**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549




**FORM
      10-KSB**




**Amendment
      No. 1**




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




For
      the
      fiscal year ended December 31, 2006




**o
      TRANSITION REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT** **OF
      1934**




*Commission
      File Number: 000-31539*




**CHINA
      NATURAL GAS, INC.**


(Name
      of
      small business issuer in its charter)





Delaware
            
            98-0231607State
                or other jurisdiction of
            
            I.R.S.
                Employerincorporation
                or organization
            
            Identification
                Number




19th
      Floor, Building B, Van Metropolis


Tang
      Yan
      Road, Hi-Tech Zone


Xian,710065,
      Shaanxi Province


China


(Address
      of principal executive office)




Issuer's
      telephone number: 86-29-88323325




Securities
      registered under Section 12(b) of the Exchange Act: None




Securities
      registered under Section 12(g) of the Exchange Act:


Common
      Stock, $.0001 par value per share




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x




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


The
      issuer's revenues for the fiscal year ended December 31, 2006 were
      $18,828,790.




The
      number of shares of the Registrant's common stock, par value $0.0001 per share,
      outstanding as of April 13, 2007 held by non-affiliates was 18,278,587 shares.
      All executive officers and directors of the registrant have been deemed, solely
      for the purpose of the foregoing calculation, to be "affiliates" of the
      registrant. The aggregate market value of the common equity held by
      non-affiliates as of April 13, 2007 was $38,750,604.




As
      of
      April 13, 2007, there were 24,210,183 shares of the issuer's common stock,
      $0.0001 par value, outstanding.




Transitional
      Small Business Disclosure format (Check one): YES o NO x









**EXPLANATORY
      STATEMENT**





This
        Amendment No. 1 to Form 10-KSB, which amends the Company’s Form 10-KSB for the
        years ended December 31, 2006 and 2005, filed with the Securities and Exchange
        Commission (the “SEC”) on April 17, 2007, is being filed to do the
        following:





(i)
              Revised
                  the disclosure regarding the Company’s organizational history and the
                  disclosure in Footnote 1 to the Company’s Consolidated Financial
                  Statements, in Item 1, Description of Business and in Item 6. Management’s
                  Discussion and Analysis or Plan of Operations to clarify that Xian
                  Xilan
                  Natural Gas Co. Ltd. is a 100% Variable Interest Entity of the
                  Company,
                  which financial results are consolidated with those of the Company’s in
                  accordance with Financial Interpretation No. 46R, Consolidation
                  of
                  Variable Interest Entities ("FIN 46R");
                  and




(ii)
              Include
                  additional risk factors arising out of the Variable Interest Entity
                  relationship between the Company and Xian Xilan Natural Gas Co.
                  Ltd.




1


**FORM
      10-KSB**




**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**




**INDEX**




PagePART
              I
            
            
            4ITEM
                1.
            DESCRIPTION
                OF BUSINESS
            
            4ITEM
                2.
            DESCRIPTION
                OF PROPERTY
            
            20ITEM
                3.
            LEGAL
                PROCEEDINGS
            
            20ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITYHOLDERS
            
            21PART
              II
            
            
            21ITEM
                5.
            MARKET
                FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
                BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
            
            21ITEM
                6.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            
            22ITEM
                7.
            FINANCIAL
                STATEMENTS
            
            30ITEM
                8.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            
            31ITEM
                8A.
            CONTROLS
                AND PROCEDURES
            
            31ITEM
                8B.
            OTHER
                INFORMATION
            
            31PART
                III
            
            
            31ITEM
                9.
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                SECTION
                16(a) OF THE EXCHANGE ACT
            
            31ITEM
                10.
            EXECUTIVE
                COMPENSATION
            
            35ITEM
                11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS
            
            36ITEM
                12.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS
            
            37ITEM
                13.
            EXHIBITS
            
            37ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            
            38




2


**STATEMENT
      REGARDING FORWARD-LOOKING STATEMENTS**




In
      this
      annual report, references to "China Natural Gas," "CHNG," "the Company," "we,"
      "us," and "our" refer to China Natural Gas, Inc.




Except
      for the historical information contained herein, some of the statements in
      this
      Report contain forward-looking statements that involve risks and uncertainties.
      These statements are found in the sections entitled "Business," "Management's
      Discussion and Analysis or Plan of Operation," and "Risk Factors." They include
      statements concerning: our business strategy; expectations of market and
      customer response; liquidity and capital expenditures; future sources of
      revenues; expansion of our proposed product line; and trends in industry
      activity generally. In some cases, you can identify forward-looking statements
      by words such as "may," "will," "should," "expect," "plan," "could,"
      "anticipate," "intend," "believe," "estimate," "predict," "potential," "goal,"
      or "continue" or similar terminology. These statements are only predictions
      and
      involve known and unknown risks, uncertainties and other factors, including,
      but
      not limited to, the risks outlined under "Risk Factors," that may cause our
      or
      our industry's actual results, levels of activity, performance or achievements
      to be materially different from any future results, levels of activity,
      performance or achievements expressed or implied by such forward-looking
      statements. For example, assumptions that could cause actual results to vary
      materially from future results include, but are not limited to: our ability
      to
      successfully develop and market our products to customers; our ability to
      generate customer demand for our products in our target markets; the development
      of our target markets and market opportunities; our ability to manufacture
      suitable products at competitive cost; market pricing for our products and
      for
      competing products; the extent of increasing competition; technological
      developments in our target markets and the development of alternate, competing
      technologies in them; and sales of shares by existing shareholders. Although
      we
      believe that the expectations reflected in the forward-looking statements are
      reasonable, we cannot guarantee future results, levels of activity, performance
      or achievements. Unless we are required to do so under US federal securities
      laws or other applicable laws, we do not intend to update or revise any
      forward-looking statements.





3





**PART
      I**




**ITEM
      1. DESCRIPTION OF BUSINESS**




**Organizational
      History**





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





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





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




**Overview
      of our Business**




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




We
      operate three primary business lines:




·
              Distribution
                  and sale of compressed natural gas (CNG) through Company-owned
                  CNG filling
                  stations for hybrid (natural gas/gasoline) powered vehicles (17
                  stations
                  as of March 21, 2007);




4


·
              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 March 31, 2007,
                  the
                  Company distributed and sold natural gas to approximately 75,000
                  homes and
                  businesses.




We
      buy
      all of the natural gas that we sell and distribute to our customers from
      government owned enterprises. We do not mine or produce any of our own natural
      gas and have no plans to do so during the next 12 months. The natural gas that
      we buy is available in two forms: (1) piped natural gas; and (ii)
      CNG.




We
      believe that the Company is the first China based natural gas company publicly
      traded in the US capital markets (stock symbol: CHNG.OB).




**Our
      Products, Services and Customers**




**Our
      Pipeline Distribution System**




We
      own
      and operate a network of approximately 120 km of high pressure pipeline in
      the
      Xian area. Our pipeline network connects with a high pressure pipeline network
      from the government operated Shaanxi Natural Gas Company. This pipeline supplies
      natural gas directly from a gas field in the northern region of the province
      to
      the high pressure pipes that then feed into citygate "let-down" stations at
      HongQing and Lantian County. At HongQing and LanTian the pressure is reduced
      and
      transported through a network of low-pressure distribution pipes to supply
      our
      residential, commercial and industrial customers in Lantian County, and the
      Lintong and Baqiao Districts. The spur also feeds a compressor station at
      HongQing where CNG is collected by tankers to supply CNG filling
      stations.




Each
      of
      our pipeline customers is physically connected to our pipeline network through
      Company installed and maintained connection equipment and natural gas usage
      monitoring systems. We generate additional fees from the construction and
      installation of connections to our natural gas distribution system.




We
      believe that we are currently the sole authorized provider of natural gas to
      residential customers in our service area and the only privately owned company
      in the Shaanxi province to own and operate this type of high pressure
      pipeline.




**CNG
      Filling Stations**




We
      also
      distribute CNG as a vehicular fuel through our own and through third party-owned
      CNG filling stations. We currently own and operate thirteen natural gas filling
      stations in the Xian metropolitan area and four natural gas filling stations
      in
      Henan province. CNG is sold to taxis and buses that operate on CNG
      technology.




Currently,
      we purchase natural gas for 1.26 RMB/cubic meter and sell each cubic meter
      for
      2.65RMB net of value added taxes. We can construct a CNG filling station in
      approximately 60 days for a cost of approximately US$800,000. As of March 17,
      2007, we were in the process of constructing seven additional CNG filling
      stations. We continue to evaluate additional sites for CNG filling stations
      in
      the Xian metropolitan area. In July 2005, we purchased a Compressor Station
      located near our pipeline that will allow us to compress and transport CNG
      via
      truck to CNG filling stations.




5


**Our
      CNG Market**




We
      estimate that currently there are approximately 50,000 vehicles using CNG in
      the
      Xian area. PRC government statistics indicate that there are currently 5,000
      buses and 20,000 taxis using CNG in Xian. Each bus uses an average of 70 cubic
      meters of CNG per day and taxis use an average of 30 cubic meters of CNG per
      day
      (source: Xian Clean Fuel Vehicles Commission 2005).




The
      PRC
      government estimates in its Eleventh Five Year Plan (2006-2010) that current
      total demand for CNG as a vehicular fuel in the Xian area is approximately
      one
      million seventy thousand (1,070,000) cubic meters per day. The PRC government's
      clean energy policy as expressed in the proposal for the Eleventh Five Year
      Plan
      (2006-2010) encourages the use of CNG as a vehicular fuel. In addition,
      currently CNG is cheaper than gasoline. We estimate that the average CNG station
      in Xian pumps approximately 15,000 cubic meters of CNG per day and in November
      2006, based on a survey we conducted, there were 53 CNG filling stations in
      Xian. Therefore, we estimate that approximately 800,000 cubic meters of CNG
      is
      pumped per day, a figure well below estimated total demand. As a result, we
      believe that there is significant unmet demand for CNG in the Xian area and
      that
      the market for CNG vehicular fuel provides us with the greatest opportunities
      for profit and growth.




We
      believe that our vertically integrated operations and our proprietary pipeline
      and supply contracts gives us greater access to CNG supplies and customers
      and
      uniquely position us to become a major supplier of CNG vehicular fuel in the
      Xian area.




**Our
      Pipeline Network Customers**




As
      of
      December 31, 2006, we had approximately 75,000 customers, including residential,
      industrial and commercial customers. We are continuing to expand our customer
      base in Xian's newly developed business and residential areas including the
      districts of Xihan and Chanliu. Our industrial customers, including the Xiwei
      Aluminum Company and the Hungtian Company, use natural gas as a raw material
      for
      their production process. We are not dependent upon any single customer or
      group
      of customers for a material portion of our natural gas sales or
      revenues.




Our
      pipeline customers purchase natural gas by means of prepaid cards that can
      be
      inserted into the connection equipment to initiate gas flow.




6


We
      are
      currently seeking to expand pipeline distribution to the Shangluo and Ankang
      areas of Shaanxi province. In September 2005, we submitted applications to
      local
      government authorities for approval to supply the Shanglou and Ankang areas
      on
      an exclusive basis. Approval is still pending and can take up to three years.
      As
      a result, we cannot be certain if we will receive such government approval
      at
      all or, if approved, when we will receive such government approval. However,
      we
      believe that if we receive government approval, the approval would give us
      the
      exclusive right to provide natural gas to residential, commercial and industrial
      customers in those areas.




**Our
      Proposed Liquefied Natural Gas Project**




During
      2007, we plan to move into the processing, distribution and sale of liquefied
      natural gas (LNG). We believe that adding LNG to our product offerings will
      expand our geographic sales footprint and increase revenues and
      profitability.




Both
      CNG
      and LNG are natural gas that has been compressed into canisters to enable
      transportation, usually by truck, to the point of distribution or consumption.
      Typically CNG is compressed at 200 times atmospheric pressure and can be
      transported at normal temperatures to distances of up to 300 km. LNG is
      typically compressed at up to 625 times atmospheric pressure and must be
      transported at sub-zero degree temperatures. LNG can be transported over greater
      distances by gas tanker truck. LNG is compressed at much higher pressure and
      transported at much lower temperature than CNG. Therefore, the cost of
      compression and processing of LNG is higher than that of CNG, although the
      LNG
      transportation costs are lower.




We
      plan
      to construct an LNG processing and distribution plant in Jinbiang, Shananxi
      province (the "LNG Project"). We estimate that the construction of the LNG
      Project will cost approximately US$40 million (RMB 309 million). If we can
      obtain financing for the project by the end of 2007, we believe that the plant
      can be completed by June 2008. We have obtained the required permits and
      approvals to build the LNG plant from local government authorities; however,
      we
      will require approval from the Shaanxi Development and Reform Commission to
      begun LNG production at the plant.




**Our
      Subsidiaries**




On
      October 24, 2006, we formed a wholly-owned subsidiary, Xilan Liquefied Natural
      Gas Ltd., a limited liability company organized under the laws of PRC to
      administer the production and sales of LNG.




In
      2006,
      the Company, through its wholly-owned subsidiary, Xilan Liquefied Natural Gas
      Co., Ltd, received a letter from PetroChina Company Limited pursuant to which
      PetroChina agreed in principle, subject to the negotiation and execution of
      a
      final contract, to supply up to 150,000,000 cubic meters of natural gas annually
      upon the completion of our LNG project.




In
      2006,
      we formed a wholly-owned subsidiary, Xian Xilan Natural Gas Equipment Ltd.,
      a
      limited liability company organized under the laws of PRC ("Xilan Equipment"),
      to provide equipment to our own CNG filling stations.




7


**Suppliers**




During
      2006, we had only one natural gas supplier, the Shaanxi Natural Gas Co., Ltd.,
      a
      government owned enterprise. In the past, contracts were renewed on an annual
      basis. However, as the volume of usage has increased, Shaanxi Natural Gas has
      revised its policies, and contract terms are now six months and subject to
      review prior to renewal. The price of natural gas is strictly controlled by
      the
      government and has remained stable over the past 3 years.




In
      2006,
      we signed a three-year contract with Zhengzhou Zhongyou Hengran Petroleum Gas
      Co., Ltd., a branch company of China Petrochemical, to supply 350,000 cubic
      meters of CNG daily and to supply CNG for a filling station built by the Company
      in Henan province.




On
      October 19, 2006, we received a letter from PetroChina Company Limited pursuant
      to which PetroChina agreed in principle to supply up to 150 million cubic meters
      of LNG annually to our subsidiary subject to the negotiation of a final
      agreement once our LNG plant is built.




We
      do not
      expect any difficulty in continuing to renew our supply contracts during the
      next 12 months.




**PRC
      Natural Gas Industry Overview**




China's
      rapidly expanding economy is stretching the limits of its energy resources.
      Currently, only 3% of China's total energy usage is natural gas, while the
      world's average consumption of natural gas is 24% of total energy usage.
      (source: US Energy Information Administration ("EIA"), August 2005) Over the
      next 5 years, China's use of natural gas is expected to significantly increase.
      In 2005, China's domestic reserve of natural gas was estimated to be 53.3
      trillion cubic feet. (source: EIA August 2005). The country's largest reserves
      are located in western and north central China.




In
      order
      to meet the demand for natural gas, the PRC government has encouraged private
      companies to invest in and build the necessary transportation, distribution
      and
      sale infrastructure for natural gas. On December 27, 2002, the Ministry of
      Construction issued a memorandum stating that regulation of the public utility
      industry (including natural gas distribution) should be liberalized. It also
      stated that foreign and private investment participation should be encouraged
      and welcomed. The memorandum encouraged private investment in the sector and
      provided a legal framework for private urban natural gas
      distribution.




**Sources
      of Energy**




Although
      the PRC is the world's second largest energy consumer, its energy consumption
      per capita is lower than most other countries. This is largely because large
      portions of the Chinese population live in rural areas where access to energy
      sources is limited and the necessary infrastructure is still relatively
      underdeveloped. Energy consumption is concentrated in the urban areas where
      there is greater access to energy sources.




Traditionally,
      the PRC has relied heavily on coal and crude oil as its primary energy sources.
      According to the China Statistical Yearbook, in 2004, coal, crude oil,
      hydro-electricity and natural gas accounted for 65.0%, 23.2%, 8.8% and 3%,
      respectively, of the PRC's total energy consumption. In 2003, the ratios were
      68.0%, 23.0%, 7.9% and 2.5% respectively. Traditionally, natural gas has been
      primarily used as a raw material for chemical fertilizer and to operate oil
      and
      gas fields. Accordingly, most natural gas is consumed for production of
      fertilizer. Only a little over 10% of natural gas is consumed as fuel.
      (Source:




The
      Institute of Energy Economics of Japan).




8


The
      PRC's
      heavy reliance on coal exceeds world consumption rates for the same period,
      which was 22.2% (Source: Energy Information Administration, U.S. Department
      of
      Energy). The use of coal, however, causes air pollution and other negative
      consequences to the environment. In the PRC, the heavy use of unwashed coal
      has
      led to large emissions of sulfur dioxide and particulate matter. An air
      pollution study conducted by the World Health Organization in 1998 showed that
      seven of the 10 most polluted cities in the world were located in the PRC.
      As
      such, there have been serious environmental concerns in many countries around
      the world, resulting in a global trend to reduce coal usage. In consideration
      of
      such trends, in 1996, the PRC presented a plan to raise the share of natural
      gas
      in the country's energy mix (Source: Ninth Five-Year Plan (1996-2000)). In
      many
      locations where natural gas supply is available, local governments often require
      all new residential buildings to install piped gas connections as a condition
      to
      the issuance of the construction or occupancy permits. Before 2000, local
      municipal governments controlled gas distribution. Since then, the industry
      has
      been opened to private companies, whose investments have fostered an increase
      in
      the use of natural gas in the PRC. The PRC government has deemed the natural
      gas
      industry a suitable industry for public and private investments.




**China's
      Natural Gas Reserves and Gas Pipeline Infrastructure**




Recognizing
      the serious problems caused by the heavy reliance on coal usage, the PRC
      government has aggressively moved to reduce coal usage by substituting coal
      with
      other, more environmentally friendly forms of fuel, such as natural gas. The
      PRC
      abounds in rich natural gas reserves, which are distributed among Xinjiang,
      Sichuan, and Shaanxi Provinces, as well as Inner Mongolia. According to the
      Second Oil and Gas Reserve Assessment published by the Geological and Mineral
      Resources Department of China, natural gas reserves in China are estimated
      to be
      38,000 billion cubic meters with 30,000 billion cubic meters onshore and 8,000
      billion cubic meters offshore. These reserves are sufficient for approximately
      74 to 120 years of Chinese consumption based on current consumption
      levels.




Because
      the PRC's largest reserves of natural gas are located in western and
      north-central China, it requires a significant investment in gas transportation
      infrastructure to carry natural gas to eastern cities and the rest of the PRC.
      Until recently, the PRC's natural gas consumption was limited to local natural
      gas producing provinces because of the lack of national long-distance pipeline
      infrastructure. Because natural gas transportation was limited to areas near
      production sites, an economical supply was possible.




The
      principal method for transportation of natural gas is by means of pipelines.
      In
      order to develop the natural gas industry, it is essential that the necessary
      pipeline infrastructure be in place so that natural gas is easily accessible
      for
      distribution at affordable rates.




9


In
      its
      Eleventh Five Year Plan (2006 - 2010), the PRC government re-affirmed its
      commitment to making significant investments in the expansion of the natural
      gas
      pipeline infrastructure over a period of 20 years.




**Demand
      for Natural Gas**




Currently,
      natural gas consumption in the PRC accounts for less than 3% of its total energy
      consumption. However, driven by environmental pressures, improvements in social
      infrastructure fueled by economic growth, and a stable energy supply, it is
      anticipated that the use of natural gas will grow very rapidly in the PRC over
      the next 20 years.




**Intellectual
      Property**




We
      have
      applied for a service mark on the "Xilan" name, which is used in connection
      with
      all our products and services.




**Research
      and Development**




We
      have
      not had and do not anticipate having any material research and development
      expenses. The funding for all research and development expenses is expected
      to
      come from operating cash flows.




**Governmental
      and Environmental Regulation**




To
      date,
      we comply with all registrations and requirements for the issuance and
      maintenance of all licenses required by the applicable governing authorities
      in
      China. These licenses include:




· Qualified
        Urban Fuel Operator Business License authorized by the Shaanxi Construction
        Bureau, the local office of the Ministry of Construction, effective from
        January
        2, 2004 to January 2, 2009.(License number SHAANRANZHI 166)


· License
        to Supply, Install Equipment and Maintain Gas Fuel Lines issued by the local
        Gas
        Fuels for Heating Bureau, an agency of the Ministry of Construction and the
        Xian
        Natural Gas Management Bureau. License number: XIRAN 136)


· Safety
      and Inspection Regulation
      for Special Equipment Safety Inspection Standards for High Pressure Pipeline
      and
      Technical Safety Inspection Regulations from the Shaanxi Quality and Technology
      Inspection Bureau for compressor stations and pressure storage tank system.
      (Approval letter reference: 2004SHAANGUOCHUHAN033)




· Annual
      Safety Inspection of
      Lightning Conductor Equipment approved by the Shaanxi Meteorology Bureau.
      (Certificate number 0005274) The Citygate and Compressor Stations are approved
      by the local office of the Ministry of Construction.




· Business
      license to operate
      Xilan Equipment effective from 02/22/2006 to 02/21/2021.




· Business
      license to operate
      Xilan Liquified Natural Gas effective from 10/24/2006 to
      10/23/2036.




10


Fuel
      service station standards are subject to regulation by the Ministry of
      Construction, the General Administration of Quality Supervision, and the Bureau
      of Inspection and Quarantine of the People's Republic of China. Upon
      satisfactory inspection of service stations, certificates will be
      issued.




Various
      standards must be met for filling stations, including the handling and storage
      of CNG, tanker handling, and compressor operation. The Local Ministry of
      Construction and the Gas Field Operation Department of the Municipal
      Administration Committee regulates these standards. The Municipal Development
      and Reform Commission, which issues certificates for the handling of dangerous
      chemical agents, carries out inspections.




Standards
      for the design and construction of filling stations must conform to GB50156-2202
      and technology standard BJJ84-2000.




**Competition**




The
      three
      largest state owned energy companies, CNPC (China National Petroleum
      Corporation) Group, SINOPEC (China Petroleum and Chemical Corporation Group),
      and CNOOC (China National Offshore Oil Corporation Group) are principally
      engaged in the upstream supply of energy and are material competitors in the
      exploration and transportation of oil and gas. They build much of the country's
      high-pressure pipeline infrastructure. Natural gas is distributed to smaller
      regional firms that redistribute the gas to the end user, either through lower
      pressure pipeline networks, or via tankers in the form of liquid natural gas
      (LNG).




With
      respect to our pipeline services, we compete with privately owned companies:
      Xinjiang Guanghui LNG Development Corporation Ltd. and Xin'Ao Gas Field Ltd.
      Xinjiang Guanghui LNG Development Corporation Ltd. is primarily involved in
      the
      transportation of LNG via tanker truck to storage facilities from natural gas
      wells. Xin'Ao Gas Field Ltd. is a publicly owned company traded on the Hong
      Kong
      Exchange that distributes natural gas via pipeline in 13 provinces and
      municipalities that have a combined population of 31 million. Neither Xinjiang
      Guanghui nor Xin'Ao is approved to supply natural gas to any area in which
      Xilan
      is currently operating.




With
      respect to our CNG filling station market, currently, there are approximately
      53
      CNG filling stations in Xian City. Thirteen of these stations are state owned
      enterprises. The other 40 stations are privately owned with the majority of
      these being single station operators. We believe that we effectively compete
      with the stations based upon our organization, experience and financial
      resources.




**Employees**




As
      of
      March 17, 2007, we had 310 employees in the following capacities: 6 in
      management; 18 in administrative; 87 in operations; 25 in sales; 38 in research
      and development; 16 in finance and 120 employees at the retail filling stations.
      We have not experienced any industrial actions and we have excellent
      relationships with our employees. We are not a party to any collective
      bargaining agreements.




11




**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.




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.




12


The
      occurrence of a significant event for which we are not fully insured or
      indemnified, and/or the failure of a party to meet its indemnification
      obligations, could materially and adversely affect our operations and financial
      condition. Moreover, no assurance can be given that we will be able to maintain
      adequate insurance in the future at rates it considers reasonable. To date,
      however, we have maintained adequate coverage at reasonable rates and have
      experienced no material uninsured losses.




Changes
      in the regulatory atmosphere could adversely affect our business.




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




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




We
      are
      dependent on the continued efforts of our senior management team. We do not
      currently have employment contracts with our senior executives. If, for any
      reason, our senior executives do not continue to be active in management, our
      business, or the financial condition of our Company, our results of operations
      could be adversely affected. In addition, we do not maintain life insurance
      on
      our senior executives and other key employees.




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




If
      in the
      future, we are not capable of generating sufficient revenues from operations
      and
      our capital resources are insufficient to meet future requirements, we may
      have
      to raise funds to continue the development, commercialization and marketing
      of
      our business. We must raise $40 million in order complete the LNG
      Project.




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




**Risks
      Related To The People's Republic of China**




**China's
      economic policies could affect our business.**





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




13




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




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




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




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




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




The
      value
      of the Renminbi fluctuates and is subject to changes in the People's Republic
      of
      China political and economic conditions. Since July 2005, the conversion of
      Renminbi into foreign currencies, including United States dollars, has been
      based on rates set by the People's Bank of China which are set based upon the
      interbank foreign exchange market rates and current exchange rates of a basket
      of currencies on the world financial markets. As of March 19, 2007, the exchange
      rate between the Renminbi and the United States dollar was 7.73
      Renminbi to every one United States dollar.




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




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




14


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




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




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




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




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




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




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




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




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.




15


**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.




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.





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.




16





**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.




17


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


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




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




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




18


**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.




19


**ITEM
      2. DESCRIPTION OF PROPERTY**




Our
      principal executive offices are located at 19th Floor, Building B, Van
      Metropolis Tang Yan Road, Hi-Tech Zone, Xian, 710065, Shaanxi Province, People's
      Republic of China. Our property consists of approximately 818 square meters,
      which is rented on an annual basis for $37,753.




We
      have
      additional properties located in Lantian county, the districts of Baqiao, Tong
      and Gaoxin in the city of Xian, and the cities of Jiyuan, Kaifung and
      Pindingshan, in Henan province. We own a 120km high-pressure underground
      pipeline network and two Citygate stations (terminals) with accompanying
      buildings and equipment. We lease the main office building where we are
      headquartered and all of our CNG filling station sites.




In
      February, 2006 we formed our 100%-owned subsidiary, Xilan Equipment, which
      maintains an office in the No. 3 Xianmen St., Lantian county, Xian, Shaanxi
      Province, China. The office consists of approximately 1001 sq. feet, with annual
      rental payment of $5,560.




On
      October 24, 2006, we formed our 100% owned subsidiary, Xilan Liquified Natural
      Gas Co., Ltd., which maintains an office in the Tongwang Road, Zhangjiapan
      Town,
      Jingbian County, China, China. The office consists of approximately 3,921 sq.
      feet, with annual rental payment of $7,036.




As
      of
      December 31, 2006, the Company owned 11 trucks and 13 tankers that the Company
      used to transport natural gas.




**Insurance**




The
      Company carries auto insurance on its vehicles and maintains workers
      compensation insurance for its filling station workers. The Company believes
      this insurance is adequate for its needs. The Company does not carry any product
      liability insurance or property insurance on its office buildings or other
      property.




We
      believe that current facilities are adequate for our current and immediately
      foreseeable operating needs. We do not have any policies regarding investments
      in real estate, securities or other forms of property.




**ITEM
      3. LEGAL PROCEEDINGS**




From
      time
      to time, we may become involved in various lawsuits and legal proceedings,
      which
      arise in the ordinary course of business. However, litigation is subject to
      inherent uncertainties, and an adverse result in these or other matters may
      arise from time to time that may harm our business. We are currently not aware
      of any such legal proceedings or claims that we believe will have, individually
      or in the aggregate, a material adverse affect on our business, financial
      condition or operating results.




20


**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**




None




**PART
      II**




**ITEM
      5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
      BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.**




On
      March
      17, 2004, our common stock was approved for listing on the Over-the-Counter
      Bulletin Board under the symbol "CVNI" and on December 19, 2005 our symbol
      was
      changed to "CHNG" and our fiscal year end was changed to December31. The
      following table sets forth, the range of high and low closing bid quotations
      for
      our common stock in 2005 and 2006. The quotations represent inter-dealer prices
      without retail markup, markdown or commission, and may not necessarily represent
      actual transactions. The source of the following information is Yahoo
      Finance.





OTC
      Bulletin Board





COMMON
                STOCK MARKET
              PRICEHIGH
            
            LOWFISCAL
                YEAR ENDED DECEMBER 31, 2006:Fourth
                Quarter
            
            $
            3.15
            
            $
            3.08Third
                Quarter
            
            $
            3.05
            
            $
            2.82Second
                Quarter
            
            $
            2.55
            
            $
            2.35First
                Quarter
            
            $
            4.49
            
            $
            4.40FISCAL
                YEAR ENDED DECEMBER 31, 2005:Fourth
                Quarter
            
            $
            3.40
            
            $
            3.30Third
                Quarter
            
            $
            3.00
            
            $
            3.00Second
                Quarter
            
            $
            5.50
            
            $
            5.50First
                Quarter
            
            $
            1.35
            
            $
            1.35




As
      of
      March 22, 2007, there were approximately 22 holders of record of our common
      stock.




**Dividends**




There
      are
      no restrictions in our articles of incorporation or bylaws that prevent us
      from
      declaring dividends. The Delaware General Corporation Law, however, does
      prohibit us from declaring dividends where, after giving effect to the
      distribution of the dividend:




1.
      We
      would not be able to pay our debts as they become due in the usual course of
      business; or




21


2.
      Our
      total assets would be less than the sum of our total liabilities plus the amount
      that would be needed to satisfy the rights of shareholders who have preferential
      rights superior to those receiving the distribution.




We
      have
      never declared or paid any cash dividends on our common stock. We currently
      intend to retain future earnings, if any, to finance the expansion of our
      business. As a result, we do not anticipate paying any cash dividends in the
      foreseeable future.




**Recent
      Issuances of Unregistered Securities.**




Not
      Applicable




**ITEM
      6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**




**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
      Part II, Item 7 of this Report. Unless otherwise noted, all amounts are
      expressed in U.S. dollars. The following discussion regarding the Company and
      its business and operations contains forward-looking statements that consist
      of
      any statement other than a recitation of historical fact and can be identified
      by the use of forward-looking terminology such as "may", "expect", "anticipate",
      "estimate" or "continue" or the negative thereof or other variations thereon
      or
      comparable terminology. In particular, these include statements relating to
      our
      expectation that we will continue to have adequate liquidity from cash flow
      from
      operations the other risks and uncertainties, which are described above under
      "RISK FACTORS". The reader is cautioned that all forward-looking statements
      are
      necessarily speculative and there are certain risks and uncertainties that
      could
      cause actual events or results to differ materially from those referred to
      in
      such forward-looking statements, including the risk factors discussed in this
      Report. The Company does not have a policy of updating or revising
      forward-looking statements and thus it should not be assumed that silence by
      management of the Company over time means that actual events are bearing out
      as
      estimated in such forward-looking statements.




**OVERVIEW**





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





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





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




We
      transmit and distribute 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.




22




We
      operate three primary business lines:


·
              Distribution
                  and sale of compressed natural gas (CNG) through Company-owned
                  CNG filling
                  stations for hybrid (natural gas/gasoline) powered vehicles (17
                  stations
                  as of March 21, 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 March 31, 2007,
                  the
                  Company distributed and sold natural gas to approximately 75,000
                  pipeline
                  customers.




We
      buy
      all of the natural gas that we sell and distribute to our customers. We do
      not
      mine or produce any of our own natural gas and have no plans to do so during
      the
      next 12 months. The natural gas that we buy is available in two forms: (1)
      piped
      natural gas; and (ii) CNG.




**CONSOLIDATED
      RESULTS OF OPERATIONS**




**Comparing
      Fiscal Years Ended December 31, 2006 and 2005:**




The
      following table presents certain consolidated statement of operations
      information. Financial information is presented for the 12-month period ending
      December 31, 2006 and December 31, 2005.





2006
            
            2005Revenues
            
            $
            18,828,790
            
            $
            4,850,699Cost
                of Revenues
            
            $
            9,718,000
            
            $
            2,404,037Operating
                Expenses
            
            $
            2,596,199
            
            $
            975,083Income
                from Operations
            
            $
            6,514,591
            
            $
            1,471,579Net
                Income
            
            $
            5,451,095
            
            $
            1,252,083




Revenue.
      We generated approximately 74% of our revenues in 2006 from the sale of natural
      gas and approximately 26% of our revenues from construction and installation
      fees charged to connect end-user customers to our natural gas distribution
      system. Sales of natural gas at the Company-owned filling stations accounted
      for
      approximately 49.58% of our total revenues in 2006, or approximately $9,335,314,
      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 22.2% of our total revenues in 2006, or
      approximately $4,179,991, including both natural gas sales and construction
      and
      installation fees. Sales of natural gas to third party-owned filling stations
      accounted for approximately 3% of our total revenues in 2006, or approximately
      $564,863.The Company expects installation revenues to increase on both an actual
      basis and as a percentage of revenue. In 2007, the Company expects to add up
      to
      30,000 pipeline customers and construct an additional 15 filling stations,
      which
      the Company estimates will increase sales of natural gas by 80 million cubic
      meters.




We
      had
      total revenues of $18,828,790 for the twelve months ended December 31, 2006,
      an
      increase of $13,978,091 or approximately 288%, compared to $4,850,699 for the
      twelve months ended December 31, 2005. The increase in revenues was due
      primarily to the construction of 14 new company-owned filling stations during
      2006 as well as an increase in the number of residential, commercial and
      industrial pipeline customers from approximately 50,000 in 2005 to approximately
      75,000 in 2006.




23


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 2006, our installation revenues increased approximately
      62% over the previous year and our sales of natural gas increased approximately
      700% over the previous year. Four customers accounted for approximately 47%,
      18%, 8% and 6% of the Company's installation revenue for the year ended December
      31, 2006.




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




Cost
      of
      sales in 2006 was $9,718,000, an increase of $7,313,963 or approximately 404%
      from 2005. Cost of gas sales increased by approximately 492% to $7,663,060
      in
      2006, as compared with $1,293,585 in 2005. The increase in our cost of sales
      was
      primarily related to a material increase in the amount of gas sold in 2006.
      In
      addition, our construction and installation costs increased in 2006 by
      approximately 85% to $2,054,940, as compared with $1,110,452 in 2005 as a result
      of the addition of new pipeline customers. The price that we paid for gas in
      2006 remained relatively constant compared to 2005.




Gross
      profit. The Company earned a gross profit of $9,110,790 for the twelve months
      ended December 31, 2006, an increase of $6,664,128 or approximately 273%,
      compared to $2,446,662 for the twelve months ended December 31, 2005. The
      increase in gross profit is due to a material increase in gas sales and
      installation revenues in 2006, partially offset by an increase in cost of
      sales.




Gross
      margin. Gross margin, as a percentage of revenues, decreased to approximately
      48% for the twelve months ended December 31, 2006, from approximately 50% for
      the twelve months ended December 31, 2005. The decrease in gross margin is
      primarily attributable to the significant increase in revenues generated from
      our Company-owned filling stations. Construction of our filling stations
      requires a significant capital outlay, approximately $800,000 per station,
      and
      involves significant costs of operations, including value added taxation and
      employee expenses to operate the station. As a result, our margins on natural
      gas sold at filling stations are lower than our margins on natural gas sold
      to
      end users connected to our pipeline system. However, we believe that sales
      of
      CNG and LNG provide the best opportunity for future revenue and profit
      growth.




24


Operating
      expenses. The Company incurred operating expenses of $2,596,199 for the twelve
      months ended December 31, 2006, an increase of $1,621,116 or approximately
      166%,
      compared to $975,083 for the twelve months ended December 31, 2005. Our
      operating expenses increased primarily as a result of expenses related to the
      construction and operation of 14 new filling stations in 2006, 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 2006 as we increased our
      efforts to obtain new residential and commercial customers and attract customers
      to our filling stations. General and administrative expenses increased from
      $500,228 in 2005 to $1,287,735 in 2006 due to an increase in personnel as a
      result of our growth.




We
      purchase all of our natural gas for resale from the Shaanxi Natural Gas Co.
      Inc., a government-owned entity. As the government owns all land in China,
      the
      government controls and owns all the natural resources coming from the ground,
      thus the government controls the price and flow of the natural gas. As China
      shifts from a centrally planned economy to a market economy, we believe that
      it
      is in the government's best interest to keep prices stable, as they have been
      for the last 3 years (See Note 8), and maintain a stable flow of supply. The
      government has undertaken programs to promote the growth of the region in which
      we are located. Therefore, we expect supply and price to continue to be stable
      in the future.




For
      the
      year ended December 31, 2006, two suppliers accounted for 27.3% and 17.6% of
      the
      total equipment we purchased for construction activities. We believe that as
      a
      result of our relationships within the construction industry and the
      construction equipment vendor community, and the availability of other vendors
      to supply the construction equipment and materials, the loss of any one of
      these
      two vendors would not have a material adverse effect on our
      operations.




Net
      Income. Net income increased to $5,451,095 for the twelve months ended December
      31, 2006, an increase of $4,199,012, from $1,252,083 for the twelve months
      ended
      December 31, 2005. 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 in 2006. The Company expects installation revenues to
      increase on both an actual basis and as a percentage of revenue. In 2007, the
      Company expects to add up to 30,000 pipeline customers and construct an
      additional 15 filling stations, which the Company estimates will increase sales
      of natural gas by 80 million cubic meters.




Income
      tax was $1,025,584 for the twelve months ended December 31, 2006, as compared
      to
      $220,956 for the twelve months ended December 31, 2005. The increase in income
      tax was attributed to the growth of construction and installation fees and
      the
      sale of natural gas.




**Liquidity
      and Capital Resources**




As
      of
      December 31, 2006 the Company had $5,294,213 of cash and cash equivalents on
      hand compared to $675,624 of cash and cash equivalents as of December 31,
      2005.




The
      primary sources of cash in 2006 were income from operations and financing
      activities. The Company had net cash flows provided by operations of $4,385,524
      for the twelve months ended December 30, 2006 as compared to net cash provided
      by operations of $1,935,871 in the corresponding period last year. The increase
      in net cash flows from operations in 2006 as compared to 2005 was mainly due
      to
      the increase in net income and an increase in other payables during the twelve
      months ended December 31, 2006 offset by a decrease in unearned
      revenue.




25


In
      January 2006, we completed several private placement offerings, which generated
      net proceeds of $10,400,000, which were used for the construction of natural
      gas
      filling stations, the purchase of raw materials and working capital.
      Furthermore, in September 2006, the Company received $1,050,001 from the
      exercise of 291,667 warrants.




Cash
      outflows for investing activities increased from $4,871,821 in 2005 to
      $9,738,469 in 2006 as a result of advance payments made to equipment suppliers
      for investments necessary to construct and build 14 filling stations and for
      construction materials used to build the pipelines to individual
      households.




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




The
      Company is obligated to contribute $10 million of registered capital to its
      wholly-owned subsidiary, Xilan Natural Gas Equipment Co. As of December 31,
      2006, the Company had contributed $6,480,000 of this capital commitment and
      is
      obligated to contribute the remaining $3,520,000 by February 2008.




We
      also
      will require financing of at least $40 million in order to complete our proposed
      LNG Project.




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




The
      majority of the Company's revenues and expenses were denominated primarily
      in
      Renminbi ("RMB"), the currency of the People's Republic of China. There is
      no
      assurance that exchange rates between the RMB and the U.S. Dollar will remain
      stable. The Company does not engage in currency hedging. Inflation has not
      had a
      material impact on the Company's business.




**OFF-BALANCE
      SHEET ARRANGEMENTS**




We
      do not
      have any off-balance sheet arrangements that have or are reasonably likely
      to
      have a current or future effect on our financial condition, changes in financial
      condition, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources that are material to our
      investors.




**CRITICAL
      ACCOUNTING POLICIES**




**Use
      of Estimates**




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




26


**Cash
      and Cash Equivalents**




Cash
      and
      cash equivalents include cash on hand and cash in time deposits, certificates
      of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less.




**Accounts
      and Other Receivable**




We
      maintain reserves for potential credit losses on accounts receivable. We review
      the composition of accounts receivable and analyzes historical bad debts,
      customer concentrations, customer credit worthiness, current economic trends
      and
      changes in customer payment patterns to evaluate the adequacy of these reserves.
      Reserves are recorded primarily on a specific identification basis.




**Inventory**




Inventory
      is stated at the lower of cost, as determined on a first-in, first-out basis,
      or
      market. We compare the cost of inventories with the market value, and allowance
      is made for writing down the inventories to their market value, if lower.
      Inventory consists of material used in the construction of pipelines.




**Property
      and Equipment**




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





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




**Construction
      In Progress**




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




**Contracts
      in Progress**




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




**Revenue
      Recognition**




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




27


**Stock-Based
      Compensation**




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




**Income
      Taxes**




We
      utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.




**Local
      PRC Income Tax**




Pursuant
      to the tax laws of China, general enterprises are subject to income tax at
      an
      effective rate of 33%. The Company is in the natural gas industry whose
      development is encouraged by the government. According to the income tax
      regulation, any company engaged in the natural gas industry enjoys a favorable
      tax rate. Accordingly, the Company's income is subject to a reduced tax rate
      of
      15%.




**Foreign
      Currency Transactions and Comprehensive Income (Loss)**




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




28





**RECENT
      ACCOUNTING PRONOUNCEMENTS**




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




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




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




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




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




29




**ITEM
      7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**




**FINANCIAL
      STATEMENT INDEX**





China
      Natural Gas, Inc. and Subsidiaries


Consolidated
      Financial Statements


Years
      Ended December 31, 2006 and 2005




Contents





PageReport
                of Independent Registered Public Accounting Firm
            
            
            F-1Financial
                Statements:Consolidated
                Balance Sheet as of December 31, 2006
            
            
            F-2Consolidated
                Statements of Operations and Other ComprehensiveIncome
                for the years ended December 31, 2006 and 2005
            
            
            F-3Consolidated
                Statement of Stockholders' Equity for the yearsended
                December 31, 2006 and 2005
            
            
            F-4Consolidated
                Statements of Cash Flows for the years endedDecember
                31, 2006 and 2005
            
            
            F-5Notes
                to Consolidated Financial Statements
            
            
            F-6




30





**Report
      of Independent Registered Public Accounting Firm**




Board
      of
      Directors and Stockholders ofChina Natural Gas, Inc.




We
      have
      audited the accompanying consolidated balance sheet of China Natural Gas, Inc.
      and subsidiaries as of December 31, 2006, and the related consolidated
      statements of operations and other comprehensive income, stockholders' equity,
      and cash flows for the years ended December 31, 2006 and 2005. These
      consolidated financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall consolidated financial statement presentation. We
      believe that our audits provide a reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of China Natural
      Gas, Inc. and subsidiaries as of December 31, 2006, and the consolidated results
      of their operations and their consolidated cash flows for the years ended
      December 31, 2006 and 2005, in conformity with U.S. generally accepted
      accounting principles.




/s/ Kabani
              & Company, Inc.Certified Public
              AccountantsLos Angeles, California
              March 12, 2007




F-1




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


**CONSOLIDATED
      BALANCE SHEET**


**AS
      OF DECEMBER 31, 2006**




**ASSETS****CURRENT
              ASSETS:**Cash
                & cash equivalents
            
            $
            5,294,213Accounts
                receivable
            
            
            569,037Other
                receivable
            
            
            813,839Inventories
            
            
            285,537Advances
            
            
            1,660,974Prepaid
                expense and other current assets
            
            
            305,524Total
                current assets
            
            
            8,929,124PROPERTY
                AND EQUIPMENT, net
            
            
            17,193,728CONSTRUCTION
                IN PROGRESS
            
            
            2,343,499TOTAL
                ASSETS
            
            $
            28,466,351




**LIABILITIES
                AND STOCKHOLDERS'
                EQUITY****CURRENT
              LIABILITIES:**Accounts
                payable & accrued expense
            
            $
            406,212Other
                payables
            
            
            2,145,924Unearned
                revenue
            
            
            284,011Total
                current liabilities
            
            
            2,836,147STOCKHOLDERS'
                EQUITY:Preferred
                stock, $0.0001 per share; authorized 5,000,000 shares; none
                issued
            
            
            —Common
                stock, $0.0001 per share; authorized 30,000,000 shares;
            
            
            —issued
                and outstanding 24,210,183
            
            
            2,421Additional
                paid in capital
            
            
            18,223,911Accumulative
                other comprehensive income
            
            
            839,452Statutory
                reserve
            
            
            750,886Retained
                earnings
            
            
            5,813,534Total
                stockholders' equity
            
            
            25,630,204TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            28,466,351




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




F-2




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


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


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**




December
                31,2006
            
            2005Net
                revenueNatural
                gas revenue
            
            $
            13,713,145
            
            $
            1,687,154Construction
                / installation revenue
            
            
            5,115,645
            
            
            3,163,545Total
                revenue
            
            
            18,828,790
            
            
            4,850,699Cost
                of salesNatural
                gas cost
            
            
            7,663,060
            
            
            1,293,585Construction
                / installation cost
            
            
            2,054,940
            
            
            1,110,4529,718,000
            
            
            2,404,037Gross
                profit
            
            
            9,110,790
            
            
            2,446,662Operating
                expensesSelling
                expenses
            
            
            1,308,464
            
            
            474,855General
                and administrative expenses
            
            
            1,287,735
            
            
            500,228Total
                operating expenses
            
            
            2,596,199
            
            
            975,083Income
                from operations
            
            
            6,514,591
            
            
            1,471,579Non-operating
                income (expense):Interest
                income
            
            
            41,109
            
            
            2,131Other
                expense
            
            
            (79,021
            )
            
            (671
            )Total
                non-operating income (expense)
            
            
            (37,912
            )
            
            1,460Income
                before income tax
            
            
            6,476,679
            
            
            1,473,039Income
                tax
            
            
            1,025,584
            
            
            220,956Net
                income
            
            
            5,451,095
            
            
            1,252,083Other
                comprehensive incomeForeign
                currency translation gain
            
            
            610,705
            
            
            228,175Comprehensive
                Income
            
            $
            6,061,800
            
            $
            1,480,258Weighted
                average shares outstandingBasic
                and diluted
            
            
            23,872,936
            
            
            16,269,528Earnings
                per shareBasic
                and diluted
            
            $
            0.23
            
            $
            0.08




Basic
      and
      diluted are the same because there is no anti-dilutive effect The accompanying
      notes are an integral part of these consolidated financial
      statements




F-3





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


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**




AccumulativeAdditional
            
            Other
            
            
            
            
            
            TotalCommon
                Stock
            
            Paid
                in
            
            Comprehensive
            
            Statutory
            
            Retained
            
            Stockholders'Shares
            
            Amount
            
            Capital
            
            Income
            
            Reserve
            
            Earnings
            
            EquityBalance
                January 1, 2005
            
            
            9,275,362
            
            $
            928
            
            $
            4,831,468
            
            $
            572
            
            $
            3,457
            
            $
            (142,215
            )
            $
            4,694,210Shares
                issued for cash
            
            
            6,724,638
            
            
            672
            
            
            3,503,788
            
            
            -
            
            
            -
            
            
            -
            
            
            3,504,460Recapitalization
                on reverse acquisition
            
            
            4,204,088
            
            
            420
            
            
            (3,798
            )
            
            -
            
            
            -
            
            
            -
            
            
            (3,378
            )Cumulative
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            228,175
            
            
            -
            
            
            -
            
            
            228,175Net
                Income for the year ended December 31, 2005
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,252,083
            
            
            1,252,083Transfer
                to statutory reserve
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            166,265
            
            
            (166,265)-Balance
                December 31, 2005
            
            
            20,204,088
            
            
            2,020
            
            
            8,331,458
            
            
            228,747
            
            
            169,722
            
            
            943,603
            
            
            9,675,550Shares
                issued for cash
            
            
            3,714,428
            
            
            371
            
            
            10,399,629
            
            
            -
            
            
            -
            
            
            -
            
            
            10,400,000Offering
                costs
            
            
            -
            
            
            -
            
            
            (1,557,147
            )
            
            -
            
            
            -
            
            
            -
            
            
            (1,557,147
            )Exercise
                of warrants for cash
            
            
            291,667
            
            
            30
            
            
            1,049,971
            
            
            -
            
            
            -
            
            
            -
            
            
            1,050,001Cumulative
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            610,705
            
            
            -
            
            
            -
            
            
            610,705Net
                Income for the year ended December 31, 2006
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,451,095
            
            
            5,451,095Transfer
                to statutory reserve
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            581,164
            
            
            (581,164
            )
            
            -Balance
                December 31, 2006
            
            
            24,210,183
            
            $
            2,421
            
            $
            18,223,911
            
            $
            839,452
            
            $
            750,886
            
            $
            5,813,534
            
            $
            25,630,204




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




F-4





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


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**




Years
                Ended December 31,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            5,451,095
            
            $
            1,252,083Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Loss
                on disposal of property
            
            
            
            
            
            -
                971Depreciation
                and amortization
            
            
            731,723
            
            
            347,923(Increase)
                / decrease in assets:Accounts
                receivable
            
            
            (550,831
            )
            
            (1,011
            )Other
                receivable
            
            
            (636,262
            )
            
            (132,553
            )Inventories
            
            
            (233,582
            )
            
            2,234Advances
            
            
            (1,611,967
            )
            
            (12,773
            )Prepaid
                expense and other current assets
            
            
            (282,103
            )
            
            (15,441
            )Contract
                in progress
            
            
            -
            
            
            381,315Increase
                / (decrease) in current liabilities:Accounts
                payable & accrued expense
            
            
            201,661
            
            
            92,427Other
                payables
            
            
            1,352,866
            
            
            662,950Unearned
                revenue
            
            
            (28,882
            )
            
            (642,254
            )Due
                to affiliate
            
            
            (8,194
            )
            
            -Net
                cash provided by operating activities
            
            
            4,385,524
            
            
            1,935,871CASH
                FLOWS FROM INVESTING ACTIVITIESPayment
                on purchase of property and equipment
            
            
            (9,192,482
            )
            
            (3,170,629
            )Cash
                acquired in reverse merger transaction
            
            
            -
            
            
            86Additions
                to construction in progress
            
            
            (545,987
            )
            
            (1,700,792
            )Additions
                to Intangible assets
            
            
            -
            
            
            (1,096
            )Proceeds
                from disposal of property
            
            
            -
            
            
            610Net
                cash used in investing activities
            
            
            (9,738,469
            )
            
            (4,871,821
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Stock
                issued for cash
            
            
            10,400,000
            
            
            3,504,460Proceeds
                from exercise of warrants
            
            
            1,050,001
            
            
            -Payment
                of offering costs
            
            
            (1,557,147
            )
            
            -Net
                cash provided by in financing activities
            
            
            9,892,854
            
            
            3,504,460Effect
                of exchange rate changes on cash and cash equivalents
            
            
            78,680
            
            
            44,116NET
                INCREASE IN CASH & CASH EQUIVALENTS
            
            
            4,618,589
            
            
            612,626CASH
                & CASH EQUIVALENTS, BEGINNING OF YEAR
            
            
            675,624
            
            
            62,998CASH
                & CASH EQUIVALENTS, END OF YEAR
            
            $
            5,294,213
            
            $
            675,624SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Interest
                paid
            
            $
            -
            
            $
            -Income
                taxes paid
            
            $
            -
            
            $
            969




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




F-5




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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006 AND 2005**




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




**Organization
      and Line of Business**


We
        were
        incorporated in the state of Delaware on March 31, 1999, as Bullet Environmental
        Systems, Inc. On May 25, 2000 we changed our name to Liquidpure Corp. and
        on
        February 14, 2002 we changed our name to Coventure International, Inc.
        (“Coventure”).
  On
        December 6, 2005, we issued an aggregate of 4 million shares to all of the
        registered shareholders of Xian Xilan Natural Gas Co., Ltd. (“Xian Xilan Natural
        Gas”), and entered into exclusive arrangements with Xian Xilan Natural Gas and
        these shareholders that give us the ability to substantially influence Xian
        Xilan Natural Gas’ daily operations and financial affairs, appoint its senior
        executives and approve all matters requiring shareholder approval. Concurrently,
        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. On December 19, 2005, we changed
        our name to China Natural Gas, Inc.
 
 As
        a
        result of the share issuance, the stockholders of Xian Xilan Natural Gas
        owned
        approximately 80% of both companies and the directors and executive officers
        became the directors and executive officers of Coventure. Accordingly, the
        transaction has been accounted for as a reverse acquisition of Coventure
        by Xian
        Xilan Natural Gas resulting in a recapitalization of Xian Xilan Natural Gas
        rather than as a business combination. Xian Xilan Natural Gas 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 Xian Xilan Natural Gas have been
        presented for the comparative prior period. The historical cost of the net
        liabilities of Coventure that were acquired was $3,378. Subsequent to the
        share
        issuance, the stockholders of the Company approved a stock dividend of three
        shares for each share held, which has been accounted for as a four for one
        forward stock split.
 
 On
        February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., (“Xilan
        Equipment”) as a wholly owned foreign enterprise (WOFE). We then, through Xilan
        Equipment, entered into exclusive arrangements with Xian Xilan Natural Gas
        and
        its shareholders that give us the ability to substantially influence Xian
        Xilan
        Natural Gas’ daily operations and financial affairs, appoint its senior
        executives and approve all matters requiring shareholder approval. We
        memorialized these arrangements on August 17, 2007. As a result, the Company
        consolidates the financial results of Xian Xilan Natural Gas as variable
        interest entity pursuant to Financial Interpretation No. 46R, “Consolidation of
        Variable Interest Entities.”




**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 Shaanxi Jingbian
        Liquefied Natural Gas Co., Ltd (incorporated in October 2006) and its 100%
        VIE,
        Xian Xilan Natural Gas. All inter-company accounts and transactions have
        been
        eliminated in consolidation.





Consolidation
        of Variable Interest Entity





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





The
        Company, through XNGE, 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’ activities and enable the Company to
        receive a majority of Xian Xilan Natural Gas’ 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,





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


F-6




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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




**Basis
      of Presentation**




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




**Foreign
      Currency Translation**




As
      of
      December 31, 2006 and 2005, the accounts of the Company were maintained, and
      their consolidated financial statements were expressed in the Chinese Yuan
      Renminbi (CNY). Such consolidated financial statements were translated into
      U.S.
      Dollars (USD) in accordance with Statement of Financial Accounts Standards
      ("SFAS") No. 52, "Foreign Currency Translation," with the CNY as the functional
      currency. According to the Statement, all assets and liabilities were translated
      at the exchange rate on the balance sheet date, stockholder's equity are
      translated at the historical rates and statement of operations items are
      translated at the weighted average exchange rate for the year. The resulting
      translation adjustments are reported under other comprehensive income in
      accordance with SFAS No. 130, "Reporting Comprehensive Income."




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




**Use
      of Estimates**




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




**Cash
      and Cash Equivalents**




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




**Accounts
      Receivable and Other 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 of reserve for bad debts as on December 31,
      2006.


F-7


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




As
      of
      December 31, 2006, total other receivable was $813,839, including $478,118
      in
      advances to employees and $335,721 to other unrelated companies. These
      receivables are unsecured, interest free, due on demand, and all
      current.




**Advances**




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




**Inventory**




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




**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
      December 31, 2006, the following are the details of the property and
      equipment:


Office
                  equipment
              
              $
              73,636Operating
                  equipment
              
              
              13,219,979Vehicles
              
              
              1,210,552Buildings
              
              
              4,559,00319,063,170Less
                  accumulated depreciation
              
              
              1,869,442$
              17,193,728




Depreciation
      expense for the years ended December 31, 2006 and 2005 was $731,497and $347,923,
      respectively.


F-8




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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




**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 December 31, 2006 there were no significant impairments of its
      long-lived assets.




**Construction
      In Progress**




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




**Contracts
      In Progress**




Contracts
      in progress consist of the cost of constructing pipelines for customers. The
      major cost of construction relates to material, labor and overhead. Revenue
      from
      construction and installation of pipelines is recorded when the contract is
      completed and accepted by the customers. The construction contracts are usually
      completed within one to two months time. As of December 31, 2006, the Company
      has no contracts in progress.




**Fair
      Value of Financial Instruments**




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




**Revenue
      Recognition**




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


F-9


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




**Unearned
      Revenue**




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




**Advertising
      Costs**




The
      Company expenses the cost of advertising as incurred or, as appropriate, the
      first time the advertising takes place. Advertising costs for the years ended
      December 31, 2006 and 2005 were insignificant.




**Stock-Based
      Compensation**




The
      Company accounts for its stock-based compensation in accordance with Statement
      of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment,
      an
      Amendment of Financial Accounting Standards Board ("FASB") Statement No. 123."
      The Company recognizes in the statement of operations the grant-date fair value
      of stock options and other equity-based compensation issued to employees and
      non-employees. The Company did not grant any options and no options were
      cancelled or exercised during the period ended December 31, 2006 and 2005.
      As of
      December 31, 2006, there were no options outstanding.




**Income
      Taxes**




The
      Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
      the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized. At December 31, 2006, there was no significant book
      to
      tax differences. There is no difference between book depreciation and tax
      depreciation as the Company uses the same method for both book and
      tax.




**Local
      PRC Income Tax**




Pursuant
      to the tax laws of China, general enterprises are subject to income tax at
      an
      effective rate of 33%. The Company is in the natural gas industry whose
      development is encouraged by the government. According to the income tax
      regulation, any company engaged in the natural gas industry enjoys a favorable
      tax rate. Accordingly, the Company's income is subject to a reduced tax rate
      of
      15%.




F-10


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**


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 YearsEnded
                  December 31,2006
              
              2005Tax
                  provision (credit) at statutory rate
              
              
              34
              %
              
              (34
              %)Foreign
                  tax rate difference
              
              
              (15
              %)
              
              19
              %Change
                  in valuation allowance
              
              
              -
              
              
              15
              %19
              %
              
              -




**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 December 31, 2006, the Company had outstanding
      1,140,286 warrants. The average stock price for the year ended December 31,
      2006
      was less than the exercise price of the warrants; therefore, the warrants are
      not factored into the diluted earning per share calculation as they are
      anti-dilutive.




**Statement
      of Cash Flows**




In
      accordance with Statement of Financial Accounting Standards No. 95, "Statement
      of Cash Flows," cash flows from the Company's operations is calculated based
      upon the local currencies. As a result, amounts related to assets and
      liabilities reported on the statement of cash flows will not necessarily agree
      with changes in the corresponding balances on the balance sheet. The Company
      paid $0 and $0 for interest and $229,547 and $969 for income taxes during the
      years ended December 31, 2006 and 2005 respectively.




**Segment
      Reporting**




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


F-11


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**


China
        Natural Gas, Inc. and Subsidiaries Notes to Consolidated Financial Statements
        For the Years Ended December 31, 2006 and 2005




**Recent
      Pronouncements**




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




In
      March
      2006, FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets
      -
      an amendment to FASB Statement No. 140." The new standard requires recognition
      of servicing assets in connection with any obligation to service a financial
      asset arising from 1) a servicing contract entered into as part of a transfer
      of
      assets meeting the requirements for sale accounting, 2) the transfer of assets
      to a special purpose entity in a guaranteed mortgage securitization where the
      transferor retains a controlling interest in the securitized asset, or 3)
      an
      acquisition or assumption of obligations to service financial assets not related
      to the servicer or its consolidated affiliates. The servicing assets and
      liabilities must be measured at fair value initially, if practicable, and the
      assets or liabilities must either be amortized or recorded at fair value at
      each
      reporting date. The statement allows a one-time reclassification for entities
      with servicing rights and subsequently requires separate presentation of
      servicing assets and liabilities at fair value in the statement of financial
      position. This statement is effective for the first fiscal year beginning after
      September 15, 2006, with earlier adoption permitted. The Company does not expect
      this implementation to have a material effect on our consolidated financial
      statements.




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




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


F-12


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




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




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


F-13


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




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. While the Company analysis of the
      impact of adopting Interpretation 48 is not yet complete, it do not currently
      anticipate it will have a material impact on the Company's consolidated
      financial statements.




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




**Note
      3 - Other Payables**




Other
      payable consists of the following as of December 31, 2006:


Other
                  accounts payable
              
              $
              228,817Welfare
                  payable
              
              
              19,679Tax
                  payable
              
              
              1,866,688Other
                  levies
              
              
              30,740$
              2,145,924


**Note
      4 - Stockholders' Equity**




Common
      stock




On January 6, 2006 and January 9, 2006, the Company entered
      into securities purchase agreements with four accredited investors and completed
      the sale of $5,380,000 of units. The units contained an aggregate of 1,921,572
      shares of common stock and 523,055 common stock purchase warrants. Each common
      stock purchase warrant is exercisable for a period of three years at an exercise
      price of $3.60 per share. Pursuant to the terms of the warrant, each investor
      has contractually agreed to restrict its ability to exercise the warrants to
      an
      amount which would not exceed the difference between the number of shares of
      common stock beneficially owned by the holder or issuable upon exercise of
      the
      warrant held by such holder and 9.9% of the outstanding shares of common stock
      of the Company.





F-14


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




In
      connection with the offering, the Company paid a placement fee of 10% of the
      proceeds in cash, together with non-accountable expenses in the amount of 3%
      of
      the proceeds, in cash. In addition, the placement agent was issued warrants
      to
      purchase 298,888 shares of common stock on the same terms and conditions as
      the
      investors. The warrants issued to the placement agent are being treated as
      a
      cost of raising capital. The warrants were valued using the Black Scholes
      pricing model; however, recording the value of the warrants in the financial
      statements has no impact as the value of the warrants is both debited and
      credited to additional paid in capital.




On
      January 10, 2006 through January 13, 2006, the Company entered into securities
      purchase agreements with four accredited investors and completed the sale of
      $2,195,198 of units. The units contained an aggregate of 783,999 shares of
      common stock and 213,422 common stock purchase warrants. Each common stock
      purchase warrant is exercisable for a period of three years at an exercise
      price
      of $3.60 per share. Pursuant to the terms of the warrant, each investor has
      contractually agreed to restrict its ability to exercise the warrants to an
      amount which would not exceed the difference between the number of shares of
      common stock beneficially owned by the holder or issuable upon exercise of
      the
      warrant held by such holder and 9.9% of the outstanding shares of common stock
      of the Company.




In
      connection with the offering, the Company paid a placement fee of 10% of the
      proceeds in cash, together with non-accountable expenses in the amount of 3%
      of
      the proceeds, in cash. In addition, the placement agent was issued warrants
      to
      purchase 121,955 shares of common stock on the same terms and conditions as
      the
      investors. The warrants issued to the placement agent are being treated as
      a
      cost of raising capital. The warrants were valued using the Black Scholes
      pricing model; however, recording the value of the warrants in the financial
      statements has no impact as the value of the warrants is both debited and
      credited to additional paid in capital.




On
      January 17, 2006, the Company entered into securities purchase agreements with
      an accredited investor and completed the sale of $2,824,802 of units. The units
      contained an aggregate of 1,008,857 shares of common stock and 274,633 common
      stock purchase warrants. Each common stock purchase warrant is exercisable
      for a
      period of three years at an exercise price of $3.60 per share. Pursuant to
      the
      terms of the warrant, each investor has contractually agreed to restrict its
      ability to exercise the warrants to an amount which would not exceed the
      difference between the number of shares of common stock beneficially owned
      by
      the holder or issuable upon exercise of the warrant held by such holder and
      9.9%
      of the outstanding shares of common stock of the Company.




In
      September 2006, the Company received $1,050,001 from the exercise of 291,667
      warrants.


F-15


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




**Warrants**


Following
      is a summary of the warrant activity:


Warrants
                  outstanding
              
              Weighted
                  Average Exercise Price
              
              Aggregate
                  Intrinsic ValueOutstanding,
                  December 31, 2005
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              1,431,953
              
              $
              3.60Forfeited
              
              
              -
              
              
              -Exercised
              
              
              (291,667
              )
              $
              3.60Outstanding,
                  December 31, 2006
              
              
              1,140,286
              
              $
              3.60
              
              $
              0




Following
      is a summary of the status of warrants outstanding at December 31,
      2006:


Outstanding
                  Warrants
              
              
              
              Exercisable
                  WarrantsExercise
                  Price
              
              Number
              
              Average
                  Remaining Contractual Life
              
              Average
                  Exercise Price
              
              Number$3.60
              
              
              1,140,286
              
              
              2.03
              
              $
              3.60
              
              
              1,140,286




**Note
      5 - Employee Welfare Plan**




The
      Company has established its own employee welfare plan in accordance with Chinese
      law and regulations. The Company makes annual contributions of 14% of all
      employees' salaries to employee welfare plan. The total expense for the above
      plan was $51,765 and $13,275 for the years ended December 31, 2006 and 2005,
      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;


F-16


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




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 $581,164 and $166,265 as reserve for the statutory
      surplus reserve and welfare fund for the years ended December 31, 2006 and
      2005,
      respectively.




**Note
      7 - Earnings Per Share**




Earnings
      (loss) per share for the years ended December 31, 2006 and 2005 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. There were no common stock equivalents that were dilutive during
      the year ended December 31, 2006 and 2005; accordingly, basic and diluted
      earning per share were the same for all periods presented.




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




For
      the
      years ended December 31, 2006 and 2005, the Company purchased all of the natural
      gas for resale from one vendor, Shaanxi Natural Gas Co., Ltd., a government
      owned enterprise. No amount was owing to this vendor at December 31, 2006.
      The
      Company has had annual agreements with Shaanxi Natural Gas that requires the
      Company to purchase a minimum amount of natural gas. For the years ended
      December 31, 2006 and 2005 the minimum purchases were 2.36 million and 1.60
      million cubic meters, respectively. In the past, contracts were renewed on
      an
      annual basis. However, as the volume of usage has increased, Shaanxi Natural
      Gas
      has revised their policies, and contract terms are now six months and subject
      to
      review prior to renewal. The Company's management reports that it does not
      expect any issues or difficulty in continuing to renew the supply contracts
      going forward. Price points for natural gas are strictly controlled by the
      government and have remained stable over the past 3 years.




For
      the
      year ended December 31, 2006, two suppliers accounted for 27.3% and 17.6% of
      the
      total equipment purchased by the Company and for the year ended December 31,
      2005, two suppliers accounted for 51.5% and 13.3% of the total equipment
      purchased by the Company.




Four
      customers accounted for 46.5%, 18.1%, 7.7% and 6.1% of the Company's
      installation revenue for the year ended December 31, 2006 and four customers
      accounted for 34.7%, 21.2% , 14.0% and 10.8% of the Company's installation
      revenue for the years ended December 31, 2005.


F-17


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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE** **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




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
      9 - Commitments and Contingencies**




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




F-18




**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




No.




**ITEM
      8A. CONTROLS AND PROCEDURES**




As
      of the
      end of the period covered by this report, we conducted an evaluation, under
      the
      supervision and with the participation of our chief executive officer and
      principal financial officer of our disclosure controls and procedures (as
      defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon
      this evaluation, our chief executive officer and principal financial officer
      concluded that our disclosure controls and procedures are effective to ensure
      that information required to be disclosed by us in the reports that we file
      or
      submit under the Exchange Act is recorded, processed, summarized and reported,
      within the time periods specified in the Commission's rules and forms. There
      was
      no change in our internal controls or in other factors that could affect these
      controls during our last fiscal year that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.




**ITEM
      8B. OTHER INFORMATION**




In
      2006,
      the Company, through its wholly-owned subsidiary, Xilan Liquefied Natural Gas
      Ltd, entered into an agreement with China National Petroleum Corporation, a
      government owned entity ("CNPC") pursuant to which CNPC will supply 150,000,000
      cubic meters of natural gas annually upon the completion of our LNG
      project.




In
      2006,
      the Company, through its wholly-owned subsidiary Xian Xilan Natural Gas Co.
      entered into a five-year contract with China Petrochemical to supply the Company
      350,000 cubic meters of CNG daily and to supply the Company with CNG for a
      Company owned filling station in Henan Province.




**PART
      III**




**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
      WITH
      SECTION 16(a) OF THE EXCHANGE ACT.**




Below
      are
      the names and certain information regarding our executive officers and
      directors:




DirectorName
              
              Age
              
              Position
              
              SinceQinan
                  Ji
              
              49
              
              Chief
                  Executive Officer and Chairman of the Board
              
              2005Xiaogang
                  Zhu
              
              52
              
              Chief
                  Financial OfficerZhiqiang
                  Wang
              
              67
              
              Director
              
              2006Patrick
                  McManus
              
              54
              
              Director
              
              2006James
                  Garner
              
              60
              
              Director
              
              2006




Officers
      are elected annually by the Board of Directors, at our annual meeting, to hold
      such office until an officer's successor has been duly appointed and qualified,
      unless an officer sooner dies, resigns or is removed by the Board.




31


**Background
      of Executive Officers and Directors**




Qinan
      Ji,
      Chairman of the Board of Directors - Mr. Ji joined Xilan as the Chairman of
      the
      Board of Directors in 2005. In 1996, he founded the Anxian Hotel in Weinan
      City
      in Shaanxi Province. In 2001, he formed the Xian Sunway Technology and Industry
      Co., Ltd. He has more than 20 years experience in the energy and petroleum
      industries in operational, administrative, management and government relations
      roles. He received a Bachelors of Economic Management from North West University
      (Shaanxi).




Xiaogang
      Zhu, Chief Financial Officer - Mr. Zhu joined Xilan as Chief Financial Officer
      in January 2005. He spent 16 years working at the Ministry of General Logistics
      most recently as manager of the finance department. From September 2000 to
      December 2004, Mr. Zhu was the Vice General Manager and CFO of Xian Dapeng
      Biotech Co., Ltd. He received a Bachelors of Accounting from Xian Jiaotong
      University.




Zhiqiang
      Wang, Vice Chairman of the Board of Directors - Mr. Wang was the former head
      of
      energy industry regulations from 1992 to 2002 as well as the Vice Mayor of
      the
      city of Xi'An, China's largest western city with a population of 8 million,
      in
      which position he was in charge of regulating and licensing the city's energy
      and natural gas businesses. From 2002 until his retirement in 2004, Mr. Wang
      was
      the Chief Executive Officer of Xi'An Municipal Government Construction Company
      where he was in charge of the city's major construction projects. Since 2004,
      Mr. Wang has been an independent advisor to the Company. Mr. Wang graduated
      from
      the Northwest College of Law in 1962.




Patrick
      McManus, Director - Mr. McManus brings over 25 years of experience in business,
      finance and law to China Natural Gas. He was elected Mayor of the City of Lynn,
      Massachusetts in 1992 and served in this position until his retirement to the
      private practice of law and accounting in 2002. While serving the City of Lynn
      as its Mayor, he was elected a member and trustee of the Executive Committee
      of
      the U.S. Conference of Mayors (USCM) with responsibility for developing policy
      for the USCM. He also served as the Chairman of the USCM Science and Technology
      Subcommittee, the Urban Water Council, and the USCM Audit Committee. Mayor
      McManus started his career in business with the General Electric Company in
      1979, and was a Professor of Business and Finance at Salem State College in
      Massachusetts. Mayor McManus has extensive business and political expertise
      on
      China. He was instrumental in establishing a close alliance as well as
      coordinating a regular exchange of visits by members of the U.S. Conference
      of
      Mayors and the China Association of Mayors. Mr. McManus has been a Certified
      Public Accountant since 1985. Mr. McManus received his Juris Doctorate from
      Boston College Law School and an M.B.A from Suffolk University. Mr. McManus
      currently serves on the board of directors of Bodisen Biotech, Inc. and Harbin
      Electric, Inc.




32


James
      A.
      Garner, Director, Chairman of Nominating Committee - Mr. Garner brings over
      30
      years of experience in business and political contacts to China Natural Gas.
      He
      served as Mayor of Hempstead, New York for 16 years until his retirement to
      the
      private sector in April 2005. He has won national recognition and awards from
      national agencies such as the U.S. Housing & Urban Development Agency and
      the American Planning Association (APA). Mayor Garner was elected the 61st
      President of the United States Conference of Mayors in June 2003 and served
      the
      Conference for one year traveling worldwide and advocating the needs of U.S.
      cities. Mr. Garner holds a Bachelor of Science Degree from Adelphi University
      and an Honorary Degree of Doctorate of Civil Law from Molloy College. He was
      recently appointed to the United States Small Business Administration's National
      Advisory Council.


Board
      of
      Directors.




Our
      Directors are elected by the vote of a plurality in interest of the holders
      of
      our voting stock and hold office for a term of one year or until a successor
      has
      been elected and qualified.




A
      majority of the authorized number of directors constitutes a quorum of the
      Board
      for the transaction of business. The directors must be present at the meeting
      to
      constitute a quorum. However, any action required or permitted to be taken
      by
      the Board may be taken without a meeting if all members of the Board
      individually or collectively consent in writing to the action.




There
      are
      no family relationships, or other arrangements or understandings between or
      among any of the directors, executive officers or other person pursuant to
      which
      such person was selected to serve as a director or officer.




Our
      directors, executive officers and control persons have not been involved in
      any
      of the following events during the past five years:




1.
      any
      bankruptcy petition filed by or against any business of which such person was
      a
      general partner or executive officer either at the time of the bankruptcy or
      within two years prior to that time;




2.
      any
      conviction in a criminal proceeding or being subject to a pending criminal
      proceeding (excluding traffic violations and other minor offenses);




3.
      being
      subject to any order, judgment, or decree, not subsequently reversed, suspended
      or vacated, of any court of competent jurisdiction, permanently or temporarily
      enjoining, barring, suspending or otherwise limiting his involvement in any
      type
      of business, securities or banking activities; or




4.
      being
      found by a court of competent jurisdiction (in a civil action), the Commission
      or the Commodity Futures Trading Commission to have violated a federal or state
      securities or commodities law, and the judgment has not been reversed,
      suspended, or vacated.




33


**Corporate
      Governance Matters**




**Audit
      Committee:**




On
      March
      27, 2006, the Board of Directors established an Audit Committee and appointed
      Patrick McManus as the committee's sole member.




**Audit
      Committee Financial Expert:**




Our
      board
      of directors has not yet appointed a member who qualifies as an "audit committee
      financial expert" as defined in Item 401(e) of Regulation S-B, and is
      "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under
      the
      Exchange Act.




**Compensation
      Committee**




On
      March
      27, 2006, the Board of Directors established a Compensation Committee and
      appointed James Garner as the Committee's sole member.




**Code
      of Ethics**




On
      June
      14, 2006, the Company adopted a Code of Ethics that applies to all officers,
      directors and employees of the Company.




**COMPLIANCE
      WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934**




Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
      officers and directors and persons who own more than 10% of a registered class
      of our equity securities to file with the Securities and Exchange Commission
      initial statements of beneficial ownership, reports of changes in ownership
      and
      annual reports concerning their ownership of our common stock and other equity
      securities, on Forms 3, 4 and 5 respectively. Executive officers, directors
      and
      greater than 10% shareholders are required by the Securities and Exchange
      Commission regulations to furnish our Company with copies of all Section 16(a)
      reports they file.




To
      the
      Company's knowledge, based solely on a review of the copies of the reports
      furnished to the Company, all executive officers, directors and greater than
      10%
      shareholders filed the required reports in a timely manner.




**Directors
      Compensation**




The
      following Director Compensation Table summarizes the compensation of our
      directors for services rendered to the Company during the year ended December
      31, 2006:




Ji
      Qinan,
      CEO of the Company, does not receive any compensation for his service as a
      director.




34


Zhiqiang
      Wang was appointed as a director in September 2006; his compensation was $4,500
      annually.




Minquing
      Lu, former CEO and director of the Company, resigned from both positions in
      May
      22, 2006. Mr. Lu did not receive any compensation for his service as a director
      in 2006.




The
      Company did not pay any other compensation to these directors in 2006.




**DIRECTORS
      COMPENSATION TABLE**


Name
                
                Fees
                    Earned or Paid in Cash ($)
                
                Stock
                    Awards ($)
                
                Options
                    Awards ($)
                
                All
                    Other Compensation ($)
                
                Total
                    ($)James
                    Garner
                
                $
                24,000
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                24,000Patrick
                    McManus
                
                $
                24,000
                
                
                
                
                
                
                
                
                
                
                $
                24,000Ji
                    Qinan
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                0Minquing
                    Lu
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                0Zhiqiang
                    Wang
                
                $
                4,500
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                4,500




**ITEM
      10. EXECUTIVE COMPENSATION**




The
      following table sets forth all compensation paid in respect of our Chief
      Executive Officer and those executive officers who received compensation in
      excess of $100,000 per year (collectively, the "Named Executive Officers")
      for
      our last completed fiscal year.




**SUMMARY
      COMPENSATION TABLE**


Name
                    and Principal Position
                
                Year
                
                Salary
                    ($)
                
                Stock
                    Bonus ($)
                
                Option
                    Awards ($)
                
                Non-Stock
                    Incentive Plan Awards ($)
                
                All
                    Other Comp. ($)
                
                Comp.
                    ($)
                
                Total
                    ($)Qinan
                    Ji, Chief Executive Officer and Chairman of the Board
                
                
                2006
                
                
                15,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                15,000Xiaogang
                    Zhu, Chief Financial Officer
                
                
                2006
                
                
                10,000
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                10,000Minqing
                    Lu, former Chief Executive Officer and Director
                
                
                2006
                
                
                4,150
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                4,150




(1)
      Minqing Lu stepped down as the Company's Chief Executive Officer and Director
      on
      May 22, 2006. Mr. Lu's annual salary was $10,000.




35


**Equity
      Compensation Plan Information**




There
      has
      been no common stock authorized for issuance with respect to any equity
      compensation plan as of the fiscal year ended December 31, 2006.




**Employment
      Agreements**




There
      are
      currently no employment agreements between the Company and any of its named
      executive officers.




**Outstanding
      Equity Awards at Fiscal Year End**




There
      has
      been no outstanding equity awards at fiscal year ended December 31,
      2006.




**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**




The
      following table sets forth certain information, as of April 13, 2007 with
      respect to the beneficial ownership of the outstanding common stock by (i)
      any
      holder of more than five (5%) percent; (ii) each of our executive officers
      and
      directors; and (iii) our directors and executive officers as a group. Except
      as
      otherwise indicated, each of the stockholders listed below has sole voting
      and
      investment power over the shares beneficially owned.


Number
                  of
              
              PercentageShares
                  of
              
              SharesBeneficially
              
              BeneficiallyName
                  of Beneficial Owner (1)
              
              Owned
              
              Owned
                  (2)Executive
                  Officers and DirectorsQinan
                  Ji
              
              
              5,931,596
              (3)
              
              24.5
              %Xiaogang
                  Zhu
              
              
              —
              
              
              —All
                  officers and directors as a group (2 persons)
              
              
              5,931,596
              (3)
              
              24.5
              %5%
                  holdersYangling
                  Bodisen BiotechDevelopment
                  Co, Ltd.c/o
                  New York Global Group, Inc.14
                  Wall Street, 12th FloorNew
                  York, NY 10005
              
              
              2,063,768
              (4)
              
              8.5
              %Xiang
                  Ji
              
              
              1,456,232
              
              
              6.0
              %Xian
                  Sunway Technology &Industry
                  Co., Ltd
              
              
              2,875,364
              (3)
              
              11.9
              %





36




(1)
      Except as otherwise indicated, the address of each beneficial owner is c/o
      Xian
      Xilan Natural Gas Co., Ltd., 19th Floor, Building B, Van Metropolis, Tang Yan
      Road, Hi-Tech Zone, Xian, Shaanxi Province, China.




(2)
      Applicable percentage ownership is based on 24,210,183 shares of common stock
      outstanding as of April 13, 2007, together with securities exercisable or
      convertible into shares of common stock within 60 days of April 13, 2007 for
      each stockholder. Beneficial ownership is determined in accordance with the
      rules of the Securities and Exchange Commission and generally includes voting
      or
      investment power with respect to securities. Shares of common stock that are
      currently exercisable or exercisable within 60 days of April 13, 2007 are deemed
      to be beneficially owned by the person holding such securities for the purpose
      of computing the percentage of ownership of such person, but are not treated
      as
      outstanding for the purpose of computing the percentage ownership of any other
      person.




(3)
      Of
      which 2,875,364 shares are owned by Xian Sunway Technology & Industry Co.,
      Ltd. Qinan Ji owns 42.1% of Xian Sunway and may be deemed to beneficially own
      such shares.




(4)
      As
      set forth in the Schedule 13D filed with the SEC on December 23,
      2005.




No
      Director, executive officer, affiliate or any owner of record or beneficial
      owner of more than 5% of any class of voting securities of the Company is a
      party adverse to the Company or has a material interest adverse to the
      Company.




**Securities
      Authorized for Issuance Under Equity Compensation Plans**




The
      Company had no equity compensation plans as of the fiscal year ended December
      31, 2006.




**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




None




**ITEM
      13. EXHIBITS**




**Exhibits:**


ExhibitNumber
              
              Description
                  of Exhibit3.1
              
              Articles
                  of Incorporation (incorporated by reference to same exhibit filed
                  with the
                  Company's Form 10SB Registration Statement filed September 15,
                  2000, SEC
                  file no. 000-31539).
 3.2
                
                Registrant's
                    Amended and Restated By-Laws (incorporated by reference to exhibit
                    3.1
                    filed with the Company's Form 8K Registration Statement filed
                    June 16,
                    2006, SEC file no.
                    000-31539).
 10.1
              
              Share
                  Purchase Agreement made as of December 6, 2005 among Coventure
                  International Inc., Xian Xilan Natural Gas Co., Ltd. and each of
                  Xilan's
                  shareholders. (incorporated by reference to the exhibits to Registrants
                  Form 8-K filed on December 9, 2005).10.2
              
              Return
                  to Treasury Agreement between Coventure International Inc. and
                  John
                  Hromyk, dated December 6, 2005. (incorporated by reference to the
                  exhibits
                  to Registrants Form 8-K filed on December 9, 2005).10.3
              
              Purchase
                  Agreement made as of December 19, 2005 between China Natural Gas,
                  Inc. and
                  John Hromyk (incorporated by reference to the exhibits to Registrants
                  Form
                  8-K filed on December 23,
                  2005).




37




10.4
              
              Form
                  of Securities Purchase Agreement (incorporated by reference to
                  the
                  exhibits to Registrants Form 8-K filed on January 12,
                  2006).10.5
              
              Form
                  of Common Stock Purchase Agreement (incorporated by reference to
                  the
                  exhibits to Registrants Form 8-K filed on January 12,
                  2006).10.6
              
              Form
                  of Registration Rights Agreement (incorporated by reference to
                  the
                  exhibits to Registrants Form 8-K filed on January 12,
                  2006).
 10.8
                
                CNG
                    Product Purchase and Sale Agreement between Xian Xilan Natural
                    Gas Co.,
                    Ltd. and Zhengzhou Zhongyou Hengran Petroleum Gas Co., Ltd. made
                    as of
                    July 20, 2006, (translated from the original mandarin) (incorporated
                    by
                    reference to the exhibits to Registrants Form 10-KSB filed on
                    April 17,
                    2007).
 14.1
              
              Code
                  of Ethics adopted by the Company on June 14, 2006 (incorporated
                  by
                  reference to the exhibits to Registrants Form 8-K filed on June
                  16,
                  2006).
 21.1
                
                List
                    of Subsidiaries. (incorporated by reference to the exhibits to
                    Registrants
                    Form 10-KSB filed on April 17,
                    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)




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**




The
      following table shows the fees paid or accrued for the audit and other services
      provided by our independent auditors for 2006 and 2005.




Audit
                  fees
              
              2006
              
              2005Kabani
                  & Company, Inc.
              
              $
              72,500
              
              $
              40,000Manning
                  Elliott
              
              
              —
              
              $
              14,750Audit-related
                  fees
              
              
              —
              
              
              —Tax
                  fees
              
              
              —
              
              $
              1,775*All
                  other fees
              
              $
              10,000
              **
              
              —Total
                  fees paid or accrued to ourprincipal
                  accountants
              
              $
              82,500
              
              $
              56,525




*
      The
      aggregate fees billed for professional services rendered by Manning Elliott
      for
      tax compliance services in fiscal year 2005 was $1,775. No fees were billed
      for
      tax advice or tax planning. The fees billed related to the preparation of income
      tax returns.




**
      The
      fees billed related to the preparation of our Registration Statement on Form
      SB-2 (333-131738) filed with the SEC on February 10, 2006.




The
      Audit
      Committee has considered whether the provision of non-audit services is
      compatible with maintaining the principal accountant's
      independence.




38


**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




Date:
        November 1, 2007




**CHINA
                NATURAL GAS, INC.**By:
            /s/
              Qinan JiQinan
                Ji
              Chief
                Executive Officer
              (Principal
                Executive Officer)




By:
            /s/
              Xiaogang ZhuXiaogang
                Zhu
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)




In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.


/s/
                    Qinan
                  
                  Ji
                    Qinan Ji
                
                President
                      and Chief Executive Officer and Director
                    (Principal
                      Executive Officer)
                
                November
                    1, 2007/s/
                    Zhiqiang Wang
                  
                  Zhiqiang
                    Wang
                
                Director
                
                November
                    1, 2007James
                    A. Garner
                
                Director
                
                November
                    1, 2007/s/
                    Xiaogang Zhu
                  
                  Xiaogang
                    Zhu
                
                Chief
                    Financial Officer
                  (Principal
                    Accounting Officer)
                
                November
                    1, 2007






39