Purchase Agreement with investors
      to sell 4,615,385 shares of the Company’s common stock and attached warrants to
      purchase up to 692,308 shares of Common stock for $3.25 per share (or an
      aggregate purchase price of $15,000,000) and for total net proceeds of
      $13,823,467. Warrants are exercisable for a period of five years with exercise
      price of $7.79 per share. In connection with the above-mentioned offering,
      the
      Company entered into a finance representation agreement with a placement agent.
      Pursuant to the agreement, the Company agreed to pay the agent $10,000 and
      issued a warrant to acquire 75,000 shares of the Company’s common stock. In
      addition, the Company paid $1,050,000 fee (7% of the gross proceeds).





The
      Company expects to require financing of $40 million to $80 million in order
      to
      complete its proposed LNG Project whose estimated construction period is two
      years. After completion, the company expects to reach other populous cities
      and
      provinces far away from Shaanxi and Henan provinces by LNG vehicles.




26





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





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





**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      entered in to a foreign currency forward contract in September 2007 and please
      refer to footnote under “Derivative Accounting” for more details. We also
      entered into series of long term lease agreements with outside parties to lease
      land use right to the self-built natural gas filling stations located in the
      PRC, and please refer to footnote 10 to the financial statements for details.
      We
      have purchase agreements with several natural gas suppliers and please see
      footnote 9 for more explanations. We do not have any other off-balance
      sheet arrangements that have or are reasonably likely to have a current or
      future effect on our financial condition, changes in financial condition,
      revenues or expenses, results of operations, liquidity, capital expenditures
      or
      capital resources that are material to our investors.





**CRITICAL
      ACCOUNTING POLICIES**





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





Use
      of
      Estimates





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




27





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





Long-Lived
      Assets




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





Revenue
      Recognition





Our
      revenue recognition policies are in compliance with Staff Accounting Bulletin
      (SAB) 104. Revenue is recognized when services are rendered to customers, when
      a
      formal arrangement exists, the price is fixed or determinable, the delivery
      is
      completed, no other significant obligations of the Company exist and
      collectibility is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue. Revenue from gas sales is recognized when gas is pumped through
      pipelines to the end users. Revenue from installation of pipelines is recorded
      when the contract is completed and accepted by the customers. The construction
      contracts are usually completed within one to two months time. Revenue from
      repairing and modifying vehicles is recorded when service are rendered to and
      accepted by the customers.





Unearned
      Revenue





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





Recent
      Pronouncements





In
      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, 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.




29





**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 Liquefied Natural
      Gas (“LNG”) Project.




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




30





**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.




31





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




The
      value
      of the RMB fluctuates and is subject to changes in the People's Republic of
      China political and economic conditions. Since July 2005, the conversion of
      RMB
      into foreign currencies, including USD, has been based on rates set by the
      People's Bank of China which are set based upon the interbank foreign exchange
      market rates and current exchange rates of a basket of currencies on the world
      financial markets. As of September 30, 2007, the exchange rate between the
      RMB
      and the United States dollar was 7.50 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.




32




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




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





**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.





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




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




33




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




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




The
      PRC
      government regulates the natural gas industry including foreign ownership of,
      and the licensing and permit requirements pertaining to, companies in the
      natural gas industry. These laws and regulations are relatively new and
      evolving, and their interpretation and enforcement involve significant
      uncertainty. As a result, in certain circumstances it may be difficult to
      determine what actions or omissions may be deemed to be a violation of
      applicable laws and regulations. Issues, risks and uncertainties relating to
      PRC
      government regulation of the bio-pharmaceutical industry include the
      following:





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





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





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




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




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




34


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




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




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





**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.




35




**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.**





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.
      If
      our stock trades below $5.00 per share consistently, our securities may be
      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.




36




**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.




37





**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
      third quarter of 2007 that have materially affected, or are reasonably likely
      to
      materially affect, the Company's internal control over financial
      reporting.




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





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





None





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





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





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





None.





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





Not
      applicable





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





None





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





(a)
            Exhibits





**Exhibit
                Number**
            
            **Description
                of Exhibit**3.1
            
            Certificate
                of Amendment to the Certificate of Incorporation (incorporated by
                reference to Exhibit 3.2 to the Company’s Form SB-2 filed on November 2,
                2007)10.1
            
            Securities
                Purchase Agreement dated as of August 2, 2007 by and between the
                Company
                and the Investors named therein and form of Warrants (incorporated
                by
                reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 8,
                2007)




38




10.2
            
            Registration
                Rights Agreement dated as of August 2, 2007 by and between the Company
                and
                the Investors named therein (incorporated by reference to Exhibit
                10.2 to
                the Company’s Form 8-K filed on August 8, 2007)31.1
            
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
                promulgated under the Securities and Exchange Act of 1934, as
                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)




39


**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.November
                14, 2007
            By:
            /s/ Qinan
                JiQinan
                Ji
              Chief
                Executive Officer
              (Principal
                Executive Officer)




November
                14, 2007
            By:
            /s/ Xiaogang
                ZhuXiaogang
                Zhu
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)




40