UNITED
          STATES
 SECURITIES
          AND EXCHANGE COMMISSION
 Washington,
          D.C. 20549
 
 FORM
          10-K
 
 x
                  ANNUAL
                      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                      ACT OF
                      1934
 For
          the
          fiscal year ended December 31, 2007
 
 o
                TRANSITION
                    REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                    OF
                    1934
 For
          the
          transition period from ________ to _________
 
 Commission
          File Number: 000-31539
 
 **CHINA
          NATURAL GAS, INC.**
 (Exact
          Name of Registrant as specified in its charter)
 
 Delaware
                
                98-0231607(State
                    or other jurisdiction of
                  Incorporation
                    or organization)
                
                (I.R.S.
                    Employer
                  Identification
                    Number)
 
 19th
          Floor, Building B, Van Metropolis
 Tang
          Yan
          Road, Hi-Tech Zone
 Xi’an,
          710065, Shaanxi Province, China
 (Address
          of principal executive office)
 
 Registrant’s
          telephone number, including area code: 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
 (Title
          of
          Class)
 
 Indicate
          by check mark if the registrant is a well-known seasoned issuer, as defined
          in
          Rule 405 of the Securities Act.
 Yes oNo x
 
 Indicate
          by check mark if the registrant is not required to file reports pursuant
          to
          Section 13 or Section 15(d) of the Act.
 Yes oNo x
 
 Indicate
          by check mark whether the registrant (1) has filed all reports required
          to be
          filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
          the
          preceding 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 xNo o
 
 Indicate
          by check mark if disclosure of delinquent filers pursuant to Item 405 of
          Regulation S-K (section 229.405 of this chapter) is not contained herein,
          and
          will not be contained, to the best of the registrant’s knowledge, in definitive
          proxy or information statements incorporated by reference in Part III of
          this
          Form 10-K or any amendment to this Form 10-K. o
 
 Indicate
          by check mark whether the registrant is a large accelerated filer, an
          accelerated filer, or a non-accelerated filer. See definition of "accelerated
          filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
          one):
 
 Large
                    accelerated filer  o
                Accelerated
                    filer  oNon-accelerated
                    filer   o
                Smaller
                    reporting company x
 
 Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Act). Yes o
          No x
 
 The
          aggregate market value of the voting and non-voting stock held by non-affiliates
          of the registrant, as of March 18, 2008, was approximately $119,833,846.
          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.
 
 As
          of
          March 13, 2008, there were 29,200,304 shares of the issuer's common stock,
          $0.0001 par value per share, issued and outstanding.
  **FORM
          10-K**
  **FOR
          THE FISCAL YEAR ENDED DECEMBER 31, 2007**
  **INDEX**
  PagePART
                    I
                
                
                2ITEM
                    1.
                DESCRIPTION
                    OF BUSINESS
                
                2ITEM
                    1A
                RISK
                    FACTORS
                
                8ITEM
                    2.
                DESCRIPTION
                    OF PROPERTY
                
                16ITEM
                    3.
                LEGAL
                    PROCEEDINGS
                
                16ITEM
                    4.
                SUBMISSION
                    OF MATTERS TO A VOTE OF SECURITYHOLDERS
                
                16PART
                    II
                
                
                17ITEM
                    5.
                MARKET
                    FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
                    SMALL
                    BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
                
                17ITEM
                    6.
                SELECTED
                    FINANCIAL DATA
                
                18ITEM
                    7.
                MANAGEMENT'S
                    DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
                
                18ITEM
                    7A.
                QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                
                23ITEM
                    8.
                FINANCIAL
                    STATEMENTS
                
                24ITEM
                    9.
                CHANGES
                    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                    DISCLOSURE
                
                25ITEM
                    9A(T).
                CONTROLS
                    AND PROCEDURES
                
                25ITEM
                    9B.
                OTHER
                    INFORMATION
                
                26PART
                    III
                
                
                27ITEM
                    10.
                DIRECTORS,
                    EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
                    WITH SECTION
                    16(a) OF THE EXCHANGE ACT
                
                27ITEM
                    11.
                EXECUTIVE
                    COMPENSATION
                
                29ITEM
                    12.
                SECURITY
                    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                    STOCKHOLDER MATTERS
                
                30ITEM
                    13.
                CERTAIN
                    RELATIONSHIPS AND RELATED TRANSACTIONS
                
                31ITEM
                    14.
                PRINCIPAL
                    ACCOUNTANT FEES AND SERVICES
                
                31ITEM
                    15.
                EXHIBITS
                    AND FINANCIAL STATEMENT SCHEDULES
                
                32
 
  **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.
  1
  **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 Xi’an Xilan Natural Gas Co., Ltd., and entered into
          exclusive arrangements with Xi’an Xilan Natural Gas Co., Ltd. and these
          shareholders that give us the ability to substantially influence Xi’an Xilan
          Natural Gas’ daily operations and financial affairs, appoint its senior
          executives and approve all matters requiring shareholder approval. On December
          19, 2005, we changed our name to China Natural Gas, Inc.
 
 On
          February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., ("Xilan
          Equipment") as a wholly owned foreign enterprise (WOFE). We then, through
          Xilan
          Equipment, entered into exclusive arrangements with Xi’an Xilan Natural Gas Co.,
          Ltd. and these shareholders that give us the ability to substantially influence
          Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its
          senior executives and approve all matters requiring shareholder approval.
          We
          memorialized these arrangements on August 17, 2007. As a result, the Company
          consolidates the financial results of Xi’an Xilan Natural Gas as variable
          interest entity pursuant to FASB Interpretation No. 46R, "Consolidation
          of
          Variable Interest Entities."
 
 We
          distribute and sell natural gas to commercial, industrial and residential
          customers in the Xi’an area, including Lantian County and the Lintong and Baqiao
          Districts, of Shaanxi province of The Peoples' Republic of China ("China"
          or the
          "PRC") through a network of approximately 120 km of high pressure
          pipelines.  We also distribute and sell CNG as vehicular fuel through a
          network of CNG filling stations in Shaanxi and Henan Provinces.  As of
          December 31, 2007, we owned and operated 16 CNG filling stations in Shaanxi
          Province and 8 CNG filling stations in Henan Province.
 
 We
          operate three primary business lines:
  ·
                    Distribution
                        and sale of compressed natural gas (CNG) through Company-owned
                        CNG filling
                        stations for hybrid (natural gas/gasoline) powered vehicles
                        (24 stations
                        as of December 31,
                        2007);
   ·
                    Distribution
                        and sale of piped natural gas to residential, commercial
                        and industrial
                        customers through Company-owned pipelines. The Company distributes
                        and
                        sells natural gas to approximately 84,500 homes and businesses;
                        and
  ·
                    Conversion
                        of gasoline-fueled vehicles to hybrid (natural gas/gasoline)
                        powered
                        vehicles at our Auto Conversion
                        Division.
 We
          also
          generate additional revenues from the installation of connections to our
          piped natural gas distribution system for end users.
 
 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: (i) piped natural gas; and (ii)
          CNG.
 
 2
  **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
          Xi’an area. The network connects to a high pressure pipeline network of the
          government operated Shaanxi Natural Gas Company, which supplies natural
          gas
          directly from a gas field in the northern region of the province. Our high
          pressure pipeline then feed into city-gate "let-down" stations at Hongqing
          and
          Lantian County, where the pressure is reduced and natural gas is 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 our 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, from which we generate additional revenues.
 
 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***
 
 As
          of
          December 31, 2007, we own and operate 16 CNG natural gas filling stations
          in the
          Xi’an metropolitan area and 8 natural gas filling stations in Henan province.
          Through these company-owned filling stations, CNG is sold to taxis, buses
          and
          private cars that operate on CNG technology. Currently, we purchase natural
          gas
          for 1.22 RMB/cubic meter and sell each cubic meter for 2.35 RMB net of
          value
          added taxes.
 
 We
          continue expanding our CNG filling station base by constructing new stations
          as
          well as acquiring existing stations. We can construct a CNG filling station
          in
          approximately 60 days for a cost of approximately US$900,000. We are evaluating
          additional sites for CNG filling stations in Xi’an and in other regions such as
          Henan province.
 
 In
          July
          2005, we purchased a Compressor Station located in Hongqing, near our pipeline.
          A compressor station compresses natural gas and allows trucks to transport
          CNG
          to filling stations. In January 2008, we purchase an additional Compressor
          Station in Xianyang, approximately 15 miles from Xi’an.
 
 **Our
          Liquefied Natural Gas (LNG) Project**
 
 During
          2007, we made significant progress to move into the processing, distribution
          and
          sale of LNG. We believe that adding LNG to our product offerings will expand
          our
          geographic sales footprint and improve revenues and profitability.
 
 Both
          CNG
          and LNG are natural gas compressed into canisters for convenient transportation,
          usually by tank trucks, to locations 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 kilometers. LNG is compressed
          at
          up to 625 times atmospheric pressure and must be transported at sub-zero
          degree
          temperatures. The cost of compressing and processing LNG is higher than
          those of
          CNG, but LNG can be transported over longer distance and per unit transportation
          costs are therefore lower.
 
 In
          September 2007 we have started the construction of an LNG processing and
          distribution plant in Jingbian, Shaanxi province (the "LNG Project"). We
          estimate that the LNG Project will cost approximately $40 million (RMB
          309
          million). As of March 10, 2008, we have secured such financing and we believe
          that the plant can be completed by 2009. We have obtained the required
          permits
          and approvals to build the LNG plant from local government authorities;
          we are
          still required to have approval from the Shaanxi Development and Reform
          Commission to begin LNG production at the plant.
 3
  The
                approval process for LNG plant construction of this type is lengthy
                and
                arduous—a factor which we believe is a significant barrier to entry to potential
                competitors and which better positions our company for long-term
                growth. This
                project also allows us to diversify our business and focus on two
                high-growth areas: CNG filling station business and LNG production,
                distribution, and sale. We believe that the PRC's clean energy policies
                will
                bolster demand for natural gas in China and we have government support
                to be a
                leader in this area.
 
 **Our
                CNG Market**
 
 We
                estimate that currently there are ** approximately
                50,000 vehicles using CNG in the Xi’an area. Currently it is estimated that
                there are 5,000 buses and 20,000 taxis using CNG in Xi’an. 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: Xi’an 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 Xi’an area is approximately
                1,070,000 cubic meters per day. Compared to gasoline and diesel,
                natural gas as
                vehicular fuel is cheaper, cleaner and safer. The PRC government’s Clean Energy
                Policy encourages the use of CNG as a vehicular fuel.
 
 We
                estimate that the average CNG station in Xi’an pumps approximately 15,000 cubic
                meters of CNG per day. In the end of 2007, there were 64 CNG filling
                stations in
                Xi’an. We estimate that approximately 877,500 cubic meters of CNG is
                pumped per
                day during the year, a figure well below estimated total demand.
                As a result, we
                believe that there is significant unmet demand for CNG as vehicular
                fuel in the
                Xi’an area that provides us great opportunities for profit and
                growth.
 
 We
                believe that our vertically integrated operations, proprietary pipeline
                and
                secured supply contracts give us greater access to CNG supplies and
                customers
                and a unique competitive position as a major supplier of CNG vehicular
                fuel in
                the Xi’an area.
 
 **Our
                Pipeline Network Customers**
 
 As
                of
                December 31, 2007, we had approximately 84,500 customers, including
                residential,
                industrial and commercial customers. We are continuing to expand
                our customer
                base in Xi’an's newly developed business and residential areas including 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 prepaid cards that can
                be inserted
                into the connection equipment to initiate gas flow.
 
 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 these areas on an exclusive
                basis.
                Approval is still pending and can take up to three years. As a result,
                we cannot
                be certain when we will receive the approval, or if approved when
                we will get
                the permit, or whether we will receive such approval at all. However,
                we believe
                that if we receive the government approval, it would give us the exclusive right
                to provide natural gas to residential, commercial and industrial
                customers in
                those areas.
 
 **Our
                Subsidiaries and Variable Interest Entities**
 
 On
                October 24, 2006, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary,
                Shaanxi Jingbian Liquefied Natural Gas Co., Ltd., a limited liability
                company
                organized under the laws of the PRC to administer the production
                and sales of
                LNG.
  4




In
        2006,
        Xi’an Xilan Natural Gas, through its wholly-owned subsidiary, Shaanxi Jingbian
        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, Xi’an Xilan Natural Gas Equipment Ltd., a
        limited liability company organized under the laws of the PRC (“Xilan
        Equipment”), to provide equipment to our own CNG filling stations.
 
 Effective
        March 8, 2006, we also established a variable interest entity, Xi’an Xilan
        Natural Gas by entering into exclusive arrangement with Xi’an Xilan Natural Gas
        through our subsidiary Xilan Equipment. Pursuant to the exclusive arrangement,
        the Company, through Xilan Equipment, has the ability to substantially influence
        Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its
        senior executives and approve all matters requiring shareholder approval.
        As a
        result, based on FASB Interpretation No. 46R, Consolidation of Variable Interest
        Entities, the Company is able to treat Xi’an Xilan Natural Gas as a variable
        interest entity of the Company and consolidate its financial results.
  In
        May
        2007, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary, Xi’an Xilan Auto
        Body Shop.
  **Suppliers**
 
 The
        Company purchases all of the natural gas for resale from three vendors,
        PetroChina Changqing Oilfield Company, Shaanxi Natural Gas Co. Ltd., and
        Jingcheng City Mingshi Coal Bed Methane Exploitage Ltd. The Company has
        long-term supply agreements with PetroChina Changqing Oilfield Company and
        Jingcheng City Mingshi Coal Bed Methane Exploitage Ltd. with no minimum purchase
        requirements. The price of natural gas is strictly controlled by the government
        and has remained stable over the past 3 years.
 
 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 natural gas 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.
        The
        country is the world’s second largest energy consumer after the United States,
        with an annual energy consumption growth rate as high as 12.8% between 2002
        and
        2006. During the same period, natural gas consumption grows at 13.3% annually.
        Natural gas currently accounts for only 3% of the country’s total energy usage,
        compared to the world average 23%. Over the next 5 years, usage of natural
        gas
        in China is expected to grow 5% annually and make up 5.1% of the total energy
        consumption. As of January 1, 2007, China's domestic reserve of natural gas
        was
        estimated to be 80 trillion cubic feet. (Source: EIA). 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 provided a legal framework for private urban
        natural gas distribution.
 
 **Sources
        of Energy**
 
 Traditionally,
        the PRC has relied heavily on coal and crude oil as its primary energy sources.
        According to China Statistical Yearbook, in 2005, coal, crude oil,
        hydro-electricity and natural gas accounted for 67.7%, 22.7%, 7% and 3%,
        respectively, of the PRC's total energy consumption. During the PRC government’s
        Eleventh Five Year Plan (2006-2010), the percentage of coal, crude oil and
        hydro-electricity would go down to 66.1%, 20.5% and 6.8% respectively, while
        that of natural gas would increase to 5.1%. Traditionally, a large portion
        of
        natural gas is consumed as raw material for production of fertilizer. A little
        over 10% of natural gas is consumed as fuel. (Source: The Institute of Energy
        Economics of Japan).




5




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
        80,000 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 consumption of China based on current consumption
        levels.
 
 Because
        China's largest reserves of natural gas are located in western and north-central
        China, in 2002, the Chinese government initiated the construction of a 4,000
        kilometer long high pressure pipeline project in order to transport natural
        gas
        from Xinjiang and Shaanxi in the northwestern parts of China to Beijing,
        Shanghai, and other cities in the southern and eastern regions of China which
        are economically stronger and thus account for more energy consumption. The
        pipeline network, which runs across 9 provinces on Chinese mainland, started
        operation in December 2004, and has significantly optimized the energy
        infrastructure of China. The natural gas pipeline presented great business
        opportunity for natural gas distributors at the major junctures, such as
        Shaanxi
        province.
 
 **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.
 
 6
 
 **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 Xi’an 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 City-gate
                      and
                      Compressor Stations are approved by the local office of the
                      Ministry of
                      Construction.
 
 ·
                  Business
                      license to operate Xilan Equipment effective from February
                      22, 2006 to
                      February 21, 2021.
 
 ·
                  Business
                      license to operate Xilan Liquified Natural Gas effective from
                      October 24,
                      2006 to October 23, 2036.
 
 ·
                  Business
                      license to operate Xi’an Xilan Auto Bodyshop effective as of May 15,
                      2007.
 
 ·
                  Business
                      license to operate Xi’an Xilan Natural Gas effective as of January 8,
                      2000.
  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 regulate 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).
  7
  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 from natural gas wells to storage
          facilities. 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
          64
          CNG filling stations in Xi’an City. Fifteen of these stations are state owned
          enterprises. The other 49 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**
 
 Currently,
          we have 599 employees, including, 7 in management; 57 in administrative;
          13 in
          operations; 12 in sales; 5 in research and development; 17 in finance and
          457
          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.
 
 **Legal
          Proceedings**
 
 Neither
          our company nor any of our subsidiaries is a party to any legal proceedings
          that, individually or in the aggregate, are material to our company as
          a whole.
  **Available
          Information**
 
 We
          file
          quarterly and annual reports, proxy statements and other information with
          the
          SEC. You may read and copy any document that we file at the public reference
          facilities of the SEC in Washington, D.C. You may call the SEC at 1-800-SEC-0330
          for further information on the public reference rooms. Our SEC filings
          are also
          available to the public from the SEC’s website at
          http://www.sec.gov.
 
 **ITEM
          1A. RISK FACTORS**
 
 **RISK
          FACTORS**
 
 *An
          investment in our common stock is speculative and involves a high degree
          of risk
          and uncertainty. You should carefully consider the risks described below,
          together with the other information contained in this prospectus, including
          the
          consolidated financial statements and notes thereto of our Company, before
          deciding to invest in our common stock. The risks described below are not
          the
          only ones facing our Company. Additional risks not presently known to us
          or that
          we presently consider immaterial may also adversely affect our Company.
          If any
          of the following risks occur, our business, financial condition and results
          of
          operations and the value of our common stock could be materially and adversely
          affected.*
 
 ***Risks
          Related to Our Business***
 
 **Prices
          of natural gas can be subject to significant fluctuations, which may affect
          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.
 
 8
  **We
          are dependent on supplies of natural gas to deliver to our
          customers.**
 
 With
          the
          exception of certain compressed and liquid natural gas supplies, we obtain
          our
          supplies of natural gas from one supplier, which is a government owned
          entity.
          The ability to deliver our product is dependent on a sufficient supply
          of
          natural gas and if we are unable to obtain a sufficient natural gas supply,
          it
          could prevent us making deliveries to our customers. While we have supply
          contracts, we do not control the government owned or other suppliers, nor
          are we
          able to control the amount of time and effort they put forth on our behalf.
          It
          is possible that our suppliers will not perform as expected, and that they
          may
          breach or terminate their agreements with us. It is also possible that,
          after a
          semi-annual review of our primary supply contract, they will choose to
          provide
          services to a competitor. Any failure to obtain supplies of natural gas
          could
          prevent us from delivering such to our customers and could have a material
          adverse affect on our business and financial condition.
 
 **Our
          business operations are subject to a high degree of risk and insurance
          may not
          be adequate to cover liabilities resulting from accidents or injuries that
          may
          occur.**
 
 Our
          operations are subject to potential hazards incident to the gathering,
          processing, separation and storage of natural gas, such as explosions,
          product
          spills, leaks, emissions and fires. These hazards can cause personal injury
          and
          loss of life, severe damage to and destruction of property and equipment,
          and
          pollution or other environmental damage, and may result in curtailment
          or
          suspension of our operations.
 
 The
          occurrence of a significant event for which we are not fully insured or
          indemnified, and/or the failure of a party to meet its indemnification
          obligations, could materially and adversely affect our operations and financial
          condition. Moreover, no assurance can be given that we will be able to
          maintain
          adequate insurance in the future at rates it considers reasonable. To date,
          however, we have maintained adequate coverage at reasonable rates and have
          experienced no material uninsured losses.
 
 **Changes
          in the regulatory atmosphere could adversely affect our
          business.**
 
 The
          distribution of natural gas and operations of filling stations are highly
          regulated requiring registrations for the issuance of licenses required
          by
          various governing authorities in China. In addition, various standards
          must be
          met for filling stations including handling and storage of natural gas,
          tanker
          handling, and compressor operation which are regulated. The costs of complying
          with regulations in the future may harm our business. Furthermore, future
          changes in environmental laws and regulations could result in stricter
          standards
          and enforcement, larger fines and liability, and increased capital expenditures
          and operating costs, any of which could have a material adverse effect
          on our
          financial condition or results of operations.
  **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.
 
 9
  **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
          cannot
          be certain that funding will be available. To the extent that we raise
          additional funds by issuing equity securities, our stockholders may experience
          significant dilution. Any debt financing, if available, may involve restrictive
          covenants that impact our ability to conduct our business. If we are unable
          to
          raise additional capital if required or on acceptable terms, we may have
          to
          delay, scale back, discontinue our planned acquisitions or business development
          plans or obtain funds by entering into agreements on unattractive
          terms.
 
 ***Risks
          Related to the People’s Republic of China***
 
 **China’s
          economic policies could affect our business.**
 
 Substantially
          all of our assets are located in China and substantially all of our revenue
          is
          derived from our operations in China. Accordingly, our results of operations
          and
          prospects are subject, to a significant extent, to the economic, political
          and
          legal developments in China.
 
 While
          China's economy has experienced a significant growth in the past twenty
          years,
          growth has been irregular, both geographically and among various sectors
          of the
          economy. The Chinese government has implemented various measures to encourage
          economic growth and guide the allocation of resources. Some of these measures
          benefit the overall economy of China, but may also have a negative effect
          on us.
          For example, our operating results and financial condition may be adversely
          affected by the government control over capital investments or changes
          in tax
          regulations.
 
 The
          economy of China has been transitioning from a planned economy to a more
          market-oriented economy. In recent years the Chinese government has implemented
          measures emphasizing the utilization of market forces for economic reform
          and
          the reduction of state ownership of productive assets and the establishment
          of
          corporate governance in business enterprises; however, a substantial portion
          of
          productive assets in China are still owned by the Chinese government. In
          addition, the Chinese government continues to play a significant role in
          regulating industry development by imposing industrial policies. It also
          exercises significant control over China's economic growth through the
          allocation of resources, controlling payment of foreign currency-denominated
          obligations, setting monetary policy and providing preferential treatment
          to
          particular industries or companies.
 
 **Capital
          outflow policies in The People's Republic of China may hamper our ability
          to
          remit income to the United States.**
 
 The
          PRC
          government imposes controls on the convertibility of Renminbi into foreign
          currencies and, in certain cases, the remittance of currency outside of
          the PRC.
          We receive substantially all of our revenues in Renminbi. Under our current
          structure, our income is primarily derived from payments from Xi’an Xilan
          Natural Gas Co. Shortages in the availability of foreign currency may restrict
          the ability of Xi’an Xilan Natural Gas to remit sufficient foreign currency to
          pay dividends or other payments to us, or otherwise satisfy its foreign
          currency
          denominated obligations. Under existing PRC foreign exchange regulations,
          payments of current account items, including profit distributions, interest
          payments and expenditures from trade-related transactions, can be made
          in
          foreign currencies without prior approval from the PRC State Administration
          of
          Foreign Exchange by complying with certain procedural requirements. However,
          approval from appropriate government authorities is required in those cases
          in
          which Renminbi is to be converted into foreign currency and remitted out
          of the
          PRC to pay capital expenses, such as the repayment of bank loans denominated
          in
          foreign currencies. The PRC government also may at its discretion restrict
          access in the future to foreign currencies for current account transactions.
          If
          the foreign exchange control system prevents us from obtaining sufficient
          foreign currency to satisfy our currency demands, we may not be able to
          pay
          dividends in foreign currencies to our shareholders.
  10
  **Although
          we do not import goods into or export goods out of The People's Republic
          of
          China, fluctuation of the RMB may indirectly affect our financial condition
          by
          affecting the volume of cross-border money flow.**
 
 The
          value
          of the RMB fluctuates and is subject to changes in the People's Republic
          of
          China political and economic conditions. Since July 2005, the conversion
          of RMB
          into foreign currencies, including USD, has been based on rates set by
          the
          People's Bank of China which are set based upon the interbank foreign exchange
          market rates and current exchange rates of a basket of currencies on the
          world
          financial markets. As of March 13, 2008, the exchange rate between the
          RMB and
          the United States dollar was 7.095 RMB to every one USD.
 
 **We
          may face obstacles from the communist system in The People's Republic of
          China.**
 
 Foreign
          companies conducting operations in The People's Republic of China face
          significant political, economic and legal risks. The Communist regime in
          The
          People's Republic of China, including a stifling bureaucracy may hinder
          Western
          investment.
 
 **We
          may have difficulty establishing adequate management, legal and financial
          controls in The People's Republic of China.**
 
 The
          People's Republic of China historically has been deficient in Western style
          management and financial reporting concepts and practices, as well as in
          modern
          banking, computer and other control systems. We may have difficulty in
          hiring
          and retaining a sufficient number of qualified employees to work in The
          People's
          Republic of China. As a result of these factors, we may experience difficulty
          in
          establishing management, legal and financial controls, collecting financial
          data
          and preparing financial statements, books of account and corporate records
          and
          instituting business practices that meet Western standards.
 
 **Because
          our assets and operations are located in China, you may have difficulty
          enforcing any civil liabilities against us under the securities and other
          laws
          of the United States or any state.**
 
 We
          are a
          holding company, and all of our assets are located in the Republic of China.
          In
          addition, our directors and officers are non-residents of the United States,
          and
          all or a substantial portion of the assets of these non-residents are located
          outside the United States. As a result, it may be difficult for investors
          to
          effect service of process within the United States upon these non-residents,
          or
          to enforce against them judgments obtained in United States courts, including
          judgments based upon the civil liability provisions of the securities laws
          of
          the United States or any state.
 
 There
          is
          uncertainty as to whether courts of the Republic of China would
          enforce:
 ·
                  Judgments
                      of United States courts obtained against us or these non-residents
                      based
                      on the civil liability provisions of the securities laws of
                      the United
                      States or any state; or
 
 ·
                  In
                      original actions brought in the Republic of China, liabilities
                      against us
                      or non-residents predicated upon the securities laws of the
                      United States
                      or any state. Enforcement of a foreign judgment in the Republic
                      of China
                      also may be limited or otherwise affected by applicable bankruptcy,
                      insolvency, liquidation, arrangement, moratorium or similar
                      laws relating
                      to or affecting creditors' rights generally and will be subject
                      to a
                      statutory limitation of time within which proceedings may be
                      brought.
  11
  **The
          PRC legal system embodies uncertainties, which could limit law enforcement
          availability.**
 
 The
          PRC
          legal system is a civil law system based on written statutes. Unlike common
          law
          systems, decided legal cases have little precedence. In 1979, the PRC government
          began to promulgate a comprehensive system of laws and regulations governing
          economic matters in general. The overall effect of legislation over the
          past 27
          years has significantly enhanced the protections afforded to various forms
          of
          foreign investment in China. Each of our PRC operating subsidiaries and
          affiliates is subject to PRC laws and regulations. However, these laws
          and
          regulations change frequently and the interpretation and enforcement involve
          uncertainties. For instance, we may have to resort to administrative and
          court
          proceedings to enforce the legal protection that we are entitled to by
          law or
          contract. However, since PRC administrative and court authorities have
          significant discretion in interpreting statutory and contractual terms,
          it may
          be difficult to evaluate the outcome of administrative court proceedings
          and the
          level of law enforcement that we would receive in more developed legal
          systems.
          Such uncertainties, including the inability to enforce our contracts, could
          affect our business and operation. In addition, intellectual property rights
          and
          confidentiality protections in China may not be as effective as in the
          United
          States or other countries. Accordingly, we cannot predict the effect of
          future
          developments in the PRC legal system, particularly with regard to the industries
          in which we operate, including the promulgation of new laws. This may include
          changes to existing laws or the interpretation or enforcement thereof,
          or the
          preemption of local regulations by national laws. These uncertainties could
          limit the availability of law enforcement, including our ability to enforce
          our
          agreements with the government entities and other foreign
          investors.
  **The
          admission of China into the World Trade Organization could lead to increased
          foreign competition.**
 
 Provincial
          and central government authorities regulate the natural gas industry for
          safety
          and ensure that all areas receive natural gas service. However, as a result
          of
          China becoming a member of the World Trade Organization (WTO), restrictions
          on
          foreign investment in the industry may be reduced. With China's need to
          meet
          growth in natural gas demand and the WTO's requirement for a reduction
          of
          restrictions on foreign investment as a condition of membership, such events
          could lead to increased competition in the natural gas industry.
 
 **PRC
          laws and regulations governing our businesses and the validity of certain
          of our
          contractual arrangements are uncertain. If we are found to be in violation,
          we
          could be subject to sanctions. In addition, changes in such PRC laws and
          regulations may materially and adversely affect our business.**
  There
          are
          substantial uncertainties regarding the interpretation and application
          of PRC
          laws and regulations, including, but not limited to, the laws and regulations
          governing our business, or the enforcement and performance of our contractual
          arrangements with our variable interest entity, XXNG, 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.
  12
  **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 XXNG. 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 Xi’an Xilan Natural Gas by means of
          contractual arrangements. If the government of the People’s Republic of China
          determines that these contractual arrangements do not comply with applicable
          regulations, our business could be adversely affected.**
 
 The
          government of the People’s Republic of China restricts foreign investment in
          natural gas businesses in China. Accordingly, we operate our business in
          China
          through Xi’an Xilan Natural Gas. Xi’an Xilan Natural Gas holds the licenses and
          approvals necessary to operate our natural gas business in China. We have
          contractual arrangements with Xi’an Xilan Natural Gas and its shareholders that
          allow us to substantially control Xi’an Xilan Natural Gas. We cannot assure you,
          however, that we will be able to enforce these contracts.
 
 Although
          we believe we comply with current regulations of the People’s Republic of China,
          we cannot assure you that the government of the People’s Republic of China would
          agree that these operating arrangements comply with the People’s Republic of
          China’s licensing, registration or other regulatory requirements, with existing
          policies or with requirements or policies that may be adopted in the future.
          If
          the government of the People’s Republic of China determines that we do not
          comply with applicable law, it could revoke our business and operating
          licenses,
          require us to discontinue or restrict our operations, restrict our right
          to
          collect revenues, require us to restructure our operations, impose additional
          conditions or requirements with which we may not be able to comply, impose
          restrictions on our business operations or on our customers, or take other
          regulatory or enforcement actions against us that could be harmful to our
          business.
 
 **Our
          contractual arrangements with Xi’an Xilan Natural Gas and its shareholders may
          not be as effective in providing control over these entities as direct
          ownership.**
  Since
          the
          law of the People’s Republic of China limits foreign equity ownership in natural
          gas companies in China, we operate our business through Xi’an Xilan Natural Gas.
          We have no equity ownership interest in XXNG and rely on contractual
          arrangements to control and operate such businesses. These contractual
          arrangements may not be effective in providing control over Xi’an Xilan Natural
          Gas as direct ownership. For example, Xi’an Xilan Natural Gas could fail to take
          actions required for our business despite its contractual obligation to
          do so.
          If Xi’an Xilan Natural Gas fails to perform under its 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 the law of the People’s Republic of
          China, which may not be effective. In addition, we cannot assure you that
          Xi’an
          Xilan Natural Gas’ shareholders would always act in our best interests.
 
 13
  ***Risks
          Related to Corporate and Stock Matters***
 
 **Our
          largest stockholder has significant influence over our management and affairs
          and could exercise this influence against your best interests.**
 
 At
          March
          13, 2008, Mr. Qinan Ji, our founder, Chairman of the Board and Chief Executive
          Officer and our largest stockholder, beneficially owned approximately 20.3%
          of
          our outstanding shares of common stock. As a result, pursuant to our Bylaws
          and
          applicable laws and regulations, our controlling shareholder and our other
          executive officers and directors are able to exercise significant influence
          over
          our Company, including, but not limited to, any stockholder approvals for
          the
          election of our directors and, indirectly, the selection of our senior
          management, the amount of dividend payments, if any, our annual budget,
          increases or decreases in our share capital, new securities issuance, mergers
          and acquisitions and any amendments to our Bylaws. Furthermore, this
          concentration of ownership may delay or prevent a change of control or
          discourage a potential acquirer from making a tender offer or otherwise
          attempting to obtain control of us, which could decrease the market price
          of our
          shares. The limited prior public market and trading market may cause volatility
          in the market price of our common stock.
 
 **The
          limited trading volume in our stock 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.
  **Trading
          of our stock may be restricted by the SEC's penny stock regulations which
          may
          limit a stockholder's ability to buy and sell our stock if our stock trades
          below $5.00 per share.**
 
 The
          SEC
          has adopted Rule 15g-9 which generally defines "penny stock" to be any
          equity
          security that has a market price (as defined) less than $5.00 per share
          or an
          exercise price of less than $5.00 per share, subject to certain exceptions.
          Our
          securities are covered by the penny stock rules, which impose additional
          sales
          practice requirements on broker-dealers who sell to persons other than
          established customers and "accredited investors". The term "accredited
          investor"
          refers generally to institutions with assets in excess of $5,000,000 or
          individuals with a net worth in excess of $1,000,000 or annual income exceeding
          $200,000 or $300,000 jointly with their spouse. The penny stock rules require
          a
          broker-dealer, prior to a transaction in a penny stock not otherwise exempt
          from
          the rules, to deliver a standardized risk disclosure document in a form
          prepared
          by the SEC which provides information about penny stocks and the nature
          and
          level of risks in the penny stock market. The broker-dealer also must provide
          the customer with current bid and offer quotations for the penny stock,
          the
          compensation of the broker-dealer and its salesperson in the transaction
          and
          monthly account statements showing the market value of each penny stock
          held in
          the customer's account. The bid and offer quotations, and the broker-dealer
          and
          salesperson compensation information, must be given to the customer orally
          or in
          writing prior to effecting the transaction and must be given to the customer
          in
          writing before or with the customer's confirmation. In addition, the penny
          stock
          rules require that prior to a transaction in a penny stock not otherwise
          exempt
          from these rules, the broker-dealer must make a special written determination
          that the penny stock is a suitable investment for the purchaser and receive
          the
          purchaser's written agreement to the transaction. These disclosure requirements
          may have the effect of reducing the level of trading activity in the secondary
          market for the stock that is subject to these penny stock rules. Consequently,
          these penny stock rules may affect the ability of broker-dealers to trade
          our
          securities. We believe that the penny stock rules discourage investor interest
          in and limit the marketability of our common stock.
 
 14
  **NASD
          sales practice requirements may also limit a stockholder's ability to buy
          and
          sell our stock.**
 
 Section
          15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
          promulgated thereunder by the SEC require broker-dealers dealing in penny
          stocks
          to provide potential investors with a document disclosing the risks of
          penny
          stocks and to obtain a manually signed and dated written receipt of the
          document
          before effecting any transaction in a penny stock for the investor's
          account.
 
 Potential
          investors in our common stock are urged to obtain and read such disclosure
          carefully before purchasing any shares that are deemed to be "penny stock."
          Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve
          the
          account of any investor for transactions in such stocks before selling
          any penny
          stock to that investor. This procedure requires the broker-dealer to (i)
          obtain
          from the investor information concerning his or her financial situation,
          investment experience and investment objectives; (ii)reasonably determine,
          based
          on that information, that transactions in penny stocks are suitable for
          the
          investor and that the investor has sufficient knowledge and experience
          as to be
          reasonably capable of evaluating the risks of penny stock transactions;
          (iii)
          provide the investor with a written statement setting forth the basis on
          which
          the broker-dealer made the determination in (ii) above; and (iv) receive
          a
          signed and dated copy of such statement from the investor, confirming that
          it
          accurately reflects the investor's financial situation, investment experience
          and investment objectives. Compliance with these requirements may make
          it more
          difficult for holders of our common stock to resell their shares to third
          parties or to otherwise dispose of them in the market or otherwise.
 
 **Shares
          eligible for future sale may adversely affect the market price of our Common
          stock, as the future sale of a substantial amount of our restricted stock
          in the
          public marketplace could reduce the price of our common
          stock.**
 
 From
          time
          to time, certain of our stockholders may be eligible to sell all or some
          of
          their shares of common stock by means of ordinary brokerage transactions
          in the
          open market pursuant to Rule 144, promulgated under the Securities Act
          ("Rule
          144"), subject to certain limitations. In general, pursuant to Rule 144,
          a
          stockholder (or stockholders whose shares are aggregated) who has satisfied
          a
          one-year holding period may, under certain circumstances, sell within any
          three-month period a number of securities which does not exceed the greater
          of
          1% of the then outstanding shares of common stock or the average weekly
          trading
          volume of the class during the four calendar weeks prior to such sale.
          Rule 144
          also permits, under certain circumstances, the sale of securities, without
          any
          limitations, by a non-affiliate of our company that has satisfied a two-year
          holding period. Any substantial sale of common stock pursuant to Rule 144
          or
          pursuant to any resale prospectus may have an adverse effect on the market
          price
          of our securities.
  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.
 
 15
  **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.
  **I** **TEM
          2. DESCRIPTION OF PROPERTY**
  Our
          principal executive offices are located at 19th Floor, Building B, Van
          Metropolis, No. 35 Tangyan Road, Hi-Tech Zone, Xi’an, 710065, Shaanxi Province,
          People's Republic of China. Our property consists of approximately 818
          square
          meters, which is rented on an annual basis for $88,225.
  We
          have
          additional properties located in Lantian County, the districts of Baqiao,
          Lintong and Gaoxin in the city of Xi’an, 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. As of December
          31, 2007,
          we own and operate 16 CNG filling stations in Shaanxi Province and 8 CNG
          filling
          stations in Henan Province.
  In
          February, 2006 we formed our 100%-owned subsidiary, Xilan Equipment, which
          maintains an office in the No. 3 Xianmen St., Lantian County, Xi’an, Shaanxi
          Province, China. The office consists of approximately 1001 sq. feet, with
          annual
          rental payment of $1,106.
  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. The office consists of approximately 3,921 sq.
          feet,
          with annual rental payment of $5,214.
  As
          of
          December 31, 2007, the Company owned 11 trucks and 23 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.
  **ITEM
          4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**
  None .
  16


**PART
        II**
  **ITEM
        5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        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 December 31. The
        following table contains information about the range of high and low bid
        prices
        for our common stock for each full quarterly period for 2007 and 2006 based
        upon
        reports of transactions on the OTC Bulletin Board. The source of this
        information is the OTC Bulletin Board. The quotations represent inter-dealer
        prices without retail markup, markdown or commission, and may not necessarily
        represent actual transactions.
 
 COMMON
                  STOCK
                MARKETPRICEHIGH
              
              LOWFISCAL
                  YEAR ENDED DECEMBER 31, 2007:Fourth
                  Quarter
              
              $
              14.95
              
              $
              6.50Third
                  Quarter
              
              $
              8.34
              
              $
              4.39Second
                  Quarter
              
              $
              5.06
              
              $
              1.85First
                  Quarter
              
              $
              3.16
              
              $
              1.65FISCAL
                  YEAR ENDED DECEMBER 31, 2006:Fourth
                  Quarter
              
              $
              3.46
              
              $
              2.51Third
                  Quarter
              
              $
              3.24
              
              $
              2.60Second
                  Quarter
              
              $
              4.45
              
              $
              2.05First
                  Quarter
              
              $
              5.67
              
              $
              3.00
  As
        of
        March13, 2008, there were approximately 43 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
 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 paid any cash dividends on our common stock. We currently anticipate
        that
        we will retain any future earnings for use in our business. Consequently,
        we do
        not anticipate paying any cash dividends in the foreseeable future.
  The
        payment of dividends in the future will depend upon our results of operations,
        as well as our short-term and long-term cash availability, working capital,
        working capital needs and other factors, as determined by our board of
        directors. Currently, except as may be provided by applicable laws, there
        are no
        contractual or other restrictions on our ability to pay dividends if we were
        to
        decide to declare and pay them.
 
 **Securities
        Authorized for Issuance under Equity Compensation Plan**
  There
        has
        been no common stock authorized for issuance with respect to any equity
        compensation plan as of the fiscal year ended December 31, 2007.
 
 **Recent
        Sales of Unregistered Securities.**
  The
        following securities were issued within fiscal year 2007 and the subsequent
        interim period and were not registered under the Securities Act of
        1933.
  17




On
        January 29, 2008, the Company issued and sold RMB145,000,000 in principal
        amount
        of 5.00% Guaranteed Senior Notes due 2014 and issued seven-year warrants
        exercisable for up to 2,900,000 shares of the Company’s common stock at the
        initial exercise price of $7.3652 pursuant to a Securities Purchase Agreement
        with Abax Lotus Ltd. On March 10, 2008, the Company issued the same investor
        additional Senior Notes in aggregate principal amount of RMB145,000,000
        (approximately $20,000,000) and granted the Investor an option to purchase
        up to
        RMB 73,000,000 (approximately $10,000,000) in principal amount of its Senior
        Notes.
 
 On
        August
        2, 2007, the Company issued 4,615,385 shares of common stock at the purchase
        price of $3.25 per share and warrants to purchase up to 692,308 shares of
        common
        stock at the per share exercise price of $7.79 per share to certain investors
        pursuant to a Securities Purchase Agreement the Company entered into on the
        same
        date with the investors named therein.
 
 **ITEM
        6.**  **SELECTED
        FINANCIAL DATA.**
 
 Not
        required for smaller reporting companies.
 
 **ITEM
        7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
  *The
        information in this report contains forward-looking statements. All statements
        other than statements of historical fact made in this report are forward
        looking. In particular, the statements herein regarding industry prospects
        and
        future results of operations or financial position are forward-looking
        statements. These forward-looking statements can be identified by the use
        of
        words such as "believes," "estimates," "could," "possibly," "probably,"
        anticipates," "projects," "expects," "may," "will," or "should" or other
        variations or similar words. No assurances can be given that the future results
        anticipated by the forward-looking statements will be achieved. Forward-looking
        statements reflect management's current expectations and are inherently
        uncertain. Our actual results may differ significantly from management's
        expectations.*
 
 The
        following discussion and analysis should be read in conjunction with our
        financial statements, included herewith. This discussion should not be construed
        to imply that the results discussed herein will necessarily continue into
        the
        future, or that any conclusion reached herein will necessarily be indicative
        of
        actual operating results in the future. Such discussion represents only the
        best
        present assessment of our management.
 
 **Overview**
 
 We
        were
        incorporated in the state of Delaware on March 31, 1999, as Bullet Environmental
        Systems, Inc. On May 25, 2000, we changed our name to Liquidpure Corp. and
        on
        February 14, 2002, we changed our name to Coventure International Inc.
 
 On
        December 6, 2005, we issued an aggregate of 4 million shares to all of the
        registered shareholders of Xi’an Xilan Natural Gas Co., Ltd., and entered into
        exclusive arrangements with Xi’an Xilan Natural Gas Co., Ltd. and these
        shareholders that give us the ability to substantially influence Xi’an Xilan
        Natural Gas’ daily operations and financial affairs, appoint its senior
        executives and approve all matters requiring shareholder approval. On December
        19, 2005, we changed our name to China Natural Gas, Inc.
 
 On
        February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., (“Xilan
        Equipment”) as a wholly owned foreign enterprise (WOFE). We then, through Xilan
        Equipment, entered into exclusive arrangements with Xi’an Xilan Natural Gas Co.,
        Ltd. and these shareholders that give us the ability to substantially influence
        Xi’an Xilan Natural Gas’ daily operations and financial affairs, appoint its
        senior executives and approve all matters requiring shareholder approval.
        We
        memorialized these arrangements on August 17, 2007. As a result, the Company
        consolidates the financial results of Xi’an Xilan Natural Gas as variable
        interest entity pursuant to FASB Interpretation No. 46R, “Consolidation of
        Variable Interest Entities.”
 
 We
        transport, distribute and sell natural gas to commercial, industrial and
        residential customers in the Xi’an area, including Lantian County and the
        districts of Lintong and Baqiao, in the Shaanxi Province of The Peoples'
        Republic of China ("China" or the "PRC") through a network of high pressure
        pipelines. We also distribute and sell CNG as vehicular fuel through a network
        of approximately 120 km of CNG filling stations in Shaanxi and Henan
        Provinces.  As of December 31, 2007, we owned and operated 16 CNG filling
        stations in Shaanxi Province and 8 CNG filling stations in Henan
        Province.
 
 18
  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 (24
                    stations
                    as of December 31, 2007);
 
 ·
                Distribution
                    and sale of piped natural gas to residential, commercial and
                    industrial
                    customers through Company-owned pipelines. The Company distributes
                    and
                    sells natural gas to approximately 84,500 homes and businesses;
                    and
 
 ·
                Conversion
                    of gasoline-fueled vehicles to hybrid (natural gas/gasoline)
                    powered
                    vehicles at our Auto Conversion
                    Division.
  We
            buy
            all of the natural gas that we sell and distribute to our customers.
            We do not
            mine or produce any of our own natural gas and have no plans to do so
            during the
            next 12 months. The natural gas that we buy is available in two forms:
            (i) piped
            natural gas; and (ii) CNG.
 
 On
            October 24, 2006, Xi’an Xilan Natural Gas formed a wholly-owned subsidiary,
            Shaanxi Jingbian Liquified Natural Gas Co., Ltd., for the purpose of
            constructing a liquefied natural gas facility to be located in Jingbian,
            Shaanxi
            Province. We plan to invest approximately $40 million to construct this
            facility, and we have secured such funding for this project through security
            purchase agreement with Abax Lotus Ltd. The LNG plant is under construction
            and
            is expected to start operation in 2009. Once completed, the plant has
            LNG
            processing capacity of 500,000 cubic meters per day, or approximately
            150
            million cubic meters on an annual basis.
  **Critical
            Accounting Policies**
 
 ***Use
            of Estimates.*** The
            preparation of financial statements in conformity with generally accepted
            accounting principles requires management to make estimates and assumptions
            that
            affect the reported amounts of assets and liabilities and disclosure
            of
            contingent assets and liabilities at the date of the financial statements
            and
            the reported amounts of revenues and expenses during the reporting period.
            Actual results could differ from those estimates.
 
 ***Accounts
            and Other Receivables.*** Accounts
            and other receivables are recorded at net realizable value consisting
            of the
            carrying amount less an allowance for uncollectible accounts, as needed.
            The
            Company allowance for uncollectible accounts is not significant.
 
 The
            Company maintains reserves for potential credit losses on accounts receivable.
            Management reviews the composition of accounts receivable and analyzes
            historical bad debts, customer concentrations, customer credit worthiness,
            current economic trends and changes in customer payment patterns to evaluate
            the
            adequacy of these reserves. Reserves are recorded primarily on a specific
            identification basis. The Company’s management determined that all receivables
            are good and there is no need for a bad debt reserve as of December 31,
            2007.
 
 As
            needed
            for normal business purpose, the Company advances predetermined amounts
            based
            upon internal Company policy to certain employees and internal units
            to ensure
            certain transactions to be performed in timely manner. The Company has
            full
            oversight and control over the advanced accounts. Therefore, the allowance
            for
            the uncollectible accounts is nil.
 
 ***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 installation
            of
            pipelines and material used in repairing and modifying of vehicles. Inventory
            also consists of natural gas and gasoline.
  19
  ***Revenue
            Recognition.*** The
            Company's revenue recognition policies are in compliance with Staff Accounting
            Bulletin (SAB) 104. Revenue is recognized when services are rendered
            to
            customers, when a formal arrangement exists, the price is fixed or determinable,
            the delivery is completed, no other significant obligations of the Company
            exist
            and collectibility is reasonably assured. Payments received before all
            of the
            relevant criteria for revenue recognition are satisfied are recorded
            as unearned
            revenue. Revenue from gas sales is recognized when gas is pumped through
            pipelines to the end users. Revenue from installation of pipelines is
            recorded
            when the contract is completed and accepted by the customers. The installation
            contracts are usually completed within one to two months time.
 
 ***Unearned
            Revenue.*** Unearned
            revenue represents prepayments by customers for gas purchases and advance
            payments on installation of pipeline contracts. The Company records such
            prepayment as unearned revenue when the payments are received.
 
 **CONSOLIDATED
            RESULTS OF OPERATIONS**
 
 **Comparing
            Fiscal Years Ended December 31, 2007 and 2006:**
 
 The
            following table presents certain consolidated statement of operations
            information. Financial information is presented for the 12-month period
            ending
            December 31, 2007 and December 31, 2006.
 2007
                    
                    2006Revenues
                    
                    $
                    35,392,053
                    
                    $
                    18,828,790Cost
                        of Revenues
                    
                    $
                    18,025,075
                    
                    $
                    9,718,000Operating
                        Expenses
                    
                    $
                    6,288,929
                    
                    $
                    2,596,199Income
                        from Operations
                    
                    $
                    11,078,049
                    
                    $
                    6,514,591Net
                        Income
                    
                    $
                    9,116,070
                    
                    $
                    5,451,095




Revenue.
            We generated approximately 80.7% of our revenues in 2007 from the sale
            of
            natural gas and approximately 17.4% of our revenues from installation
            fees
            charged to connect end-user customers to our natural gas distribution
            system.
            Sales of natural gas at the Company-owned filling stations accounted
            for
            approximately 76.5% of our total revenues in 2007, or approximately $27,060,537
            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 21.4% of our total revenues in 2007, or
            approximately $7,576,286 including both natural gas sales and installation
            fees.
            Sales of natural gas to third party-owned filling stations accounted
            for
            approximately 0.2% of our total revenues in 2007, or approximately $79,200.The
            Company expects natural gas revenues to increase on both an actual basis
            and as
            a percentage of revenue. In 2008, the Company expects to add up to 15,600
            pipeline customers and construct an additional 18 filling stations, which
            the
            Company estimates will increase sales of natural gas by 69 million cubic
            meters.
  We
            had
            total revenues of $35,392,053 for the twelve months ended December 31,
            2007, an
            increase of $16,563,263 or approximately 87.97%, compared to $18,828,790
            for the
            twelve months ended on December 31, 2006. The increase in revenues was
            due
            primarily to the addition of 13 new company-owned filling stations during
            2007
            as well as an increase in the number of residential, commercial and industrial
            pipeline customers from approximately 75,000 in 2006 to approximately
            84,500 in
            2007.
  New
            pipeline customers pay approximately 60% of the installation costs to
            connect to
            our pipeline system up front and the balance is payable as part of their
            monthly
            natural gas bill. During 2007, our installation revenues increased approximately
            39.06% over the previous year and our sales of natural gas increased
            approximately 106.21% over the previous year. Four customers accounted
            for
            approximately 13.6%, 11.8%, 8.8% and 8.4% of the Company's installation
            revenue
            for the year ended December 31, 2007.
  Cost
            of
            Sales. Our cost of sales consists of both the cost of gas sales and the
            cost of
            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 installation
            costs related to connecting customers to our pipeline system that are
            generally
            expensed when incurred.
  20
  Cost
            of
            sales in 2007 was $18,025,075, an increase of $8,307,075 or approximately
            85.48%
            from 2006. Cost of gas sales increased by approximately 93.64% to $14,838,997
            in
            2007, as compared with $7,663,060 in 2006. The increase in our cost of
            sales was
            primarily related to a material increase in the amount of gas sold and
            the price
            that we paid to our suppliers in 2007. In addition, our installation
            costs
            increased in 2007 by approximately 55.04% to $3,186,078, as compared
            with
            $2,054,940 in 2006 as a result of the addition of new pipeline customers.
            The
            price that we paid for gas in 2007 remained relatively constant compared
            to
            2006.
  We
            purchase all of our natural gas for resale from three vendors, PetroChina
            Changqing Oilfield Company, Shaanxi Natural Gas Co Ltd, and Jingcheng
            city
            Mingshi Coal Bed Methane Exploitage Ltd. As the government owns all land in
            China, the government controls and owns all the natural resources coming
            from
            the ground, thus the government controls the price and flow of the natural
            gas.
            Due to the soaring crude oil price and ever increasing demand for energy
            consumption, the National Development and Reform Commission, which regulates
            the
            energy price in China, adjusted the upstream natural gas price for industrial
            users and vehicular CNG distributors upward by ¥ 0.4/CM,
            or 35% in November, 2007. The retail price for vehicular CNG was adjusted
            upward
            at a ratio of 0.75:1 to the retail price of #90 gasoline at November,
            2007. Many
            large cities see dramatic increase in retail vehicular CNG price, for
            example
            66% in Shanghai and 21% (taxi) and 38% (bus) in Tianjin. However, natural
            gas
            price for residential customers is not adjusted to keep the rate at an
            affordable level. As China shifts from a centrally planned economy to
            a market
            economy, we believe that it is in the government's best interest to keep
            prices
            stable, and maintain a stable flow of supply. The government has also
            undertaken
            programs to promote the economy growth of the region in which we are
            located.
            Therefore, we expect supply and price to continue to be stable in the
            future.
 
 Gross
            profit. The Company earned a gross profit of $17,366,978 for the twelve
            months
            ended December 31, 2007, an increase of $8,256,188 or approximately 90.62%,
            compared to $9,110,790 for the twelve months ended December 31, 2006.
            The
            increase in gross profit is due to a material increase in gas sales and
            installation revenues in 2007, partially offset by an increase in cost
            of
            sales.
  Gross
            margin. Gross margin, as a percentage of revenues, increased to approximately
            49.07% for the twelve months ended December 31, 2007, from approximately
            48% for
            the twelve months ended December 31, 2006. The increase in gross margin
            is
            primarily attributable to the significant increase in revenues generated
            from
            our Company-owned filling stations.
 
 Operating
            expenses. The Company incurred operating expenses of $6,288,929 for the
            twelve
            months ended December 31, 2007, an increase of $3,692,730 or approximately
            142.24%, compared to $2,596,199 for the twelve months ended December
            31, 2006.
            Our operating expenses increased primarily as a result of expenses related
            to
            the construction, acquisition, and operation of 13 new filling stations
            in 2007,
            as well as continuing expenses related to the identification of possible
            locations for additional filling stations and the governmental licensing
            and
            approval process, as well as the evaluation of existing natural gas filling
            stations as potential acquisition targets. In addition, sales and marketing
            costs increased in 2007 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 $1,287,735 in 2006 to $2,837,768
            in
            2007 due to an increase in personnel as a result of our growth.
  For
            the
            year ended December 31, 2007, two suppliers accounted for 29.66% and
            11.36% 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 $9,116,070 for the twelve months ended
            December
            31, 2007, an increase of $3,664,975, from $5,451,095 for the twelve months
            ended
            December 31, 2006. Increase in net income is attributed to our material
            increase
            in revenues, partially offset by a higher increase in cost of sales and
            operating expenses in 2007. The company expects revenue from our CNG
            filling
            stations to increase on both an actual basis and as a percentage of revenue.
            In
            2008, the Company expects to add up to 15,600 pipeline customers and
            construct
            or acquire an additional 18 filling stations, which the Company estimates
            will
            increase sales of natural gas by 69 million cubic meters. In addition,
            the
            Company began selling gasoline in late 2007 and expects gasoline sales
            will be a
            minor portion of our entire business.
  21
  Income
            tax was $1,913,923 for the twelve months ended December 31, 2007, as
            compared to
            $1,025,584 for the twelve months ended December 31, 2006. The increase
            in income
            tax was attributed to the growth of installation fees and the sale of
            natural gas.
  **Liquidity
            and Capital Resources**
  As
            of
            December 31, 2007 the Company had $13,291,729 of cash and cash equivalents
            on
            hand compared to $5,294,213 of cash and cash equivalents as of December
            31,
            2006.
  The
            primary sources of cash in 2007 were income from operations and financing
            activities. The Company had net cash flows provided by operations of
            $10,476,441
            for the twelve months ended December 31, 2007 as compared to net cash
            provided
            by operations of $4,385,524 in the corresponding period last year. The
            increase
            in net cash flows from operations in 2007 as compared to 2006 was mainly
            due to
            the increase in net income and a decrease in accounts receivable and
            advances
            during the twelve months ended December 31, 2007 offset by a decrease
            in other
            payables and tax payable.
  On
            August
            2, 2007, we completed a private placement offering, which generated net
            proceeds
            of $13,823,467, which were used for the construction of natural gas filling
            stations, the purchase of raw materials and working capital.
  Cash
            outflows for investing activities increased from $9,738,469 in 2006 to
            $16,885,340 in 2007 as a result of advance payments made to equipment
            suppliers
            for investments necessary to construct and acquire filling stations and
            for
            construction materials used to build the pipelines to individual
            households.
  The
            Company expects to construct an additional 18 CNG filing stations in
            2008. The
            Company expects the funds for these investing activities will come from
            the
            Company's operating cash flow.
  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 and Contractual Obligations**
  We
            entered in to a 15 day foreign currency forward contract in late December
            2007;
            please refer to financial statement footnote under "Derivative Accounting"
            for
            more details. We also entered into series of long term lease agreements
            with
            outside parties to lease land use right to the self-built natural gas
            filling
            stations located in the PRC, and please refer to footnote "Commitments
            and
            Contingencies" to the financial statements for details. We have purchase
            agreements with several natural gas suppliers and please see
            footnote "Current Vulnerability Due to Certain Concentrations" for more
            explanations. We do not have any other off-balance sheet arrangements
            that have
            or are reasonably likely to have a current or future effect on our financial
            condition, changes in financial condition, revenues or expenses, results
            of
            operations, liquidity, capital expenditures or capital resources that
            are
            material to our investors.
 
 **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.
  22
  **RECENT
            ACCOUNTING PRONOUNCEMENTS**
  In
            September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
            The
            objective of SFAS No. 157 is to increase consistency and comparability
            in fair
            value measurements and to expand disclosures about fair value measurements.
            SFAS
            No. 157 defines fair value, establishes a framework for measuring fair
            value in
            generally accepted accounting principles, and expands disclosures about
            fair
            value measurements. SFAS No. 157 applies under other accounting pronouncements
            that require or permit fair value measurements and does not require any
            new fair
            value measurements. The provisions of SFAS No. 157 are effective for
            fair value
            measurements made in fiscal years beginning after November 15, 2007.
            The
            adoption of this statement is not expected to have a material effect
            on the
            Company‘s future reported financial position or results of
            operations.
 
 In
            February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
            Financial Assets and Financial Liabilities". This Statement permits entities
            to
            choose to measure many financial assets and financial liabilities at
            fair value.
            Unrealized gains and losses on items for which the fair value option
            has been
            elected are reported in earnings. SFAS No. 159 is effective for fiscal
            years
            beginning after November 15, 2007. The Company is currently assessing
            the impact
            of SFAS No. 159 on its financial position and results of
            operations.
 
 In
            June
            2007, the FASB issued FASB Staff Position No. EITF 07-3, "Accounting
            for
            Nonrefundable Advance Payments for Goods or Services Received for use
            in Future
            Research and Development Activities" ("FSP EITF 07-3"), which addresses
            whether
            nonrefundable advance payments for goods or services that used or rendered
            for
            research and development activities should be expensed when the advance
            payment
            is made or when the research and development activity has been performed.
            Management is currently evaluating the effect of this pronouncement on
            financial
            statements.
 
 In
            December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
            Combinations." SFAS No. 141 (Revised 2007) changes how a reporting
            enterprise accounts for the acquisition of a business. SFAS No. 141
            (Revised 2007) requires an acquiring entity to recognize all the assets
            acquired
            and liabilities assumed in a transaction at the acquisition-date fair
            value,
            with limited exceptions, and applies to a wider range of transactions
            or events.
            SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
            after December 15, 2008 and early adoption and retrospective application is
            prohibited. The Company is currently evaluating the impact that adopting
            SFAS
            No. 141R will have on its financial statements.
 
 In
            December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
            in
            Consolidated Financial Statements", which is an amendment of Accounting
            Research
            Bulletin ("ARB") No. 51.  This statement clarifies that a
            noncontrolling interest in a subsidiary is an ownership interest in the
            consolidated entity that should be reported as equity in the consolidated
            financial statements.  This statement changes the way the consolidated
            income statement is presented, thus requiring consolidated net income
            to be
            reported at amounts that include the amounts attributable to both parent
            and the
            noncontrolling interest.  This statement is effective for the fiscal
            years, and interim periods within those fiscal years, beginning on or
            after
            December 15, 2008.  Based on current conditions, the Company does not
            expect the adoption of SFAS 160 to have a significant impact on its results
            of
            operations or financial position.
 
 **ITEM
            7A. QUANTITIAVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**
 
 Not
            required for smaller reporting issuers.
 ****
  23
  **ITEM
            8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
  
 CHINA
            NATURAL GAS, INC.
 AND
            SUBSIDIARIES
 
 CONSOLIDATED
            FINANCIAL STATEMENTS
 AS
            OF
            DECEMBER 31, 2007 AND 2006
 
 24




CHINA
        NATURAL GAS, INC.
 AND
        SUBSIDIARIES
 CONTENTS
 **Pages**Reports
                      of Independent Registered Public Accounting Firms
                  
                  F-1Consolidated
                      Balance Sheets as of December 31, 2007 and 2006
                  
                  F-3Consolidated
                      Statements of Income and Other Comprehensive income for the
                      years ended
                      December 31, 2007 and 2006
                  
                  F-4Consolidated
                      Statements of Stockholders’ Equity for the years ended December 31, 2007
                      and 2006
                  
                  F-5Consolidated
                      Statements of Cash Flows for the years ended December 31, 2007
                      and
                      2006
                  
                  F-6Notes
                      to Consolidated Financial Statements as of December 31,
                      2007
                  
                  F-7 –
                      F-22







**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders of
 China
        Natural Gas, Inc. and Subsidiaries
 
 We
        have
        audited the accompanying consolidated balance sheets of China Natural Gas,
        Inc.
        and Subsidiaries as of December 31, 2007, and the related consolidated
        statements of income and other comprehensive income, stockholders’ equity, and
        cash flows for year then ended. 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 audit. The
        consolidated financial statements of China Natural Gas, Inc. and Subsidiaries
        as
        of December 31, 2006 were audited by other auditors whose report dated March
        12,
        2007, expressed an unqualified opinion on those statements.
 
 We
        conducted our audit 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 financial
        statements are free of material misstatement. The company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audit included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the consolidated financial statements, assessing the accounting principles
        used
        and significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of China Natural Gas, Inc.
        and
        Subsidiaries as of December 31, 2007, and the results of its operations and
        its
        cash flows for the year ended December 31, 2007, in conformity with accounting
        principles generally accepted in the United States of America.
 
 /s/
        Moore
        Stephens Wurth Frazer and Torbet, LLP
  Walnut,
        California
 March
        31,
        2008
  1




**Report
        of Independent Registered Public Accounting Firm**
  
 
 
 Board
        of
        Directors and Stockholders of
 China
        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 year ended December 31, 2006. 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 audit.
 
 We
        conducted our audit 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 audit 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 year
        ended
        December 31, 2006, in conformity with U.S. generally accepted accounting
        principles.
 
 
 
 /s/
        Kabani & Company, Inc.
 **Certified
        Public Accountants**
 
 Los
        Angeles, California
 March
        12,
        2007




2






**CHINA
        NATURAL GAS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 **AS
        OF DECEMBER 31, 2007 and 2006**
 **2007**
                
                **2006****ASSETS****CURRENT
                    ASSETS:**Cash
                    & cash equivalents
                
                $
                13,291,729
                
                $
                5,294,213Short-term
                    investments
                
                
                238,554
                
                
                -Accounts
                    receivable
                
                
                306,179
                
                
                569,037Other
                    receivable
                
                
                824,020
                
                
                711,279Inventories
                
                
                231,339
                
                
                285,537Advances
                
                
                663,041
                
                
                960,681Prepaid
                    expense and other current assets
                
                
                109,722
                
                
                304,620**Total
                    current assets**
                
                
                15,664,584
                
                
                8,125,367**PROPERTY
                    AND EQUIPMENT, net**
                
                
                32,291,995
                
                
                17,193,728**CONSTRUCTION
                    IN PROGRESS**
                
                
                2,210,367
                
                
                2,343,499**OTHER
                    ASSETS**
                
                
                3,123,052
                
                
                803,757**TOTAL
                    ASSETS**
                
                $
                53,289,998
                
                $
                28,466,351**LIABILITIES
                    AND STOCKHOLDERS' EQUITY****CURRENT
                    LIABILITIES:**Accounts
                    payable and accrued liabilities
                
                $
                487,710
                
                $
                406,212Other
                    payables
                
                
                55,979
                
                
                279,236Unearned
                    revenue
                
                
                327,220
                
                
                284,011Taxes
                    Payable
                
                
                1,211,775
                
                
                1,866,688**Total
                    current liabilities**
                
                
                2,082,684
                
                
                2,836,147**COMMITMENTS
                    AND CONTINGENCIES**
                
                
                -
                
                
                -**STOCKHOLDERS'
                    EQUITY:**Preferred
                    stock, $0.0001 per share; authorized 5,000,000 shares; none issued
                
                
                -
                
                
                -Common
                    stock, $0.0001 per share; 45,000,000 authorized shares 29,200,304
                    and
                    24,210,183 shares issued and outstanding at December 31, 2007
                    and 2006,
                    respectively
                
                
                2,920
                
                
                2,421Additional
                    paid-in capital
                
                
                32,046,879
                
                
                18,223,911Cumulative
                    translation adjustment
                
                
                3,477,025
                
                
                839,452Statutory
                    reserves
                
                
                1,802,735
                
                
                750,886Retained
                    earnings
                
                
                13,877,755
                
                
                5,813,534**Total
                    stockholders' equity**
                
                
                51,207,314
                
                
                25,630,204**TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY**
                
                $
                53,289,998
                
                $
                28,466,351




See
      report of independent registered public accounting firm.




The
      accompanying notes are an integral part of these statements.




F-3




**CHINA
        NATURAL GAS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2007 AND 2006**
 
 **Years
                  Ended December 31,****2007**
              
              **2006****Revenue**Natural
                  gas revenue
              
              $
              28,278,033
              
              $
              13,713,145Installation
                  and other
              
              
              7,114,020
              
              
              5,115,645Total
                  revenue
              
              
              35,392,053
              
              
              18,828,790**Cost
                  of revenue**Natural
                  gas cost
              
              
              14,838,997
              
              
              7,663,060Installation
                  and other
              
              
              3,186,078
              
              
              2,054,940Total
                  cost of revenue
              
              
              18,025,075
              
              
              9,718,000**Gross
                  profit**
              
              
              17,366,978
              
              
              9,110,790**Operating
                  expenses**Selling
                  expenses
              
              
              3,451,161
              
              
              1,308,464General
                  and administrative expenses
              
              
              2,837,768
              
              
              1,287,735Total
                  operating expenses
              
              
              6,288,929
              
              
              2,596,199**Income
                  from operations**
              
              
              11,078,049
              
              
              6,514,591**Non-operating
                  income (expense):**Interest
                  income
              
              
              70,697
              
              
              41,109Other
                  income
              
              
              39,076
              
              
              -Other
                  expense
              
              
              (7,100
              )
              
              (79,021
              )Foreign
                  exchange loss
              
              
              (150,729
              )
              
              -Total
                  non-operating expense
              
              
              (48,056
              )
              
              (37,912
              )**Income
                  before income tax**
              
              
              11,029,993
              
              
              6,476,679**Provision
                  for income tax**
              
              
              1,913,923
              
              
              1,025,584**Net
                  income**
              
              
              9,116,070
              
              
              5,451,095**Other
                  comprehensive income**Foreign
                  currency translation gain
              
              
              2,637,573
              
              
              610,705**Comprehensive
                  Income**
              
              $
              11,753,643
              
              $
              6,061,800**Weighted
                  average shares outstanding**Basic
              
              
              26,200,679
              
              
              23,872,936Diluted
              
              
              26,301,802
              
              
              23,872,936**Earnings
                  per share**Basic
              
              $
              0.35
              
              $
              0.23Diluted
              
              $
              0.35
              
              $
              0.23




See
          report of independent registered public accounting firm.
  The
        accompanying notes are an integral part of these statements.


F-4





**CHINA
        NATURAL GAS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY**
 **Common
                    Stock**
                
                **Additional**
                
                **Accumulative
                    Other**
                
                
                
                
                
                **Total****Shares**
                
                **Amount**
                
                **Paid
                    in**
                  **Capital**
                
                **Comprehensive
                    Gain**
                
                **Statutory
                    Reserve**
                
                **Retained
                    Earnings**
                
                **Stockholders'
                    Equity**Balance
                    December 31, 2005
                
                
                20,204,088
                
                $
                2,020
                
                $
                8,331,458
                
                $
                228,747
                
                $
                169,722
                
                $
                943,603
                
                $
                9,675,550Shares
                    issued for cash, at $2.80
                
                
                3,714,428
                
                
                371
                
                
                10,399,629
                
                
                
                
                
                
                
                
                
                
                
                10,400,000Offering
                    costs
                
                
                
                
                
                
                
                
                (1,557,147
                )
                
                
                
                
                
                
                
                
                
                
                (1,557,147
                )Cashless
                    exercise of warrants
                
                
                291,667
                
                
                30
                
                
                1,049,971
                
                
                
                
                
                
                
                
                
                
                
                1,050,001Cumulative
                    translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                610,705
                
                
                
                
                
                
                
                
                610,705Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                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**Shares
                    issued for cash, at $3.25
                
                
                4,615,385
                
                
                462
                
                
                14,999,538
                
                
                
                
                
                
                
                
                
                
                
                15,000,000Offering
                    costs
                
                
                
                
                
                
                
                
                (1,176,533
                )
                
                
                
                
                
                
                
                
                
                
                (1,176,533
                )Cashless exercise
                    of warrants
                
                
                374,736
                
                
                37
                
                
                (37
                )
                
                
                
                
                
                
                
                
                
                
                -Cumulative
                    translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                2,637,573
                
                
                
                
                
                
                
                
                2,637,573Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                9,116,070
                
                
                9,116,070Transfer
                    to statutory reserve
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,051,849
                
                
                (1,051,849
                )
                
                -**Balance
                    December 31, 2007**
                
                
                **29,200,304**
                
                **$**
                **2,920**
                
                **$**
                **32,046,879**
                
                **$**
                **3,477,025**
                
                **$**
                **1,802,735**
                
                **$**
                **13,877,755**
                
                **$**
                **51,207,314**




See
          report of independent registered public accounting firm.
  The
        accompanying notes are an integral part of these statements.




F-5


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


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 2007 AND 2006**





**Years
                Ended December 31,****2007**
            
            **2006****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            9,116,070
            
            $
            5,451,095Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            1,639,685
            
            
            731,723Change
                in assets and liabilities:Accounts
                receivable
            
            
            290,660
            
            
            (550,831
            )Other
                receivable
            
            
            36,929
            
            
            (636,262
            )Inventory
            
            
            71,226
            
            
            (233,582
            )Advances
            
            
            245,514
            
            
            (1,611,967
            )Prepaid
                expense and other current assets
            
            
            (11,113
            )
            
            (282,103
            )Accounts
                payable
            
            
            (130,228
            )
            
            201,661Accrued
                expense
            
            
            158,759
            
            
            -Other
                payables
            
            
            (208,669
            )
            
            1,352,866Unearned
                revenue
            
            
            22,425
            
            
            (28,882
            )Taxes
                payable
            
            
            (754,817
            )
            
            (8,194
            )Net
                cash provided by operating activities
            
            
            10,476,441
            
            
            4,385,524**CASH
                FLOWS FROM INVESTING ACTIVITIES**Purchase
                of property and equipment
            
            
            (14,180,053
            )
            
            (9,192,482
            )Purchase
                short term investments
            
            
            (229,106
            )
            
            -Additions
                to construction in progress
            
            
            (519,309
            )
            
            (545,987
            )Prepayment
                on long term assets
            
            
            (1,914,343
            )
            
            -Payment
                for land use rights
            
            
            (42,529
            )
            
            -Net
                cash used in investing activities
            
            
            (16,885,340
            )
            
            (9,738,469
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Stock
                issued for cash
            
            
            15,000,000
            
            
            10,400,000Proceeds
                from exercise of warrants
            
            
            -
            
            
            1,050,001Payment
                for offering costs
            
            
            (1,176,533
            )
            
            (1,557,147
            )Net
                cash provided by financing activities
            
            
            13,823,467
            
            
            9,892,854Effect
                of exchange rate changes on cash and cash equivalents
            
            
            582,948
            
            
            78,680**NET
                INCREASE IN CASH & CASH EQUIVALENTS**
            
            
            7,997,516
            
            
            4,618,589**CASH
                & CASH EQUIVALENTS, BEGINNING OF YEAR**
            
            
            5,294,213
            
            
            675,624**CASH
                & CASH EQUIVALENTS, END OF YEAR**
            
            $
            13,291,729
            
            $
            5,294,213**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Interest
                paid
            
            $
            -
            
            $
            -Income
                taxes paid
            
            $
            2,387,487
            
            $
            -




See
          report of independent registered public accounting firm.
  The
        accompanying notes are an integral part of these statements.




F-6




**China
        Natural Gas, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007**


**Note
        1 - Organization and Basis of Presentation**
 
 Organization
        and Line of Business
  China
        Natural Gas, Inc. (formerly Coverture International Inc.) was incorporated
        in
        the state of Delaware on March 31, 1999 as Bullet Environmental Systems,
        Inc.
        and on May 25, 2000, the Company changed its name to Liquidpure Corp. On
        February 14, 2002 the Company changed its name to Coventure International,
        Inc.
 
 Xi’an
        Xilan Natural Gas Co, Ltd. (“XXNGC”) was incorporated on January 8, 2000 in
        Xi’an city in the Shaanxi province, China. The core business of XXNGC is
        distribution of natural gas to commercial, industrial and residential customers,
        construction of pipeline networks, and installation of natural gas fittings
        and
        parts for end-users. XXNGC has an exclusive permit to provide gas utility
        service in Lantian County,  Lintong
        and Baqiao District of Xi’an city, China.
 
 On
        December 6, 2005, XXNGC executed a share purchase agreement with Coventure
        International, Inc. (“Coventure”), a public shell in the United States of
        America. Pursuant to the purchase agreement, Coventure acquired all of the
        issued and outstanding capital stock of XXNGC in exchange for 16,000,000
        (post-split) shares of Coventure’s common stock.
 
 Concurrently
        with the closing of the purchase agreement and as a condition thereof, Coventure
        entered into an agreement with John Hromyk, its President and Chief Financial
        Officer, pursuant to which Mr. Hromyk returned 23,884,712 (post-split) shares
        of
        Coventure's common stock for cancellation. Upon completion of the foregoing
        transactions, Coventure had an aggregate of 20,204,088 (post-split) shares
        of
        common stock issued and outstanding.
 
 As
        a
        result of the merger, XXNGC’s stockholders own approximately 80% of the combined
        company and the directors and executive officers of XXNGC became the directors
        and executive officers of the Coventure. Accordingly, the transaction has
        been
        accounted for as a reverse acquisition of Coventure by XXNGC resulting in
        a
        recapitalization of XXNGC rather than as a business combination. XXNGC is
        deemed
        to be the purchaser and surviving company for accounting purposes. Accordingly,
        its assets and liabilities are included in the balance sheet at their historical
        book values and the results of operations of XXNGC have been presented for
        the
        comparative prior period. The historical cost of the net liabilities of
        Coventure that were acquired was $3,378. In addition, Coventure changed it
        name
        to China Natural Gas, Inc. (hereafter referred to as the “Company”) and the
        stockholders approved a stock dividend of three shares for each share held,
        which has been accounted for as a four to one forward stock split. All shares
        and per share data have been restated retrospectively.
 
 However,
        this merger acquisition was not able to be approved under the certain laws
        of
        the People’s Republic of China (“PRC”). PRC law currently has limits on foreign
        ownership of companies in certain industries. To comply with these foreign
        ownership restrictions, the Company established its wholly owned subsidiary,
        Xilan Natural Gas Equipment Ltd. (“XNGE”), a limited liability company organized
        under the PRC law on February 21, 2006. The Company through XNGE entered
        into
        exclusive arrangements with XXNGC. Through these arrangements, the Company
        has
        the ability to substantially influence XXNGC’s daily operations and financial
        affairs, appoint its senior executives and approve all matters requiring
        shareholder approval. These arrangements were formalized on August 17, 2007,
        and
        made retroactive to March 8, 2006. As a result, XXNGC became a variable interest
        entity effective on March 8, 2006
  See
              report of independent registered public accounting
              firm.
 F-7
 **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  Shaanxi
        Jingbian Liquefied Natural Gas Co., Ltd (“SJLNG”) was incorporated on October
        24, 2006 with registered capital of $3,792,000 (RMB 30,000,000) in Jingbian
        District, Shaanxi province, People’s Republic of China (“PRC”). SJLNG was
        established for the purpose of constructing a liquefied natural gas (“LNG”)
        facility to be located in Jingbian, Shaanxi province and to administer the
        production and sales of LNG. SJLNG is 100% owned by XXNGC.
 
 Xi'an
        Xilan Auto Bodyshop Co., Ltd (“XXABC”) was incorporated on May 15, 2007 with
        registered capital of $519,200 (RMB 4,000,000) in Shaanxi province, People’s
        Republic of China (“PRC”). XXABC was established for the purpose of providing
        modification services to different types of automobiles to be able to use
        natural gas. XXABC is 100% owned by XXNGC.
 
 Principles
        of Consolidation
 
 The
        accompanying consolidated financial statements include the accounts of China
        Natural Gas, Inc. and its wholly owned subsidiaries, Shaanxi Natural Gas
        Equipment Co., Ltd (incorporated in February 2006) and its 100% variable
        interest entities (“VIE”), Xi’an Xilan Natural Gas Co. Ltd., Shaanxi Jingbian
        Liquefied Natural Gas Co., Ltd, and Xian Xilan Auto Bodyshop. All inter-company
        accounts and transactions have been eliminated in the
        consolidation.
 
 In
        accordance with Financial Interpretation No. 46R, Consolidation of Variable
        Interest Entities ("FIN 46R"), VIEs are generally entities that lack sufficient
        equity to finance their activities without additional financial support from
        other parties or whose equity holders lack adequate decision making ability.
        All
        VIEs with which the Company is involved must be evaluated to determine the
        primary beneficiary of the risks and rewards of the VIE. The primary beneficiary
        is required to consolidate the VIE for financial reporting
        purposes.
  On
          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.”
 a.
              Xian
                  Xilan Natural Gas holds the licenses and approvals necessary to
                  operate
                  its natural gas business in China.
 
 b.
              Xilan
                  Equipment provides exclusive technology consulting and other general
                  business operation services to Xian Xilan Natural Gas in return
                  for a
                  consulting services fee which is equal to Xian Xilan Natural Gas’s
                  revenue.
 
 c.
              Xian
                  Xilan Natural Gas’s shareholders have pledged their equity interests in
                  Xian Xilan Natural Gas to the
                  Company.
  See
              report of independent registered public accounting
              firm.
 F-8
 **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
 d.
              Irrevocably
                  granted the Company an exclusive option to purchase, to the extent
                  permitted under PRC law, all or part of the equity interests in
                  Xian Xilan
                  Natural Gas and agreed to entrust all the rights to exercise their
                  voting
                  power to the person appointed by the
                  Company.
 
 Basis
        of Presentation
 
 The
        accompanying consolidated financial statements have been prepared in conformity
        with accounting principles generally accepted in the United States of America.
        The Company’s functional currency is the Chinese Renminbi (“RMB”); however, the
        Company’s reporting currency is the United States Dollar (“USD”), therefore, the
        accompanying consolidated financial statements have been translated and
        presented in USD.
 
 Foreign
        Currency Translation
 
 As
        of
        December 31, 2007 and 2006, the accounts of the Company were maintained,
        and
        their consolidated financial statements were expressed in RMB. Such consolidated
        financial statements were translated into USD in accordance with Statement
        of
        Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation,"
        with the RMB as the functional currency. According to the Statement, all
        assets
        and liabilities were translated at the exchange rate on the balance sheet
        date,
        stockholder's equity are translated at the historical rates and statement
        of
        income and cash flow items are translated at the weighted average exchange
        rate
        for the year. The resulting translation adjustments are reported under other
        comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive
        Income."
 
 Translation
        adjustments resulting from this process amounted to $3,477,025 and $839,452
        as
        of December 31, 2007 and 2006, respectively. The balance sheet amounts with
        the
        exception of equity at December 31, 2007 were translated 7.29 RMB to $1.00
        USD
        as compared to 7.80 RMB at December 31, 2006. The equity accounts were stated
        at
        their historical rate. The average translation rates applied to income and
        cash
        flow statement amounts for the years ended December 31, 2007 and 2006 were
        7.59
        RMB and 7.96 RMB to $1.00 USD, respectively.
 
 **Note
        2 – Summary of Significant Accounting Policies**
 
 Use
        of
        Estimates
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates.
 
 Cash
        and Cash Equivalents
 
 Cash
        and
        cash equivalents include cash on hand and cash in banks maintained with state
        owned with the PRC and the United States. The Company considers all highly
        liquid investments with original maturities of three months or less at the
        time
        of purchase to be cash equivalents.
  See
              report of independent registered public accounting
              firm.
 F-9
  **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  Certain
        financial instruments, which subject the Company to concentration of credit
        risk, consist of cash. The Company maintains balances at financial institutions
        which, from time to time, may exceed Federal Deposit Insurance Corporation
        insured limits for the banks located in the Unites States. Balances at financial
        institutions or state owned banks within the PRC are not covered by insurance.
        As of December 31, 2007 and 2006, the Company had deposits in excess of
        federally insured limits total of $13,053,994 and $5,183,581, respectively.
        The
        Company has not experienced any losses in such accounts and believes it is
        not
        exposed to any significant risks on its cash in bank accounts.
 
 Short
        Term Investments
 
 Short-term
        investments are securities available for sale, held by a private investment
        trust company for investing activities. Gain or loss on securities is computed
        using cost basis of first-in, first-out (FIFO) basis. The fair value of
        securities at December 31, 2007 totaled $238,554, which equaled the original
        costs, and was returned to the Company in March 2008.
 
 Accounts
        Receivable
 
 Accounts
        and other receivable are recorded at net realizable value consisting of the
        carrying amount less an allowance for uncollectible accounts, as needed.
        The
        Company allowance for uncollectible accounts is not significant.
 
 The
        Company maintains reserves for potential credit losses on accounts receivable.
        Management reviews the composition of accounts receivable and analyzes
        historical bad debts, customer concentrations, customer credit worthiness,
        current economic trends and changes in customer payment patterns to evaluate
        the
        adequacy of these reserves. Reserves are recorded primarily on a specific
        identification basis. The Company’s management has determined that all
        receivables are collectible and there is no need for a reserve for bad debts
        as
        of December 31, 2007 and 2006.
 
 Other
        Receivable
 
 As
        needed
        for normal business purpose, the Company advances predetermined amounts based
        upon internal Company policy to certain employees and internal units to ensure
        certain transactions to be performed in a timely manner. The Company has
        full
        oversight and control over the advanced accounts. Therefore, the allowance
        for
        the uncollectible accounts is nil.
 
 Advances
 
 The
        Company advances to certain vendors for purchase of its material. The advances
        are interest free and unsecured.
 
 Inventory
 
 Inventory
        is stated at the lower of cost, as determined on a first-in, first-out basis,
        or
        market. Management compares the cost of inventories with the market value,
        and
        allowance is made for writing down the inventories to their market value,
        if
        lower. Inventory consists of material used in the installation of pipelines
        and
        material used in repairing and modifying of vehicles. Inventory also consist
        of
        natural gas and gasoline
  See
          report of independent registered public accounting firm.
 F-10
 **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  At
        December 31, 2007 and 2006, the following are the details of the
        inventories:
 
 2007
              
              2006Materials
                  and supplies
              
              $
              109,333
              
              $
              283,997Natural
                  gas and gasoline
              
              
              122,006
              
              
              1,540$
              231,339
              
              $
              285,537
 
 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, 2007 and 2006, the following are the details of the property
        and
        equipment:
 
 2007
              
              2006Office
                  equipment
              
              $
              163,432
              
              $
              73,636Operating
                  equipment
              
              
              22,413,270
              
              
              13,219,979Vehicles
              
              
              1,484,892
              
              
              1,210,552Buildings
              
              
              11,943,006
              
              
              4,559,00336,004,600
              
              
              19,063,170Less
                  accumulated depreciation
              
              
              (3,712,605
              )
              
              (1,869,442
              )$
              32,291,995
              
              $
              17,193,728
 
 Depreciation
        expense for the years ended December 31, 2007 and 2006 was $1,639,685 and
        $731,723, respectively.
  Long-Lived
        Assets
 
 The
        Company applies the provision of Statement of Financial Accounting Standards
        No.
        144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
        144") to all long lived assets., SFAS 144 addresses accounting and reporting
        for
        impairment and disposal of long-lived assets. The Company periodically evaluates
        the carrying value of long-lived assets to be held and used in accordance
        with
        SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived
        assets used in operations when indicators of impairment are present and the
        undiscounted cash flows estimated to be generated by those assets are less
        than
        the assets' carrying amounts. In that event, a loss is recognized based on
        the
        amount by which the carrying amount exceeds the fair market value of the
        long-lived assets. Loss on long-lived assets to be disposed of is determined
        in
        a similar manner, except that fair market values are reduced for the cost
        of
        disposal. Based on its review, the Company believes that, as of December
        31,
        2007 there were no significant impairments of its long-lived
        assets.
  See
          report of independent registered public accounting firm.
 F-11
  **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  Construction
        In Progress
 
 Construction
        in progress consists of the cost of constructing property and equipment for
        the
        Company’s use. The major cost of construction in progress relates to material,
        labor and overhead.
 
 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. The Company
        considers the carrying amount of these current assets and current liabilities
        to
        approximate their fair values because of the short period of time between
        the
        origination of such instruments and their expected realization and their
        current
        market rate of interest.
 
 Derivative
        Accounting
 
 The
        Company entered into a 15 days foreign currency forward contract on December
        25,
        2007. As of December 31, 2007, the fair value of the contract is $3,055,505
        (or
        342,030,266 Japanese Yen) and is recorded in cash and cash equivalents in
        the
        accompanying consolidated balance sheets due to the short term nature of
        the
        investment.
 
 The
        financial instruments are accounted for in accordance with Financial Accounting
        Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
        Activities”, which established accounting and reporting requirements for
        derivative instruments and hedging activities. SFAS No. 133, as amended by
        SFAS
        No. 138 and 149, requires that all derivative instruments subject to the
        requirements of the statement be measured at fair market value and recognized
        as
        assets or liabilities in the balance sheet. The accounting for changes in
        the
        fair value of a derivative depends on the intended use of the derivative
        and the
        resulting designation is generally established at the inception of a derivative.
        For derivatives designated as cash flow hedges and meeting the effectiveness
        guidelines of SFAS No. 133, changes in fair value, to the extent effective,
        are
        recognized in other comprehensive income until the hedged item is recognized
        in
        earnings. Hedge effectiveness is measured at least quarterly based on the
        relative changes in fair value between the derivative contract and the hedged
        item over time. Any change in fair value of a derivative resulting from
        ineffectiveness or an excluded component of the gain/loss is recognized
        immediately in the statement of operations.
 
 The
        Company elected not to apply hedge accounting. For a derivative instrument
        that
        is not designated, as a hedge, the change in fair value is recognized in
        earnings in the period of change. For the year ended December 31, 2007, no
        gain
        or loss was incurred.
  See
          report of independent registered public accounting firm.
 F-12
 **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  Revenue
        Recognition
 
 The
        Company's revenue recognition policies are in compliance with Staff accounting
        bulletin (SAB) 104. Revenue is recognized when services are rendered to
        customers when a formal arrangement exists, the price is fixed or determinable,
        the delivery is completed, no other significant obligations of the Company
        exist
        and collectibility is reasonably assured. Payments received before all of
        the
        relevant criteria for revenue recognition are satisfied are recorded as unearned
        revenue. Revenue from gas and gasoline sales is recognized when gas and gasoline
        is pumped through pipelines to the end users. Revenue from installation of
        pipelines is recorded when the contract is completed and accepted by the
        customers. The installation contracts are usually completed within one to
        two
        months time. Revenue from repairing and modifying vehicles is recorded when
        service are rendered to and accepted by the customers
 
 Unearned
        Revenue
 
 Unearned
        revenue represents prepayments by customers for gas purchases and advance
        payments on installation of pipeline contracts. The Company records such
        prepayment as unearned revenue when the payments are received .
 
 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, 2007 and 2006. As of December 31, 2007
        and
        2006, there were no options outstanding.
 
 The
        Company accounts for non-employee stock-based compensation expense in accordance
        with EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued
        to
        Other Than Employee for Acquiring, or in Conjunction with Selling, Goods
        or
        Services (“EITF 96-18”). The Company used the Black-Scholes option-pricing model
        as its method of valuation for share-based awards granted. The Company’s
        determination of fair value of share-based payment awards on the date of
        grant
        using an option-pricing model is affected by the Company’s stock price as well
        as assumptions regarding a number of complex and subjective variables. These
        variables include, but are not limited to, the Company’s expected stock price
        volatility over the term of the awards and the expected term of the
        awards.
 See
          report of independent registered public accounting firm.
 F-13
  **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  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, 2007 and 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.
        The
        Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
        Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
        benefit only if it is “more likely than not” that the tax position would be
        sustained in a tax examination, with a tax examination being presumed to
        occur.
        The amount recognized is the largest amount of tax benefit that is greater
        than
        50% likely of being realized on examination. For tax positions not meeting
        the
“more likely than not” test, no tax benefit is recorded. The adoption had no
        affect on the Company’s financial statements.
 
 Local
        PRC Income Tax
 
 The
        Company’s subsidiary or variable interest entities operate in China. Pursuant to
        the tax laws of China, general enterprises are subject to income tax at an
        effective rate of 33%. The Company’s variable interest entity, XXNGC, is in the
        natural gas industry whose development is encouraged by the government.
        According to the income tax regulation, any company engaged in the natural
        gas
        industry enjoys a favorable tax rate. Accordingly, except for income from
        XNGE, SJLNG, XXABC,
        which subjects to 33% PRC income tax rate, XXNGC’s income is subject to a
        reduced tax rate of 15%.
 
 A
        reconciliation of tax at United States federal statutory rate to provision
        for
        income tax recorded in the financial statements is as follows:
 
 
 For
                  the Years
                Ended
                  December 31,2007
              
              2006Tax
                  provision (credit) at statutory rate
              
              
              34
              %
              
              34
              %Foreign
                  tax rate difference
              
              
              (1
              )%
              
              (1
              )%Effect
                  of favorable tax rate
              
              
              (15
              )%
              
              (14
              )%18
              %
              
              19
              %
 
 The
        estimated tax savings for the years ended December 31, 2007 and 2006 amounted
        to
        approximately $2,174,806 and $1,232,074, respectively. The net effect on
        earnings per share had the income tax been applied would decrease basic earnings
        per share for the years ended December 31, 2007 and 2006 from $0.35 to $0.26
        and
        $0.23 to $0.18, respectively.
 
 Beginning
        January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law will replace
        the existing laws for Domestic Enterprises (“DES”) and Foreign Invested
        Enterprises (“FIEs”). The new standard EIT rate of 25% will replace the 33% rate
        currently applicable to both DES and FIEs.
 
 Starting
        from January 1, 2008, XNGE, SJLNG and XXABC will be subject to 25% income
        tax
        rate according to the newly issued Income Tax Laws of PRC. As XXNGC is in
        the natural
        gas industry ,
        XXNGC
        is continuing to enjoy the reduced tax rate of 15% until 2010.
  See
          report of independent registered public accounting firm.
 F-14
 **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  Value
        added tax
 
 Sales
        revenue represents the invoiced value of goods, net of a value-added tax
        (“VAT”). All of the Company’s variable interest entity XXNGC’s products that are
        sold in the PRC are subject to a Chinese value-added tax at a rate of 13%
        of the
        gross sales price. This VAT may be offset by VAT paid by the XXNGC on raw
        materials and other materials included in the cost of producing their finished
        product. XXNGC recorded VAT payable and VAT receivable net of payments in
        the
        financial statements. The VAT tax return is filed offsetting the payables
        against the receivables.
 
 All
        revenues from XXABC subject to a Chinese value-added tax at a rate of 6%.
        This
        VAT cannot offset with VAT paid for materials included in the cost of revenues.
 
 Basic
        and Diluted Earning Per Share
  Earning
        per share is calculated in accordance with the Statement of Financial Accounting
        Standards No. 128 (“SFAS No. 128”), “Earnings per share”. Basic net earnings per
        share is based upon the weighted average number of common shares outstanding.
        Diluted net earnings per share is based on the assumption that all dilutive
        convertible shares and stock options were converted or exercised. Dilution
        is computed by applying the treasury stock method. Under this method, options
        and warrants are assumed to be exercised at the beginning of the period (or
        at
        the time of issuance, if later), and as if funds obtained thereby were used
        to
        purchase common stock at the average market price during the period.
 
 Statement
        of Cash Flows
 
 In
        accordance with Statement of Financial Accounting Standards No. 95, "Statement
        of Cash Flows," cash flows from the Company's operations is calculated based
        upon the local currencies and translated to USD at average translation rates
        for
        the period. As a result, translation adjustments amounts related to assets
        and
        liabilities reported on the statement of cash flows will not necessarily
        agree
        with changes in the corresponding balances on the balance sheet.
 
 Reclassifications
 
 Certain
        prior period amounts have been reclassified to conform to current period’s
        presentation. This reclassification had no material effect on operations
        or cash
        flows.
 
 Recent
        Pronouncements
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements“. The
        objective of SFAS No. 157 is to increase consistency and comparability in
        fair
        value measurements and to expand disclosures about fair value measurements.
        SFAS
        No. 157 defines fair value, establishes a framework for measuring fair value
        in
        generally accepted accounting principles, and expands disclosures about fair
        value measurements. SFAS No. 157 applies under other accounting pronouncements
        that require or permit fair value measurements and does not require any new
        fair
        value measurements. The provisions of SFAS No. 157 are effective for fair
        value
        measurements made in fiscal years beginning after November 15, 2007. The
        adoption of this statement is not expected to have a material effect on the
        Company‘s future reported financial position or results of
        operations.
  See
          report of independent registered public accounting firm.
 F-15
  **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities“. This Statement permits entities to
        choose to measure many financial assets and financial liabilities at fair
        value.
        Unrealized gains and losses on items for which the fair value option has
        been
        elected are reported in earnings. SFAS No. 159 is effective for fiscal years
        beginning after November 15, 2007. The Company is currently assessing the
        impact
        of SFAS No. 159 on its financial position and results of
        operations.
 
 In
        June
        2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
        Nonrefundable Advance Payments for Goods or Services Received for use in
        Future
        Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
        nonrefundable advance payments for goods or services that used or rendered
        for
        research and development activities should be expensed when the advance payment
        is made or when the research and development activity has been performed.
        Management is currently evaluating the effect of this pronouncement on financial
        statements.
 
 In
        December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
        Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
        enterprise accounts for the acquisition of a business. SFAS No. 141
        (Revised 2007) requires an acquiring entity to recognize all the assets acquired
        and liabilities assumed in a transaction at the acquisition-date fair value,
        with limited exceptions, and applies to a wider range of transactions or
        events.
        SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
        after December 15, 2008 and early adoption and retrospective application is
        prohibited. The Company is currently evaluating the impact that adopting
        SFAS
        No. 141R will have on its financial statements.
 
 In
        December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements”, which is an amendment of Accounting Research
        Bulletin (“ARB”) No. 51.  This statement clarifies that a
        noncontrolling interest in a subsidiary is an ownership interest in the
        consolidated entity that should be reported as equity in the consolidated
        financial statements.  This statement changes the way the consolidated
        income statement is presented, thus requiring consolidated net income to
        be
        reported at amounts that include the amounts attributable to both parent
        and the
        noncontrolling interest.  This statement is effective for the fiscal
        years, and interim periods within those fiscal years, beginning on or after
        December 15, 2008.  Based on current conditions, the Company does not
        expect the adoption of SFAS 160 to have a significant impact on its results
        of
        operations or financial position.
  See
          report of independent registered public accounting firm.
 F-16
 **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
 **Note
        3 – Other Assets**
 
 Other
        assets at December 31, 2007 and 2006 consisted of the following,
 
 2007
              
              2006Prepaid
                  rent – natural gas stations
              
              $
              225,924
              
              $
              -Prepayment
                  for acquiring land use right
              
              
              993,975
              
              
              128,200Advances
                  on purchasing equipment/construction in progress
              
              
              1,501,443
              
              
              341,333Refundable
                  security deposits
              
              
              356,460
              
              
              333,320Others
              
              
              45,250
              
              
              904Total
              
              $
              3,123,052
              
              $
              803,757
 
 All
        land
        in the People’s Republic of China is government owned. However, the government
        grants the user a land use right to use the land. As of December, 2007 and
        2006,
        the Company prepaid $993,975 and $128,200, respectively, to the PRC local
        government to purchase land use rights. The Company is in the process of
        negotiating the final purchase price with the local government and the land
        use
        rights have not been granted to the Company. Therefore, the Company did not
        amortize the prepaid land use rights.
 
 Advances
        on the purchase of equipment/construction in progress are monies deposited
        or
        advanced to outside vendors/subcontractors for the purchase of operating
        equipment or for services to be provided for constructions in progress.
 
 Refundable
        security deposit is monies deposited to one of its major vendor and gas station
        landlord. These amounts will be returned to the Company if they terminate
        the
        business relationship or at the end of the lease.
  **Note
        4 – 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 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 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.
  See
          report of independent registered public accounting firm.
 F-17
  **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  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 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.
 
 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.
 
 On
        August
        2, 2007, the Company entered into a Securities Purchase Agreement with investors
        to sell 4,615,385 shares of the Company’s common stock and attached warrants to
        purchase up to 692,308 shares of Common stock (“Investor warrants”) for $3.25
        per share (or an aggregate purchase price of $15,000,000) and for total net
        proceeds of $13,823,467. Warrants are exercisable for a period of five years
        with exercise price of $7.79 per share.
 
 In
        connection with the above-mentioned offering, the Company entered into a
        finance
        representation agreement (“Agreement”) with a placement agent (“Agent”).
        Pursuant to the agreement, the Company agreed to pay the Agent $10,000 and
        issued a warrant (“Placement Agent Warrants”) to acquire 75,000 shares of the
        Company’s common stock. In addition, the Company paid $1,050,000 fee (7% of the
        gross proceeds).
 
 Warrants
        associated with the above-mentioned issuance of common stock were issued
        in
        October 2007 upon the effective filling of its certificate of Amendment of
        Articles of Incorporation to increase the authorized number of common stock
        from
        30,000,000 to 45,000,000.
 
 Both
        Investor Warrants and Placement Agent Warrants meet the conditions for equity
        classification pursuant to FAS 133 “Accounting for Derivatives” and EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
        Settled in, a Company’s Own Stock.” Therefore, these warrants were classified as
        equity and accounted as common stock issuance cost.




See
        report of independent registered public accounting firm.


F-18
 **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  Following
        is a summary of the warrant activity:
 
 Warrants
                  Outstanding
              
              Weighted
                Average
                Exercise
                  Price
              
              Aggregate
                Intrinsic
                ValueOutstanding,
                  December 31, 2005
              
              
              -
              
              
              -
              
              
              -Granted
              
              
              1,431,953
              
              $
              3.60
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              (291,667
              )
              $
              3.60
              
              
              -Outstanding,
                  December 31, 2006
              
              
              1,140,286
              
              $
              3.60
              
              
              -Granted
              
              
              767,308
              
              $
              7.79
              
              
              -Forfeited
              
              
              -
              
              
              -
              
              
              -Exercised
              
              
              (819,110
              )
              $
              3.60
              
              
              -Outstanding,
                  December 31, 2007
              
              
              1,088,484
              
              $
              6.55
              
              $
              376,977
 
 Following
        is a summary of the status of warrants outstanding at December 31, 2007:
 
 Outstanding
                  warrants
              
              
              
              Exercisable
                  WarrantsExercise
                Price
              
              Number
              
              Average
                Remaining
                  Contractual
                Life
              
              Average
                Exercise
                Price
              
              Number$3.60
              
              
              321,176
              
              
              1.03
              
              $
              3.60
              
              
              321,176$7.79
              
              
              767,308
              
              
              4.59
              
              $
              7.79
              
              
              767,308$6.55
              
              
              1,088,484
              
              
              3.54
              
              $
              6.55
              
              
              1,088,484
 
 **Note
        5 – Defined Contribution Plan**
 
 The
        Company is required to participate in a defined contribution plan operated
        by
        the local municipal government in accordance with Chinese law and regulations.
        The Company makes annual contributions of 14% of all employees' salaries
        to the
        plan. The total expense for the above plan was $122,677 and $51,765 for the
        years ended December 31, 2007 and 2006, respectively.
 
 **Note
        6 – Statutory Common Welfare Fund**
 
 As
        stipulated by the Company Law of the People’s Republic of China (PRC) as
        applicable to Chinese companies with foreign ownership, net income after
        taxation can only be distributed as dividends after appropriation has been
        made
        for the following:
  i.
              Making
                  up cumulative prior years’ losses, if
                  any;
  See
          report of independent registered public accounting firm.
  F-19
  **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
 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 $1,051,849 and $581,164 as reserve for the statutory
        surplus reserve and welfare fund for the years ended December 31, 2007 and
        2006,
        respectively.
 
 **Note
        7 – Earnings Per Share**
 
 Earnings
        (loss) per share for the years ended December 31, 2007 and 2006 is determined
        by
        dividing net income (loss) for the periods by the weighted average number
        of
        both basic and diluted shares of common stock and common stock equivalents
        outstanding. The following is an analysis of the differences between basic
        and
        diluted earnings per common share in accordance with Statement of Financial
        Accounting Standards No. 128, “Earnings Per Share.”
 
 The
        following demonstrates the calculation for earnings per share for the years
        ended December 31, 2007 and 2006:
 
 **Year
                  Ended December 31,**2007
              
              2006**Basic
                  earning per share**Net
                  income
              
              $
              9,116,070
              
              $
              5,451,095Weighted
                  shares outstanding-Basic
              
              
              26,200,679
              
              
              23,872,936Earnings
                  per share-Basic
              
              $
              0.35
              
              $
              0.23**Diluted
                  earning per share**Net
                  income
              
              $
              9,116,070
              
              $
              5,451,095Weighted
                  shares outstanding-Basic
              
              
              26,200,679
              
              
              23,872,936Effect
                  of diluted securities-Warrants
              
              
              101,123
              
              
              -Weighted
                  shares outstanding-Diluted
              
              
              26,301,802
              
              
              23,872,936Earnings
                  per share -Diluted
              
              $
              0.35
              
              $
              0.23
  See
          report of independent registered public accounting firm.
  F-20
  **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  At
        December 31, 2007 and 2006, the Company had outstanding warrants of 1,088,484
        and 1,140,286, respectively. For the year ended December 31, 2007, the average
        stock price was greater than the exercise prices of the 321,176 warrants
        which
        resulted in additional weighted average common stock equivalents of 101,123;
        767,308 outstanding warrants were excluded from the diluted earnings per
        share
        calculation as they are anti-dilutive. The average stock price for the year
        ended December 31, 2006 was less than the exercise price of the warrants;
        therefore, 1,140,286 outstanding warrants are not factored into the diluted
        earning per share calculation as they are anti-dilutive.
 
 **Note
        8 – Current Vulnerability Due to Certain
        Concentrations**
 
 For
        the
        years ended December 31, 2007 and 2006, the Company purchased all of the
        natural
        gas for resale from three vendors, PetroChina Changqing Oilfield Company,
        Shaanxi Natural Gas Co Ltd, and Jingcheng city Mingshi Coal Bed Methane
        Exploitage Ltd. No amount was owed to these vendors at December 31, 2007.
        Except
        for Shaanxi Natural Gas Co Ltd, the other two vendors have long-term agreements
        with the Company without minimum purchase requirements. The Company has had
        annual agreements with Shaanxi Natural Gas Co Ltd to purchase certain amount
        of
        natural gas. For the year ended December 31, 2007, the minimum purchase was
        12.93 million cubic meters. Contracts are renewed on an annual basis. The
        Company’s management reports that it does not expect any issues or difficulty in
        continuing to renew the supply contracts with these vendors going forward.
        Price
        points for natural gas are strictly controlled by the government and have
        remained stable over the past 3 years.
  For
        the
        year ended December 31, 2007, three suppliers accounted for 88.4% of the
        total
        inventory purchased by the Company and for the year ended December 31, 2006,
        two
        supplier accounts for 72.4% of the total inventory purchased by the
        Company
 
 For
        the
        year ended December 31, 2007, two suppliers accounted for 41.02% of the total
        equipment purchased by the Company and for the year ended December 31, 2006,
        two
        suppliers accounted for 44.9% of the total equipment purchased by the
        Company.
 
 Four
        customers accounted for 42.6% of the Company’s installation revenue for the year
        ended December 31, 2007 and four customers accounted for 78.4% of the Company’s
        installation revenue for the year ended December 31, 2006.
 
 The
        Company's operations are carried out in the People’s Republic of China.
        Accordingly, the Company's business, financial condition and results of
        operations may be influenced by the political, economic and legal environments
        in the People’s Republic of China, by the general state of the People’s Republic
        of China‘s economy. The Company's business may be influenced by changes in
        governmental policies with respect to laws and regulations, anti-inflationary
        measures, currency conversion and remittance abroad, and rates and methods
        of
        taxation, among other things.
  See
          report of independent registered public accounting firm.
  F-21
 **China
          Natural Gas, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2007**
  **Note
        9 – Commitments and Contingencies**
 
 The
        Company recognizes lease expense on a straight line basis over the term of
        the
        lease in accordance to SFAS 13, “Accounting for leases.” The
        Company entered into series of long term lease agreements with outside parties
        to lease land use right to the self-built Natural Gas filing stations located
        in
        the PRC. The agreements have terms ranging from 10 to 30 years. The Company
        makes annual prepayment for most lease agreements. The Company also entered
        into
        three office leases in Xian, PRC and one office lease in New York, NY. The
        minimum future payment for leasing land use rights and offices is as
        follows:
  Year
                  ended December 31, 2008
              
              $
              529,921Year
                  ended December 31, 2009
              
              
              532,236Year
                  ended December 31, 2010
              
              
              534,621Year
                  ended December 31, 2011
              
              
              531,874Year
                  ended December 31, 2012
              
              
              477,156Thereafter
              
              
              2,665,256Total
              
              $
              5,271,064
  For
        the
        year ended December 31, 2007 and 2006, the land use right and office lease
        expenses were $433,755 and $60,289, respectively.
 
 **Note
        10 – Subsequent Event**
 
 In
        January 2008, the Company purchased an additional Compressor Station in
        Xianyang, PRC, approximately 15 miles from Xi’an, PRC.
 
 On
        December 30, 2007, as previously reported, China Natural Gas, Inc. (the
“Company”) entered into a Securities Purchase Agreement with Abax Lotus Ltd.
        (the “Investor”) which was subsequently amended on January 29, 2008 (as amended,
        the “Purchase Agreement”). Pursuant to the Purchase Agreement the Company, among
        other things, (i) agreed to issue to the Investor 5.00% Guaranteed Senior
        Notes
        due 2014 (the “Senior Notes”) in aggregate principal amount of RMB 145,000,000
        (approximately $20,000,000), (ii) granted the Investor an option to purchase
        up
        to RMB145,000,000 (approximately $20,000,000) in aggregate principal amount
        of
        its Senior Notes (the “First Option Notes”) if such option was exercised on or
        before March 3, 2008 and subject to the Company meeting certain closing
        conditions, and (iii) granted the Investor an option to purchase up to RMB
        73,000,000 (approximately $10,000,000) in principal amount of its Senior
        Notes
        within 30 days following the issuance of the First Option Notes, subject
        to the
        Company meeting certain closing conditions.
  On
        March
        3, 2008, the Investor exercised its option to purchase the First Option Notes
        for an additional RMB145,000,000 in aggregate principal amount of Senior
        Notes.
        On March 10, 2008, the Company issued Senior Notes for an additional aggregate
        principal amount of RMB145,000,000 (approximately $20,000,000) representing
        the
        First Option Notes for total Senior Notes of RMB290,000,000 (approximately
        $40,000,000).
  See
          report of independent registered public accounting firm.
  F-22




**ITEM
        9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
  None.
  **ITEM
        9A(T). CONTROLS AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 The
        Company’s management has evaluated, under the supervision and with the
        participation of the Company’s Chief Executive Officer and Chief Financial
        Officer, the effectiveness of the design and operations of the Company’s
        disclosure controls and procedures (as defined in Securities Exchange Act
        Rule
        13a-15(e)), as of the end of the period covered by this annual report. Based
        on
        that evaluation, the Company’s Chief Executive Officer and Chief Financial
        Officer have concluded that the evaluation of the effectiveness of our
        disclosure controls and procedures was completed; our disclosure controls
        and
        procedures were satisfactory subject to the following:
 
 ·
              Inadequate
                  US GAAP expertise - The current staff in the accounting department
                  is
                  inexperienced and they were primarily engaged in ensuring compliance
                  with
                  PRC accounting and reporting requirement for our operating subsidiaries
                  and was not required to meet or apply U.S. GAAP requirements. They
                  need
                  substantial training to meet the higher demands of being a U.S.
                  public
                  company. The accounting skills and understanding necessary to fulfill
                  the
                  requirements of US GAAP-based reporting, including the skills of
                  subsidiary financial statements consolidation, are
                  inadequate.
 
 ***Remediation
        Initiative***
 
 We
        have
        engaged Pickard & Green, CPAs, a Certified Public Accounting firm in
        Valencia, CA, to serve as our accountant. They are mainly engaged to perform
        our
        financial statements consolidation and to prepare our financial statements.
        In
        addition, we are seeking accountants experienced in several key areas of
        accounting, including persons with experience in Chinese and U.S. GAAP, U.S.
        GAAP consolidation requirements, and SEC financial reporting requirements.
        In
        addition, we plan to allocate additional resources to train our existing
        accounting staff and continue this effort in the future.
 
 **Management’s
        Annual Report on Internal Control over Financial Reporting**
 
 The
        Company’s management is responsible for establishing and maintaining an adequate
        system of internal control over financial reporting. Internal control over
        financial reporting is a process designed to provide reasonable assurance
        regarding the reliability of financial reporting and the preparation of
        financial statements for external purposes in accordance with generally accepted
        accounting principles. A company’s internal control over financial reporting
        includes those policies and procedures that (i) pertain to the maintenance
        of
        records that, in reasonable detail, accurately and fairly reflect the
        transactions and dispositions of the assets of the company; (ii) provide
        reasonable assurance that transactions are recorded as necessary to permit
        preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (iii) provide reasonable assurance regarding prevention
        or
        timely detection of unauthorized acquisition, use, or disposition of the
        company’s assets that could have a material effect on the financial
        statements.
 
 Because
        of its inherent limitations, a system of internal control over financial
        reporting can provide only reasonable assurance and may not prevent or detect
        misstatements. Therefore, even those systems determined to be effective can
        provide only reasonable assurance with respect to financial statement
        preparation and presentation. Further, because of changes in conditions,
        effectiveness of internal control over financial reporting may vary over
        time.
 
 25
  A
        significant deficiency is a control deficiency, or combination of control
        deficiencies, that adversely affects the company’s ability to initiate,
        authorize, record, process, or report external financial data reliably in
        accordance with generally accepted accounting principles such that there
        is more
        than a remote likelihood that a misstatement of the company’s annual or interim
        financial statements that is more than inconsequential will not be prevented
        or
        detected. An internal control material weakness is a significant deficiency,
        or
        combination of significant deficiencies, that results in more than a remote
        likelihood that a material misstatement of the annual or interim financial
        statements will not be prevented or detected.
 
 Management
        of the Company conducted an evaluation of the effectiveness of the Company’s
        internal control over financial reporting based on the Internal
        Control-Integrated Framework issued by the Committee of Sponsoring Organizations
        of the Treadway Commission (COSO). Based on that evaluation, the Company’s
        management concluded that as of December 31, 2007, and as of the date that
        the
        evaluation of the effectiveness of our disclosure controls and procedures
        was
        completed:
  ·The Company is lacking qualified resources to perform the
              internal audit functions properly. In addition, the scope and effectiveness
              of
              the Company's internal audit function are yet to be
              developed.
 ***Remediation Initiative***
 
 ·We
        are committed to establishing the internal audit functions but due to limited
        qualified resources in the region, we were not able to hire sufficient internal
        audit resources before the end of 2007. However, internally we established
        a
        central management center to recruit more senior qualified people in order
        to
        improve our internal control procedures. Externally, we recently engaged
        Ernst
& Young Hua Ming to assist the Company in improving the Company's internal
        control system based on COSO Framework. We also will increase our efforts
        to
        hire the qualified resources.
 
 Despite
        of the deficiencies reported above, the Company's management believes that
        its
        consolidated financial statements included in this report fairly present
        in all
        material respects the Company's financial condition, results of operations
        and
        cash flows for the periods presented and that this report does not contain
        any
        untrue statement of a material fact or omit to state a material fact necessary
        to make the statements made, in light of the circumstances under which such
        statements were made, not misleading with respect to the period covered by
        this
        report.
 
 **Changes
        in Internal Control over Financial Reporting**
 Except
        as
        described above, there were no changes in its internal controls over financial
        reporting in connection with its fourth quarter evaluation that would materially
        affected, or are reasonably likely to materially affect, its internal control
        over financial reporting.
  **ITEM
        9B. OTHER INFORMATION**
  None.
  26
  **PART
        III**
  **ITEM
        10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
        GOVERNANCE.**
 
 Below
        are
        the names and certain information regarding our executive officers and
        directors:
  Name
              
              Age
              
              Position
              
              Held
                  Position SinceQinan
                  Ji
              
              50
              
              Chief
                  Executive Officer and Chairman of the Board
              
              2005Lihong
                  Guo
              
              41
              
              Chief
                  Financial Officer
              
              2007Zhiqiang
                  Wang
              
              67
              
              Director
              
              2006James
                  Garner
              
              62
              
              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.
 
 **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 Xi’an 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 Northwestern
        University (Shaanxi).
  Lihong
        Guo, Chief Financial Officer - Ms. Guo has over 12 years of financial experience
        at various companies in China, including previously serving in the role of
        Chief
        Financial Officer. Most recently, from September 2005 to July 2007, Ms. Guo
        was
        the Chief Financial Officer of Aoda Enterprise Group Co., Ltd. Prior to that,
        Ms. Guo served as Director of Finance of Xi’an Yangsen Pharmaceutical Ltd., a
        subsidiary of Johnson & Johnson Company.  Ms.
        Guo
        received her Bachelor’s Degree in Economics and Management from Shaanxi Normal
        University in 1987 and her MBA from Northwestern University in Shaanxi, China,
        in 2002.
  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 Northwestern University of Politics and Law in China in 1962.
 
 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.
 
 27
  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.
 
 **Corporate
        Governance Matters**
  **Audit
        Committee:**
  Currently
        we do not have an audit committee or committee performing similar
        functions.
 
 **Compensation
        Committee**
  On
        March
        27, 2006, the Board of Directors established a Compensation Committee and
        appointed James Garner as the Committee's sole member.
 
 **Nominating
        Committee**
 
 James
        A.
        Garner is Chairman, and the only member, of the Nominating
        Committee.
  **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.
  28
 **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, except for
          James
          Garner and Zhiqiang Wang who did not timely file Form 3s when they were
          appointed to the Company’s Board of Directors.
  **ITEM
          11. EXECUTIVE COMPENSATION**
  **EXECUTIVE
          COMPENSATION**
 
 The
          following table sets forth all cash compensation paid by us to our principal
          executive officer for fiscal year 2007.
 
 **Summary
          Compensation Table**
 
 **Name and Principal**
                  **Position**
                
                Year
                
                Salary
                  ($)
                
                Bonus
                  ($)
                
                Option
                  Awards
                  ($)
                
                All Other
                    Compensation
                  ($)
                
                Total
                  ($)Qinan
                    Ji, Chief Executive
                  Officer
                    and Chairman of the Board
                
                
                2007
                
                
                15,000
                
                
                -
                
                
                -
                
                
                -
                
                
                15,000
  During
          the last fiscal year, none of our officers had a salary and bonus greater
          than
          $100,000.
  **Stock-Based
          Compensation**
  None
          of
          our officers or other employees have been granted stock options or stock
          appreciation rights, or paid any other stock-based compensation, by our
          company
          or any of our subsidiaries.
  **Director
          Compensation**
 
 The
          following Director Compensation Table summarizes the compensation of our
          directors for services rendered to the Company during the year ended December
          31, 2007.
 
 Name
                
                Fees
                  Earned
                  or
                    Paid in
                  Cash
                  ($)
                
                Stock
                  Awards
                  ($)
                
                Option
                  Awards
                  ($)
                
                All
                    Other Compensation
                  ($)
                
                Total
                  ($)James
                    Garner
                
                
                36,000
                
                
                -
                
                
                -
                
                
                -
                
                
                36,000Qinan
                    Ji(1)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Zhiqiang
                    Wang(2)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Patrick
                    McManus(3)
                
                
                15,000
                
                
                -
                
                
                -
                
                
                -
                
                
                15,000
  (1)
                Ji
                    Qinan, our Chief Executive Officer, does not receive any compensation
                    for
                    his service as a director.(2)
                Zhiqiang
                    Wang was appointed as a director in September 2006; he receives
                    no
                    compensation for his service as a director.(3)
                Patrick
                    McManus resigned as a director in July 2007.
 
 29
  The
          Company did not pay any other compensation to these directors in
          2007.
 
 **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,
          2007.
  **ITEM
          12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED
          STOCKHOLDER**
  The
          following table sets forth certain information, as of March 13, 2008 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.
 
 **Name
                    of Beneficial Owner (1)**
                
                **Number
                    of**
                  **Common**
                  **Stock**
                  **Beneficially**
                  **Owned**
                
                **Percentage**
                  **Of
                    Common**
                  **Stock**
                  **Outstanding(2)****Executive
                    Officers and Directors**Qinan
                    Ji
                
                
                5,931,596
                (3)
                
                20.3
                %Lihong
                    Guo
                
                
                —
                
                
                —**All
                    officers and directors as a group (2 persons)**
                
                
                5,931,596
                (3)
                
                20.3
                %**5%
                    holders**Yangling
                    Bodisen Biotech Development co, Ltd.
                  c/o
                    New York Global Group, Inc.
                  14
                    Wall Street, 12thFloor, New York, NY 10005
                
                
                2,063,768
                (4)
                
                7.1
                %Xiang
                    Ji
                
                
                1,456,232
                
                
                5.0
                %Robert
                    Moses
                
                
                2,000,000
                (5)
                
                6.9
                %Heartland
                    Value Fund
                
                
                1,725,000
                (6)
                
                5.9
                %Xi’an
                    Sunway Technology &
                  Industry
                    Co., Ltd
                
                
                2,875,364
                (3)
                
                9.8
                %
 
 (1)
          Except as otherwise indicated, the address of each beneficial owner is
          c/o Xi’an
          Xilan Natural Gas Co., Ltd., 19th Floor, Building B, Van Metropolis, Tangyan
          Road, Hi-Tech Zone, Xi’an, Shaanxi Province, China.
  (2)
          Applicable percentage ownership is based on 29,200,304 shares of common
          stock
          outstanding as of March 13, 2008, together with securities exercisable
          or
          convertible into shares of common stock within 60 days of March 13, 2008
          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 March 13, 2008 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.
  30
  (3)
          Of
          which 2,875,364 shares are owned by Xi’an Sunway Technology & Industry Co.,
          Ltd. Qinan Ji owns 42.1% of Xi’an 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.
 
 (5)
          As
          set forth in the Schedule 13G filed with the SEC on September 7,
          2007.
 
 (6)
          William J. Nasgovitz has shared voting and dispositive power with respect
          to
          such shares as reported in the Schedule 13G filed with the SEC on February
          8,
          2008.
  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, 2007.
  **ITEM
          13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
          INDEPENDENCE.**
  **Transactions
          with related persons**
 
 None
 
 **Director
          Independence**
 
 The
          Board
          has determined that all Board members, excluding Qinan Ji, are independent
          under
          the applicable NASDAQ rules. The Board has also determined the members
          of each
          committee of the Board are independent under the listing standards of the
          NASDAQ
          Global Select Market. In making these determinations, the Board considered,
          among other things, the types and amounts of the commercial dealings between
          the
          Company and the companies and organizations with which the directors are
          affiliated.
 
 **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 2007 and 2006.
 Audit
                      fees
                  
                  2007
                  
                  2006Moore
                      Stephens Wurth Frazen and Torbet, LLP
                  
                  $
                  150,000
                  **Kabani
                      & Company, Inc.
                  
                  $
                  35,000
                  
                  $
                  72,500Manning
                      Elliott
                  
                  
                  
                  
                  $
                  —Audit-related
                      fees
                  
                  $
                  9,000
                  
                  
                  —Tax
                      fees
                  
                  
                  
                  
                  $
                  —All
                      other fees
                  
                  $
                  -
                  
                  
                  10,000
                      *Total
                        fees paid or accrued to our principal accountants
                  
                  $
                  150,000
                  
                  $
                  82,500
  31
  *
          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
          fees billed for professional services rendered for the audit of the Company’s
          consolidated annual financial statements and review of the interim consolidated
          financial statements included in quarterly reports and services that are
          normally provided by our auditors in connection with statutory and regulatory
          filings or engagements.
 
 **ITEM
          15. 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 Registrant's Form 8K filed June 16, 2006, SEC
                      file no.
                      000-31539).10.1
                  
                  Share
                      Purchase Agreement made as of December 6, 2005 among Coventure
                      International Inc., Xi’an Xilan Natural Gas Co., Ltd. and each of Xilan's
                      shareholders. (incorporated by reference to the exhibits to
                      Registrant’s
                      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 Registrant’s 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 Registrant’s
                      Form 8-K filed on December 23, 2005).10.4
                  
                  Form
                      of Securities Purchase Agreement (incorporated by reference
                      to the
                      exhibits to Registrant’s Form 8-K filed on January 12,
                      2006).10.5
                  
                  Form
                      of Common Stock Purchase Agreement (incorporated by reference
                      to the
                      exhibits to Registrant’s Form 8-K filed on January 12,
                      2006).10.6
                  
                  Form
                      of Registration Rights Agreement (incorporated by reference
                      to the
                      exhibits to Registrant’s Form 8-K filed on January 12,
                      2006).10.7
                  
                  CNG
                      Product Purchase and Sale Agreement between Xi’an 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 Registrant’s Form 10-KSB filed on April 17,
                      2007).10.8
                  
                  Securities
                      Purchase Agreement dated August 2, 2007 between the Company
                      and the
                      Investors named therein (incorporated by reference to the exhibits
                      to
                      Registrant’s Form 8-K filed on August 8, 2007).10.9
                  
                  Registration
                      Rights Agreement dated August 2, 2007 between the Company and
                      the
                      Investors named therein (incorporated by reference to the exhibits
                      to
                      Registrant’s Form 8-K filed on August 8,
                      2007).
  32
  10.10
                  
                  Consulting
                      Services Agreement dated August 17, 2007 between Shaanxi Xilan
                      Natural Gas
                      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
                      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
                      2007).10.11
                  
                  Operating
                      Agreement dated August 17, 2007 between Shaanxi Xilan Natural
                      Gas
                      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
                      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
                      2007).10.12
                  
                  Equity
                      Pledge Agreement dated August 17, 2007 between Shaanxi Xilan
                      Natural Gas
                      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
                      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
                      2007).10.13
                  
                  Option
                      Agreement dated August 17, 2007 between Shaanxi Xilan Natural
                      Gas
                      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
                      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
                      2007).10.14
                  
                  Proxy
                      Agreement dated August 17, 2007 between Shaanxi Xilan Natural
                      Gas
                      Equipment Co., Ltd. and Xi’an Xilan Natural Gas Co., Ltd. (incorporated by
                      reference to the exhibits to Registrant’s Form 10-QSB filed on August 20,
                      2007).10.15
                  
                  Securities
                      Purchase Agreement dated December 30, 2007 between the Company
                      and Abax
                      Lotus Ltd. (incorporated by reference to the exhibits to Registrant’s Form
                      8-K filed on January 31, 2008).10.16
                  
                  Amendment
                      to Securities Purchase Agreement dated January 29, 2008 between
                      the
                      Company and Abax Lotus Ltd. (incorporated by reference to the
                      exhibits to
                      Registrant’s Form 8-K filed on January 31, 2008).10.17
                  
                  Indenture,
                      dated January 29, 2008, by and among the Company and DB Trustees
                      (Hong
                      Kong) Limited, as trustee, relating to the 5.00% Guaranteed
                      Senior Notes
                      due 2014(incorporated
                      by reference to the exhibits to Registrant’s Form 8-K filed on January 31,
                      2008).10.18
                  
                  Warrant
                      Agreement, dated January 29, 2008, by and among the Company,
                      Mr. Qinan Ji,
                      Deutsche Bank AG, Hong Kong Branch as Warrant Agent and Deutsche
                      Bank
                      Luxembourg S.A. as Warrant Agent(incorporated
                      by reference to the exhibits to Registrant’s Form 8-K filed on January 31,
                      2008).10.19
                  
                  Equity
                      Registration Rights Agreement, dated January 29, 2008, by and
                      between the
                      Company and Abax Lotus Ltd. (incorporated by reference to the
                      exhibits to
                      Registrant’s Form 8-K filed on January 31, 2008).10.20
                  
                  Investor
                      Rights Agreement, dated January 29, 2008, by and among the
                      Company, its
                      subsidiaries, Mr. Qinan Ji, and Abax Lotus Ltd. (incorporated
                      by reference
                      to the exhibits to Registrant’s Form 8-K filed on January 31,
                      2008).10.21
                  
                  Information
                      Rights Agreement, dated January 29, 2008. between the Company
                      and Abax
                      Lotus Ltd. (incorporated by reference to the exhibits to Registrant’s Form
                      8-K filed on January 31, 2008).10.22
                  
                  Onshore
                      Share Pledge Agreement, dated January 29, 2008, between the
                      Company and DB
                      Trustees (Hong Kong) Limited, as security agent (incorporated
                      by reference
                      to the exhibits to Registrant’s Form 8-K filed on January 31,
                      2008).10.23
                  
                  Account
                      Pledge and Security Agreement, dated January 29, 2008, by and
                      between the
                      Company and DB Trustees (Hong Kong) Limited as Security Agent
                      (incorporated by reference to the exhibits to Registrant’s Form 8-K filed
                      on January 31, 2008).
  33
  14.1
                  
                  Code
                      of Ethics adopted by the Company on June 14, 2006 (incorporated
                      by
                      reference to the exhibits to Registrant’s Form 8-K filed on June 16,
                      2006).21.1
                  
                  List
                      of Subsidiaries. (incorporated by reference to the exhibits
                      to
                      Registrant’s 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)
  34
  **SIGNATURES**
  Pursuant
          to the requirements of Section 13 or 15(d) of the Exchange Act of 1934,
          the
          registrant has duly caused this report to be signed on its behalf by the
          undersigned, thereunto duly authorized.
  Date:
          March 31, 2008
  **CHINA
                    NATURAL GAS, INC.**By:
                /s/
                    Qinan JiQinan
                    Ji
                  Chief
                    Executive Officer
                  (Principal
                    Executive Officer)By:
                /s/
                    Lihong GuoLihong
                    Guo
                  Chief
                    Financial Officer
                  (Principal
                    Financial and Accounting Officer)
  Pursuant
          to the requirements of Section 13 or 15(d) of the Exchange Act of 1934,
          the
          registrant has duly caused this report to be signed on its behalf of the
          registrant and in the capacities and on the dates indicated.
 
 /s/
                      Qinan Ji
                  
                  President
                      and Chief
                    Executive
                      Officer and
                      Director
                        (Principal Executive Officer)
                  
                  March
                      31, 2008Qinan
                      Ji/s/
                      Zhiqiang Wang
                  
                  Director
                  
                  March
                        31, 2008Zhiqiang
                      Wang/s/
                      James A. Garner
                  
                  Director
                  
                  March
                        31, 2008James
                      A. Garner/s/
                      Lihong Guo
                  
                  Chief
                      Financial Officer
                    (Principal
                      Accounting Officer)
                  
                  March
                        31, 2008Lihong
                      Guo
 35