UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

o ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

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 000-51364

SINO GAS INTERNATIONAL

HOLDINGS, INC.

(Name of small business issuer in its charter)

Utah	90-0438712
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

No.18 Zhong Guan Cun Dong St.

Haidian District

Beijing, P. R. China 100083

(Address of Principal Executive Offices) (Zip Code)

Issuer’s Telephone Number: 86-10-82600527

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

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

COMMON STOCK, PAR VALUE $.001 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 o  No x

Check whether the issuer is not required to file reports pursuant to Sections 13 or 15(d) of the Exchange Act. Yes o  No x

Check whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x

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

Yes o No x

The aggregate market value of the 11,807,969 shares of voting and non-voting common equity stock held by non-affiliates of the registrant was $6,612,462 as of June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, based on the last sale price of the registrant’s common stock on such date of $0.56 per share, as reported by The Over-The-Counter Bulletin Board.

As of March 28, 2011, the Registrant had 27,156,617 shares of common stock outstanding.

Except as otherwise indicated by the context, references in this Form 10-K to:

o “Sino Gas International Holdings, Inc.,” the “Company,” “Sino Gas,” “we,” “us” or “our” are references to the combined business of Sino Gas International Holdings, Inc. and its direct and indirect subsidiaries.

o “U.S. Dollar,” “$” and “US$” mean the legal currency of the United States of America.

o “RMB” means Renminbi, the legal currency of China.

o “China” or the “PRC” are references to the People’s Republic of China.

o “U.S.” is a reference to the United States of America

o “SEC” is a reference to the Securities & Exchange Commission of the United States of America.

DOCUMENTS INCORPORATED BY REFERENCE

Document	Parts Into Which Incorporated
None	Not applicable

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial position, business strategy and plans and objectives of management for future operations. When used in this filing, the words believe, may, will, estimate, continue, anticipate, intend, expect, and similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the risks discussed under the heading “Risk Factors”. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements.

In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this annual report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.

TABLE OF CONTENTS

		PAGE
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	19
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	30
Item 3.	Legal Proceedings	31
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchaser of Equity Securities	32
Item 6.	Selected Financial Data	32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	39
Item 9A.	Controls and Procedures	39
Item 9B.	Other Information	41
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	42
Item 11.	Executive Compensation	44
Item 12.	Security ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	45
Item 13.	Certain Relationships and Related Transactions, and Director Independence	48
	PART IV
Item 14.	Principal Accounting Fees and Services	48
Item 15.	Exhibits, Financial Statement Schedules	49
	Signatures	53

PART I

Item 1. Business

Information regarding forward-looking statements and other information in this annual report

This annual report and the documents to which we refer you and incorporate into this report by reference contain forward-looking statements. In addition, from time to time, we or our representatives may make forward-looking statements orally or in writing. We base these forward-looking statements on our expectations and projections about future events, which we derive from the information currently available to us. Such forward-looking statements relate to future events or our future performance. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential” or “continue” or the negative of these or similar terms. In evaluating these forward-looking statements, you should consider various factors, including those described in elsewhere in this report. These and other factors may cause our actual results to differ materially from any forward-looking statement. Forward-looking statements are only predictions. The forward-looking events discussed in this report, the documents to which we refer you and other statements made from time to time by us or our representatives, may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about us.

Unless otherwise noted, all currency figures in this filing are in U.S. Dollars. References to the “PRC” or “China” are to the People’s Republic of China. References to “yuan” or “RMB” are to the Chinese yuan (also known as the renminbi). According to the currency exchange website www.xe.com, on March 28, 2011, $1.00 = 6.5595 yuan.

“Sino Gas,” “we” and “the Company” refer to Sino Gas International Holdings, Inc. and our subsidiaries or, as context requires, Sino Gas International Holdings, Inc. alone. “Exchange Act” refers to the Securities Exchange Act of 1934, as amended.

Unless otherwise indicated, “2009” “2008” and “2007” refer to the fiscal years ended December 31, 2009, December 31, 2008, and December 31, 2007, respectively.

Overview

We are engaged in the development of natural gas distribution systems and the distribution, through our indirectly owned subsidiaries in the PRC, Beijing Zhong Ran Wei Ye Gas Co., Ltd. (“Beijing Gas”) and its subsidiaries, of natural gas to residential and industrial customers in small- and medium-sized cities in the People’s Republic of China (the “PRC” or “China”).

The company owns and operates natural gas distribution systems in 35 small and medium size cities and serves approximately 183,500 residential and seven industrial customers. Our facilities include approximately 1,525 kilometers (“km”) of pipeline and delivery networks with a daily distribution of approximately 120,000 cubic meters of natural gas. We have two types of customers: (i) residential and (ii) industrial. The following table presents, for the periods indicated, selected operating data:

	At and for the year ended December 31
	2010		2009
Total gas distributed and supplied (US$ millions)		18.7		15.7
Distribution network (km)		1,525		1,040
Number of industrial customers		7		7
Number of residential customers		183,500		145,000

We own and operate natural gas distribution systems in small and medium sized cities in Hebei, Jiangsu, Jilin,Anhui and Yunnan Provinces in addition to natural gas distribution systems in the suburbs of Beijing. Beijing is not a province but a municipality directly under the jurisdiction of China’s State Council and has many urban districts in the suburbs.

1

We generate revenues in two ways: (i) connection fees for connecting to our natural gas distribution system and (ii) the sale of natural gas. The following table presents, for the periods indicated, the revenues generated from each of our major categories of operations:

	At and for the year ended December 31
	2010				2009
	(in US$ millions)				(in US$ millions)
Connection fees (as % of total Sales)		13.4	(42	)%		11.9	(43	)%
Gas sales		18.7	(58	)%		15.7	(57	)%
Other sales						—

Our cost of sales consists of cost of gas sales and cost of connection. Cost of gas sales consists of cost of natural gas purchased from the suppliers, transportation cost, depreciation of plant and equipment, and amortization of the capitalized construction costs as our expenditures in constructing our pipeline infrastructure are generally capitalized as fixed assets and amortized over a period of time. Cost of connection includes certain construction costs that are expensed. The following table presents Beijing Gas’s costs of sales for the periods indicated: 

	For the year ended Dec 31
	2010 (US$ millions)		2009 (US$ millions)
Gas costs		17.1		14.8
Connection costs		2.7		3.3

We buy natural gas for distribution in two forms: (i) compressed natural gas (“CNG”); and (ii) liquefied natural gas (“LNG”). Both CNG and LNG are natural gas that has been compressed into canisters so as to enable transportation, usually by truck, to a point of distribution or consumption. Typically CNG is compressed under pressure to less than 1% of its volume and transported at normal temperature, while LNG is natural gas that has been converted temporarily to liquid form for ease of storage or transport, which can take up about 1/600th of the volume. The key difference is that CNG is in compressed form, while LNG is in liquefied form. CNG has a lower cost of production and storage compared to LNG as it does not require an expensive cooling process and cryogenic tanks. However, it is more cost-efficient to transport LNG over long distances because of the reduction in volume. Generally, we transport CNG to a city if it is located within 300 km from the natural gas supplier and we transport LNG to a city if it is located more than 300 km away from the natural gas supplier. Approximately 99% of the natural gas we purchase is CNG and approximately 1% is LNG.

2

Our business is generally affected by two seasonal factors: First, between December and March, the cold weather in northern China makes construction very difficult. For a given gas distribution project, to avoid running into this time period, we generally start the process of pipeline installation, which has a duration of six to eight months, in April so as to complete the process before December. As a result, our revenues from connection fees are higher in the third and fourth quarter than those in the first and second quarters. Second, gas sales in winter are generally higher than in summer, as our customers tend to consume more natural gas for heating purposes during the winter.

Organization and Structure of the Company

We operate through our indirectly-owned subsidiaries in the PRC, Beijing Gas and its subsidiaries.

As of March 24, 2011, our corporate structure is set forth below

(1) The subsidiaries of Beijing Gas are set forth below:

Name of Subsidiary	Beijing Gas Equity Interest %
Peixian Weiye Gas Co., Ltd.		90
Sihong Weiye Gas Co., Ltd.		95
Wuhe Weiye Gas Co., Ltd.		100
Changli Weiye Gas Co., Ltd.		100
Yutian Zhongran Weiye Gas Co., Ltd.		90
Yuxian Jinli Gas Co., Ltd.		100
Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd.		100

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Wuqiao Gas Co., Ltd.	95
Jinzhou Weiye Gas Co., Ltd.	95
Shenzhou Weiye Gas Co., Ltd.	95
Ningjin Weiye Gas Co., Ltd.	95
Linzhang Weiye Gas Co., Ltd.	85
Hengshui Weiye Gas Co., Ltd.	100
Longyao Zhongran Weiye Gas Co., Ltd.	95
Xingtang Weiye Gas Co., Ltd.	95
Gucheng Weiye Gas Co., Ltd.	100
Langfang Weiye Dangerous Goods Transportation Co., Ltd	95
Beijing Chenguang Gas Co., Ltd.	100
Xinji Zhongchen Gas Co., Ltd	100
Luquan Chenguang Gas Co., Ltd.	100
Chengan Chenguang Gas Co., Ltd.	100
Nangong Weiye Gas Co., Ltd.	100
Sishui Weiye Gas Co., Ltd.	95
Guannan Weiye Gas Co., Ltd.	100
Sixian Weiye Gas Co., Ltd.	100
Baishan Wiye Gas Co., Ltd.	100
Shijiazhuang Chengguang Gas Co., Ltd.	100
Gaocheng Wiye Gas Co., Ltd.	100
Xinhe Wiye Gas Co., Ltd.	100
Hebei Wiye Gas Co., Ltd.	100

Organizational History of Sino Gas

Sino Gas International Holdings, Inc. was incorporated under the laws of the State of Utah on August 19, 1983 as Evica Resources, Inc. On April 5, 1984, we changed our name to American Arms, Inc. American Arms, Inc. commenced the manufacture and sale of weapons and laser sights. On April 12, 1988, we changed our name to American Industries, Inc. as we were no longer engaged in the manufacturing and sale of weapons and laser sights. American Industries, Inc. was in the business of providing room safes for hotels.

On February 19, 2002, we formed a subsidiary corporation named Pegasus Tel, Inc. under the laws of the State of Delaware, in order to enter into the telecommunications business. On March 28, 2002, Pegasus Tel, Inc. merged with Pegasus Communications, Inc., a New York corporation, with Pegasus Tel, Inc. as the surviving entity. On January 14, 2002 we purchased payphone assets consisting of 29 payphones and associated equipment from the Margaretville Telephone Company for $11,600.00.

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On May 21, 2002, we changed our name to Dolce Ventures, Inc. We were an inactive shell between May 2002 and September 7, 2006.

On September 7, 2006, the shareholders holding 72,569,764 shares of our common stock, which constituted 72.01% of the then outstanding shares of our capital stock, sold all of their shares to GAS Investment China Co., Ltd. (“Gas (BVI)”), the parent company of Beijing Gas, for a cash consideration of $675,000. On the same date, we consummated a share exchange transaction with the shareholders of Gas (BVI), whereby we exchanged 14,361,646 shares of our Series A Convertible Preferred Stock, par value $0.001 per share (“Series A Preferred”), which constituted all of the then outstanding shares of our Series A Preferred, for all of the issued and outstanding stock of Gas (BVI) held by the shareholders of Gas (BVI). As a result of the share exchange transaction, Gas (BVI) became our wholly-owned subsidiary, and Beijing Gas became our indirectly wholly-owned subsidiary. In addition, as a result of the share exchange transaction, we ceased being a shell company as such term is defined in Rule 12b-2 under the Exchange Act and are now engaged in the development of natural gas distribution systems and the distribution and supply of natural gas in the PRC.

On November 17, 2006, we changed our name to Sino Gas International Holdings, Inc. and effected a 304.44-for-1 reverse stock split which reduced the number of the outstanding shares of our common stock from 100,770,140 to 331,002. Upon the effectiveness of the reverse stock split, each of the 14,361,646 shares of the then outstanding Series A Preferred was automatically converted into one share of our common stock, resulting in all of the shareholders of Gas (BVI) immediately prior to the share exchange owning approximately 97.7% of the outstanding shares of our common stock immediately after the reverse stock split, with Mr. Yuchuan Liu, the CEO of the Company, owning 36.7%, Gas (BVI) owning 1.6% and the original shareholders of Dolce Ventures, Inc. immediately prior to the share exchange owning 0.6%. On August 18, 2008, Sino Gas consummated a spin-off of Pegasus Tel, Inc. (“Pegasus”), a Delaware corporation and a wholly-owned subsidiary of Sino Gas, to Sino Gas’ stockholders of record as of August 15, 2008 (“Spin-off”). The Ratio of Distribution of the Spin-off was one (1) share of common stock of Pegasus for every twelve (12) shares of common stock of Sino Gas (1:12). Fractional shares were rounded up to the nearest whole-number. An aggregate of 2,215,136 shares of Pegasus common stock were issued pursuant to the Spin-off to an aggregate of 167 Sino Gas stockholders.

Organizational History of Gas (BVI) and Beijing Gas

Gas (BVI) was incorporated on June 19, 2003 in the Territory of the British Virgin Islands with Mr. Liu Yu Chuan as its sole shareholder. Gas (BVI) is the holding company for Beijing Gas. Prior to the acquisition of all of the equity interests of Beijing Gas by Gas (BVI) as described below, Gas (BVI) had no business operations, assets or liabilities, apart from organizational expenses and fees.

Beijing Gas was originally formed as a limited liability company under the laws of the PRC in 2001 under the name Beijing Yuan Wang Yu Cheng Construction Ltd., and changed its name to its current name, Beijing Zhong Ran Wei Ye Gas Co. Ltd., in June 2003. On February 17, 2004, Gas (BVI) acquired all the outstanding capital stock of Beijing Gas from its then shareholders. On July 14, 2004, Gas (BVI) transferred 1% of the capital stock of Beijing Gas to Shen Zhen Shen Qi Cheng Tong Investment Ltd., a limited liability company organized under the laws of the PRC (“Shen Zhen Shen Qi”), and, simultaneously, Shen Zhen Shen Qi invested RMB 20 million in Beijing Gas in exchange for 50% of its capital stock. As a result, Gas (BVI) and Shen Zhen Shen Qi held 49% and 51% of the capital stock of Beijing Gas, respectively. On April 30, 2006, Gas (BVI) acquired all of the capital stock of Beijing Gas held by Shen Zhen Shen Qi in exchange for RMB 20.4 million. As a result of this transaction, Beijing Gas is now a “wholly foreign owned entity” under PRC law by virtue of its status as a wholly-owned subsidiary of Gas (BVI).

Beijing Gas has subsidiaries, known as project companies, in four provinces, and four branch offices in Beijing. The project companies are the operating subsidiaries of Beijing Gas. Each project company operates as a local natural gas distributor in a city or county, which we refer to as an operational location, pursuant to an exclusive franchise agreement with the local government or entities responsible for administering and/or regulating gas utilities, pursuant to which Beijing Gas is granted the exclusive right to develop and operate natural gas distribution systems and distribute natural gas at the operational location.

As of December 31, 2010, we now have operations in Hebei Province, Jiangsu Province, Anhui Province, Yunnan province and Jilin province and in the suburbs of Beijing through our four branch offices in Beijing. We have operations in 23 cities in Hebei, 2 cities in Anhui, 4 cities in Jiangsu, 1 city in Yunnan, and 1 city in Jilin province. Most of them have an urban population of less than 300,000 and are experiencing quick urbanization. Hebei Province is the closest province to the Chinese Capital city Beijing, where our headquarters is located. Jiangsu Province and Anhui Province are two adjourning provinces in eastern China, which are close to Shanghai City. Jilin Province is located in North-Eastern China.

5

Each of the project companies is organized as a limited liability company under PRC law with Beijing Gas holding an equity interest of 85% to 100% and an individual shareholder nominally holding the remainder of the equity interest in such project company. Each such individual shareholder has relinquished any and all rights, power and interest of a shareholder in the respective project company under enforceable contracts. This structure was intended to comply with a PRC law that required a limited liability company to have at least two (2) shareholders; however, that requirement was removed in January 2006. Beijing Gas intends to cause the individual shareholders to transfer their shares in each of the project companies back to Beijing Gas in the near future.

In addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang Ke Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint venture entity engaged in the business of development, licensing and sale of oil and gas technologies and equipment, and sale of self-produced chemical preparation for use in the exploration process of oil field. We have not derived any material amounts of revenues from this joint venture.

In 2007 and 2008, we made the following acquisitions:

On January 15, 2007, Beijing Gas acquired 100% equity interest of Beijing Chenguang Gas Ltd., Co. for a purchase price of 26,000,000 RMB (or approximately US$ 3.35 million) in cash. Beijing Chenguang became a wholly-owned subsidiary of Beijing Gas. Beijing Chenguang is primarily engaged in the business of developing, transferring and licensing of technologies regarding natural gas purification, compression and transportation, as well as installation of natural gas equipment and supplying natural gas. Mr. Zhicheng Zhou, our Chief Operating Officer, owned 30% of Beijing Chenguang immediately prior to the acquisition. We have made full disclosure of this fact under the heading “Certain relationships and related transactions” in this report.

On June 20, 2007, Beijing Gas acquired 100% equity interest of Guannan Zhongyuan Natural Gas Co., Ltd. for a purchase price of 7,500,000 RMB (approximately US$ 987,000) in cash. Guannan is a regional natural gas distributor and developer of natural gas distribution networks in China’s Jiangsu Province. The acquisition of Guannan includes all of the assets and customer relationships of Guannan, including concession rights to be the exclusive natural gas distributor in Guannan County, Jiangsu Province, for a period of 30 years beginning June 29, 2007. This acquisition is not with related parties.

On July 9, 2007, we purchased the assets of Baishan Gas Co., Ltd., a regional distributor and developer of distribution networks for natural gas in Jilin Province for a price of US$ 921,000 (RMB7,000,000). Under the asset purchase agreement, we are responsible for paying outstanding debts of Baishan Gas Co., Ltd. in the amount of US$ 4,000,000, which are due in periodic installments through the year 2030. This acquisition is not with related parties.

On April 22, 2008, we entered into an agreement with the Qujing Development Investment Co., Ltd. a PRC state-owned company and Yunnan Investment Group Co., Ltd, also a PRC state-owned company, to set up Qujing Gas Co. Ltd to operate in the City of Qujing, Yunnan Province (the “Qujing Gas”). The Company will hold a 39% equity interest in Qujing Gas. The initial registered capital of the Qujing Gas is RMB 30 million (US$ 4.29 million). This acquisition is not with related parties.

On April 23, 2008, the Company entered into an agreement to acquire 100% equity interest in Tongshan Hengxin Jiaye Natural Gas Co., Ltd. (“Tongshan”), for a purchase price of RMB 32.6 million (US $4.66 million). Tongshan is a regional natural gas distributor and developer of natural gas distribution networks in China’s Jiangsu Province. This acquisition is not with related parties.

Our Industry

China’s Macro-Economic Environment for the Natural Gas Market

Traditionally, the PRC has relied heavily on coal and crude oil as its energy sources. According to the China Statistical Yearbook, in 2004, coal, crude oil, hydro-electricity and natural gas accounted for 68.0%, 22.3%, 7.1% and 2.6%, respectively, of the PRC’s total energy consumption. In 2005, the ratios were 68.9%, 21.0%, 7.2% and 2.9% respectively. In 2006, the ratios were 69.4%, 20.4%, 7.2%, and 3% respectively. In 2007, the ratios were 69.5%, 19.7%, 7.3%, and 3.5% respectively. Based on the PRC government’s Eleventh Five Year Plan (2006-2010), the ratios of coal, crude oil, hydro-electricity would change to 66.1%, 20.5%, and 6.8% respectively, while that of natural gas would increase to 5.1%. Natural gas has been primarily used as a raw material for chemical fertilizer and to operate oil and gas fields. Accordingly, most natural gas is consumed for production of fertilizer, while the non-production sector accounts for low percentage of final consumption.. In 2007, non-production consumption of natural gas was around 18.6 billion cubic meters, which was about 26.7% of total natural gas consumption that reached 69.5 billion cubic meters (Source: National Bureau of Statistics of China).

6

The PRC’s heavy reliance on coal is out of line with world consumption rates for the same time period, which was 26.5% in 2005 (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 lead to large emissions of sulfur dioxide and particulate matter. The latest air pollution study conducted by the Blacksmith Institute shows that in 2007 two of the ten most polluted cities in the world are located in the PRC (Source: http://www.blacksmithinstitute.org). As such, there have been serious environmental concerns in many countries around the world and these concerns have led to a global trend to reduce coal usage.

Recognizing the serious problems caused by 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. In consideration of such trends, the PRC set out a policy to raise the share of natural gas in the country’s energy mix in its Ninth 5-Year Plan (1996-2000). At the local government level, in many locations where natural gas supply is available, local governments often require all new residential buildings to incorporate piped gas connections in their designs as a condition to the issuance of the construction or occupancy permits. Before 2000, the gas distribution had principally been served by local municipal governments. Since then, the industry has been open to private sector, whose investments have fostered the wide use of natural gas in the PRC. The natural gas industry has been deemed by the PRC government as a suitable industry for public and private investments.

Demand for Natural Gas in China

Currently, natural gas consumption in the PRC accounts for about 3.5% of its total energy consumption. However, driven by environmental pressure from the demand side and improvements in social infrastructure with economic growth, in the west in particular, and stable energy supply, it is anticipated that the use of natural gas will grow very rapidly in the PRC. According to the statistics of the China National Development and Reform Commission (the ”NDRC”), the consumption of natural gas as increased from 24.5 billion cubic meters in 2000 to 69.5 billion cubic meters in 2007, which represented an average growth of 16.06% per year.

China’s Natural Gas Reserves and Gas Pipeline Infrastructure

The PRC abounds in rich natural gas reserves, which are distributed principally in Xinjiang, Sichuan and Inner Mongolia in western and north-central China. According to the statistics of the Energy Information Administration, proved natural gas reserves in China are estimated to be 53,325 billion cubic feet in 2006, and 80,000 billion cubic feet in 2007.

Because the PRC’s largest reserves of natural gas are located in western and north-central China, it requires a significant investment in gas transportation infrastructure to carry natural gas to eastern cities and the rest of the PRC. Until recent years, the PRC’s natural gas consumption was limited to local natural gas producing provinces because of the lack of national long-distance pipeline infrastructure.

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

Under with the PRC government’s Tenth 5-Year Plan (2001-2005), the country’s longest pipeline, known as the West-East Pipeline, was constructed and went into operation in January 2005. It transports natural gas to demand centers in the southeast from deposits in the western Xinjiang province to Shanghai, picking up additional gas in the Ordos Basin along the way. The full length of the pipeline is about 4,200 km with a designed annual throughput capacity of 20 billion cubic meters, a delivery pressure of 10 megapascals and 35 processing stations along the pipeline.

There are other pipelines linking smaller natural gas deposits to consumers, such as the pipeline linking the Sebei natural gas field in the Qaidam Basin with consumers in the city of Lanzhou, Ganshu province in the northwest, and a pipeline linking natural gas deposits in Sichuan province in the southwest to demand centers in Hubei and Hunan provinces in the central PRC.

In its Eleventh 5-Year Plan (2006-2010), the PRC government re-affirmed its commitment to making significant investments in the expansion of the natural gas pipeline infrastructure over a period of 20 years

Natural Gas Suppliers

The natural gas supply in China is dominated by the three large state-owned oil and gas holding companies, namely China National Petroleum Corporation Group (“PetroChina”), China Petroleum and Chemical Corporation Group (“Sinopec”), and China National Offshore Oil Corporation Group (“CNOOC”). In 2006, production by CNPC, Sinopec and CNOOC accounted for 73.7%, 14.1% and 12.2%, respectively of the total national production. CNPC and Sinopec own and primarily operate onshore pipelines while CNOOC owns and operates virtually all off shore pipelines (Source: The Institute of Energy Economics of Japan).

7

Natural Gas Distributors

Before 2000, natural gas distribution had been principally served by local municipal governments. Since then, the natural gas industry has been designated by the PRC government as a suitable industry for public and private investment and has been open to private investment which has fueled the development of the industry and fostered a wider use of natural gas in the PRC. In large cities where the population exceeds 500,000, the natural gas distribution business is dominated by state owned companies, while in cities where the population is less than 500,000, natural gas distribution is carried out by mainly privately owned companies, most of whom only operate in a few locations.

The Gas Delivery Process

The natural gas delivery process is categorized by three segments: production, transmission and distribution, as shown in the chart below:

Production involves underground exploration, drilling, extraction and purification of the natural gas. After extraction from a gas well, natural gas is transported to nearby refineries for removal of water and other impurities. The natural gas is then transported from the refineries via long distance pipelines under extremely high pressure facilitating the supply to a large number of locations near these pipelines at high speeds. The long distance pipelines are owned and operated by PRC state owned oil and gas exploration and production companies such as Sinopec and PetroChina.

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Distribution companies (such as our company) distribute natural gas to end users and often own the gas pipeline infrastructure rights of an operational location (including the local pipelines, the processing stations, and the branch pipelines). A distribution company purchases natural gas from oil and gas exploration and production companies. The distribution company determines the method of delivering natural gas to its desired destination after taking into account factors such as the distance between the stations along the major pipeline and delivery points and the expected demand for gas from the relevant gas supply locations.

The transportation of CNG and LNG involves the delivery of natural gas by trucks from gas wells or stations located along the relevant long distance pipeline to a processing station. Such processing stations may contain CNG or LNG pressure regulating facilities which will depressurize the CNG or LNG to reduce the pressure of natural gas from high pressure to medium pressure, before transferring the natural gas to a local pipeline.

The processing station is usually located on the outskirts of an operational location for safety reasons and it provides certain ancillary facilities, including facilities for the addition of bromine to the gas to enable the detection of leakages when the gas is transmitted through the pipelines, and for storing the gas under high, medium or low pressure to be used as reserves for future unexpected fluctuations in demand.

High pressure gas storage tanks usually have thicker walls, and, therefore, are more expensive to construct than gas storage tanks for storage of gas under medium or low pressure.

After processing, the gas is transmitted under medium pressure to the local pipelines. Local pipelines are laid within an operational location and represent the backbone of the local gas delivery system. Different sections of the local pipelines operate at slightly different pressures, with computer controlled regulators controlling the flow of natural gas for delivery to end users via the branch pipelines and customers’ inlets.

When there is a demand for a connection of gas to a particular area within a gas supply location, the distribution company will invest in the construction of the branch pipelines to connect the local pipelines to the pressure regulating boxes located in the end-users’ buildings or premises. The pressure regulating box reduces the natural gas to a lower pressure before the natural gas is transmitted to the customers’ inlets. Customers’ inlets transmit the natural gas through the pressure regulating box to the end users.

Our Strategy

Our strategy involves: (i) expanding our presence in small and medium sized cities; (ii) acquiring existing gas distribution systems and/or franchises; and (iii) expanding our business upstream by developing and maintaining pipelines that connect China’s East-West Gas Pipeline with the cities where we have our gas stations or where other distributors own distribution networks.

(i) Expand Our Presence in Small and Medium Sized Cities by Obtaining Additional Exclusive Franchises. We have focused on small (with urban population in the city proper of less than 300,000) and medium sized (with urban population in the city proper of less than 1,000,000) cities, generally near a larger metropolitan area where there is little competition to obtain a franchise, and where our franchise grants us exclusivity. In such places in the PRC, we are in a better position to obtain exclusive natural gas distribution system development and supply franchise agreements during negotiations with the cities. These smaller cities urgently need to provide their citizens with energy and usually do not have the leverage of very large cities, which can attract multiple bidders for their franchises. Accordingly, we require and receive an exclusive franchise entitling us to be the sole natural gas utility in such cities. Usually, our franchises have a term of 25 to 30 years. Since our founding, we have successfully obtained 29 franchises in small and medium sized cities.

(ii) Acquire Existing Franchises and Gas Distribution Networks to Facilitate Growth. Our expanded presence in small and medium sized cities was accomplished not only by securing franchises and developing gas distribution networks ourselves but also by acquiring existing franchises and networks from other operators. We believe acquisitions will provide us opportunities for growthas well as enable us to explore opportunities in bigger cities (with urban populations in the city proper of more than 300,000). Normally we target companies that have valuable assets and market prospects with strategic locations.

(iii) Expand into Upstream Business. We currently develop gas distribution networks which deliver gas from our storage and distribution station in a particular city to residential or industrial customers in that city. We do not have pipelines that connect the national main pipeline that runs across China from the West to the East with the cities where our customers are located. We have to deliver the gas we purchase from the main pipeline operator to our gas storage facilities in different cities by trucks. We intend to expand into the upstream business by developing regional distribution networks to connect the West-East main pipeline with cities that are not located near the passageway of the national main pipeline. By developing and maintaining regional pipelines, we believe we can deliver natural gas to our customers more efficiently and with potentially higher margins. In addition, such regional distribution networks can be used by other gas distributors along the pipelines, which will add potential revenue sources for us. As the development of such regional networks require a significant capital outlay, we intend to start exploring such projects after we are able to raise a significant amount of funds in the future.

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(iv) Raise Additional Capital. We are in a capital-intensive business due to the fact that a major part of our activities is to build local natural gas distribution networks which requires a large capital outlay Although the connection fees we charge our customers provide us with the needed capital for building local natural gas distribution networks to a large degree, they may not provide sufficient capital if we carry out the acquisitions and upstream expansion as we have planned. Our growth will, therefore, depend on our ability to raise additional funds. We anticipate using our financing strategy as a competitive tool. Our goal is to duplicate the type of financing and related financial instruments used by utilities in the United States, including the issuance of subsidiary level, non-recourse debt, preferred stock and holding company fixed income issuances. Such a financing plan would not only give us a favorable cost of capital, but enhance investor returns and keep investor dilution at a minimum.

Competitive Advantages

We believe we have the following competitive advantages:

(i) Better Relationships with Natural Gas Suppliers. We have been able to develop good relationships and therefore secure contracts with large state-owned natural gas producers such as PetroChina and China Petroleum Chemical. These contracts have ensured a stable supply of natural gas for us.

(ii) Experienced Management and Technical Personnel.We have a team of senior executives who are industry experts in managing larger Chinese petroleum and/or gas companies with decades of combined experience in running our company or managing businesses in our industry. Our founder and Chief Executive Officer, Mr. Yuchuan Liu, is a natural gas industry expert with over 20 years experience in senior management positions at PetroChina and China Gas Holdings Limited, a Hong Kong Stock Exchange-listed PRC company. Our Chief Operating Officer, Mr. Zhicheng Zhou, served as the Director and General Manager of Beijing Chenguang Gas Co., Ltd. from late 2002 to 2006. Our Chief Engineer, Mr. Shukui Bian, is one of the draftsmen of the PRC National Standards for Urban Gas Supply, and was previously the Chief Executive Officer of the First Oil Extraction Plant of North China Oilfield. Our company was one of the earliest to engage in the natural gas distribution business in small and medium sized cities, and thus has gained significant experience in this market segment.

(iii) Experienced Sales and Marketing Team. Our sales and marketing team has gained significant experience in working with local governments and identifying potential markets in small and medium sized cities. Due to their efforts, we have won franchises in 29 locations.

(iv) U.S. Capital Markets Access. By becoming a U.S. public company, we have gained access to size and efficiency of the U.S. capital market. We will be able to raise funds, as we have done, for our expansion and growth, albeit our ability to raise funds in the U.S. is a limited one because we have not been listed on any major U.S. national stock exchanges. Very few Chinese companies that are in the natural gas distribution business have become U.S. public companies.

Products and Services

Currently, we generate revenues primarily from the connection fees we charge our customers for connecting to the pipelines in our natural gas distribution systems which we have constructed and, for usage of the natural gas we supply to them.

Connection Fees

We charge our real estate developer customers a flat connection fee for the installation of gas lines to each of their apartments or housing units. The level of connection fees varies among operational locations and is determined based on a detailed analysis of factors such as estimated capital expenditure, fees charged in surrounding cities, number of users, expected penetration rates, income levels and affordability to local residents and is approved by the relevant local state price bureau. Connection fees are usually paid in installments, with 30% within certain days set out in the contracts after the start of each project, 30% at milestones set out in the contracts, 30% upon completion and 10% in the form of a guarantee which is paid after one year. Connection fees generally provide a 60-80% profit margin. The rates of connections fee are set by the local state price bureau based on the connection fees charged by other gas distributors in surrounding areas and can vary in different cities. In most cases, we accept the price set by the local state price bureau. But if we find the price does not offer a profit margin equal to or greater than 20%, we will negotiate with local governments for an increase and local governments usually agree to increase our connection fees under such circumstances. The connection fees in most cities are very close to our average connection fee per household. Gas usage fees are also subject to the approval of the local state price bureau. Future price increases are also subject to the same approval process. In considering applications for an increase in gas usage charges, the local state price bureau may consider factors such as increases in the wholesale price of gas or operating expenses, inflation, additional capital expenditure, and whether the profit margin remains fair and reasonable.

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When entering into master supply contracts for mass connections, we usually require the payment of deposit from customers while the balance is payable in accordance with the terms set out in the contracts. In the event customers default in the payment of connection fees, we will not start the supply of natural gas until the connection fees are paid.

Gas Usage Charges

We calculate gas usage charges after taking into consideration the wholesale price of gas, operating costs, price of substitute products, internal business model margins and the purchasing power of local residents. Gas usage charges are based on actual usage on a per cubic meter basis. The gas usage charges per cubic meter vary between operational locations and the payment mechanism between different categories of customers varies.

Since our inception, the majority of our residential customers have purchased gas units in cash at our sales outlets with details of the prepaid gas units stored electronically on a debit card. The debit card is inserted into a debit card debit gas meter installed at the end user’s premises to activate the gas supply. Units of gas used are deducted from the debit card. When the level of prepaid gas units drops to a certain level (currently pre-set at three cubic meters), the gas meter will produce a sound signal to remind the customer to replenish the value stored in the debit card. Over 85% of our residential customers utilize the debit card payment method. This payment method provides significant advantages to us as all gas purchases are prepaid - not at the point of sale or in arrears.

For those residential customers without a debit card gas meter installed and for commercial and industrial customers, payments for natural gas usage are made in arrears. Gas meters that record actual gas consumption are installed at the end users’ premises and meter readings are taken physically by our staff every month. Monthly bills based on the prior month’s actual usage are then sent to customers. In the event customers default in payment of gas usage charges, gas supply will be suspended within one month of billing.

Our Business Activities

Our major business activities include development and construction of local gas distribution networks, transport of natural gas from suppliers to our storage facilities in a given operational location, and operating and maintaining the gas distribution networks.

Development

(i) Identifying distribution opportunities in new operational location:

Our business development team actively explores and identifies suitable areas of service by conducting market research on potential operational locations where there is sufficient demand for piped natural gas. Because of our experience and ongoing cooperation with governmental authorities, we also receive invitations from local governments to bid for new natural gas projects or to take over existing natural gas projects.

As the piped natural gas supply industry in the PRC is still in the early stages of development, most areas in the PRC are not yet supplied with piped natural gas even though they may be in close proximity to natural gas sources. Due to the capital intensive nature of new natural gas distribution projects, we are very selective in our choices for new operational locations.

The selection of new operational locations is determined after conducting preliminary evaluation and study of the target locations and the potential return on investment. The criteria for any potential operational location that are investigated and documented by us are:

1.	Size and density of the population.
2.	Economic statistics of the targeted locations.
3.	Extent and concentration of industrial and commercial activities.
4.	New property development in the target location.

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5.	Projected levels of connection fees and gas usage charges.
6.	Extent of the local government’s commitment to environmental protection, environmental policies in place, and the local population’s awareness of environmental issues.
7.	Likelihood of exclusive operational rights and preferential treatment on tax and governmental fees.
8.	Types of gas supply (piped natural gas, CNG or LNG) and methods of delivery. CNG trucks are deployed if the gas source, or long distance pipeline, is located within 300 km. Generally, LNG trucks are used if the gas source, or long distance pipeline, is located beyond 300 km.
9.	For an acquisition of existing natural gas projects, the cost of acquisition, quality of assets and/or business are also valued. In addition, the liabilities of the business are analyzed along with any other perceived or actual problems encountered.

Based on the findings of the investigation, our business development team will decide whether to make a recommendation to management for approval to proceed with discussions and negotiations on a new project. We have conducted dozens of preliminary evaluations since our inception in 2003.

(ii) Securing a new operational location. Once we have approved a potential natural gas distribution project in an operational location, we normally set up a local independent subsidiary, also known as a project company, to administer the project for its lifetime. We then prepare and submit a detailed gas project proposal to the local government and commence negotiations on major issues such as the granting of exclusive rights or rights of first refusal to supply gas to that location, proposed connection fees and gas usage charges and whether any tax and other concessions or favorable policies will be granted by the local government. Once established, the project company will conduct a series of marketing and promotional campaigns (which may include joint promotional campaigns with the local government) to increase public awareness of piped natural gas in the operational location. Concurrently, we begin actively seeking out potential customers in the operational location and negotiate the terms of supply contracts with the aim of entering into supply contracts as soon as possible with such customers.

(iii) Construction.

(a) Design stage.The design of the gas pipeline infrastructure for a natural gas distribution project includes the processing stations, the local pipelines and other ancillary facilities such as gas storage tanks. It is carried out by a government approved design institute in accordance with our requirements and specifications. It also takes into account the local population size, the development of the economy, the utilization of energy resources and the environmental conditions. The master design is subject to approval by the local city construction department. The design stage normally takes two to three months.

(b) Construction Stage.Once the design is approved, we invite independent qualified contractors to tender bids for the construction work. The selection criteria for the contractors include their qualifications, experience, expertise, reputation, familiarity with the local environment, prior experience with us and price. We generally enter into turnkey contracts with independent contractors for construction, installation and maintenance of the natural gas pipelines. We pay a down payment with the remainder to be paid upon completion of the project. At the time of entering into turnkey contracts, we source raw materials such as piping, gas regulating equipment and machinery. We have strict quality control procedures for the sourcing of supplies for all construction purposes.

Our internal engineers and independent external inspectors monitor the entire construction process to ensure that each stage of construction meets our quality and safety standards and the relevant regulatory requirements.

For a given operational location, although the gas pipeline infrastructure is designed to cover the entire operational location, our construction program focuses on early gas delivery to areas of concentrated customer demand within such operational location. This ensures that natural gas supply can begin as soon as the essential gas pipeline infrastructure and facilities such as the processing stations are completed. Construction work in a target area will gradually extend to cover the whole operational location, which typically takes two to five years.

Operation

Once the necessary gas pipeline infrastructure is in place in a given operational location, we begin the design and construction of the branch pipelines and customers’ inlets pursuant to gas supply contracts with customers. The designs of branch pipelines and customers’ inlets are normally prepared by us, reviewed by a government approved design institute, and carried out by external contractors. Upon completion of the construction of the branch pipelines and the customer inlets in the operational location, we begin to supply and sell natural gas and related services to customers within the operational location pursuant to supply contracts with such customers. The natural gas to be supplied to the residential or industrial customers is carried by trucks with canisters that contain CNG or LNG, to our storage facilities in various operational locations for storage, decompression and gasification. From those storage facilities, the gas is transported through our pipeline system to our end users.

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Intellectual Property

We do not hold any registered trademarks or patents. We have developed a proprietary natural gas compression process that allows us to effectively and economically compress natural gas and distribute it.

We own and operate a website under the internet domain name www.sino-gas.com.

Research and Development

We have full-time employees engaged in the company-sponsored research and development efforts. These employees specialize in the fields of energy, mechanical and electronic engineering. Areas that are targets of our ongoing research and development activities include:

· Methodology and practices to increase operating efficiency and safety standards.

· Expansion of the applications for natural gas, such as gas-fuelled air conditioners, washing machines and dryers, and the use of CNG in motor vehicles.

· Improvements in gas storage and transportation systems, especially the reduction of the size of the storage facilities.

Sales and Marketing

Our main sales and marketing team is responsible for managing our overall sales policies and devising our marketing strategy. They are responsible for developing and maintaining accounts with major industrial customers and large real estate developers. They regularly visit potential customers and conduct meetings with them to determine if demand exists and to introduce the advantages of using natural gas.

Our sales and marketing staff at our operational locations target residential customers by working with local neighborhood committees and government agencies. In addition, they coordinate with our national office in targeting industrial customers and local developers. We establish a project company at each operational location and the local sales and marketing team for each project company works together with the main office team to structure an appropriate plan accommodating the specific needs and circumstances of the operational location. Our marketing team plays an active role in lobbying the relevant government authorities during the negotiation stage.

The sales and marketing team is responsible for our company image and brand building, as well as promoting the advantages and concept of using natural gas as a necessary part of modern day life. Once established, a project company will implement a series of promotional campaigns (which may include joint promotional campaigns with the local government) to increase public awareness of piped natural gas in an operational location. At the same time, the project company begins to actively seek out potential customers in the operational location and negotiate the terms of supply contracts with the aim of entering into supply contracts with such customers as soon as possible.

Our Customers

We have two principal types of customers: (i) residential customers and (ii) industrial customers.

Residential Customers

Natural gas is primarily used by residential owners for cooking as well as water and space heating. We market directly to property developers, government departments and organizations, private companies and state-owned enterprises, as these entities enter into master supply contracts with us for the connection of gas to all the units within a residential development (new or existing, owned by such entities or their respective employees). These entities are responsible for making, or they coordinate with the end users to facilitate our efforts in collecting the advance payment of connection fees, while gas usage charges are paid by the individual end users. For new residential developments, connection fees are usually paid in installments, with 30% paid within certain days set out in the contracts after the start of each project, 30% paid at milestones set out in the contracts, 30% paid upon completion, and the final 10% is paid as a guarantee used to incentivize quality workmanship from the developer and is normally received after one year.

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We also perform gas connection services to existing buildings formerly without piped natural gas supplies. Representatives of the buildings will consult individual households as to whether they wish to have piped natural gas supply and coordinate the collection of connection fees from the end users on our behalf. Both connection fees and gas usage charges are payable in advance by the individual end users. We build pipelines to connect these customers to our gas storage facilities and supply gas at market price after receiving payment. The inlets that are located inside the home and gas appliances are owned by the end users, and come with a one-year quality guarantee from us. We maintain the pipelines outside the end users’ homes. The contracts are generally renewable on a yearly basis.

At present, we have approximately 183,500 end users in Beijing, Hebei, Jiangsu, Jilin and Anhui. Our top five residential customers in 2010 and 2009, who are developers or owners of residential areas, are shown below:

	Percentage of Connections Fees for the year ended December 31,
Customers	2010			2009
Jiangsu Zhonghuang Real Estate Co., Ltd.		5.03	%	-		%
Lianyun Port Zhaolong Home Development Co., Ltd.		4.36	%	-		%
Qinwan Island Yongsheng Qiangwang Real Estate Co., Ltd.		3.67	%		-	%
Baishan Xinde Real Estate Co., Ltd.		1.97	%	-		%
Peixian Hancheng International Co., Ltd.		1.76	%	-		%
Total		16.79	%		-	%

Industrial and Commercial Customers

Our industrial customers use natural gas primarily for heating, air conditioning, water heating and cooking purposes. These customers we target include manufacturers, owners of hotels, restaurants, office buildings, shopping centers, hospitals, educational establishments, sports and leisure facilities and exhibition halls. Natural gas has a wide variety of applications for industrial customers such as fuelling industrial boilers, furnaces, ovens, incinerators, foundries and steamers as well as water and space heating in staff canteens and dormitories within the industrial customers’ premises. We enter into supply contracts with these customers for the distribution of gas to their premises, and both connection fees and gas usage charges are borne by such customers.

The table below presents information about our top five industrial customers for 2010 and 2009:

	Percentage of Sales Fiscal year ended December 31,
Customers	2010			2009
Hebei Zhong Gang Steel		19.41	%		20.46	%
Hongyuan Caituban Factory		2.94	%		6.17	%
Huabei Machine Factory		2.59	%		2.99	%
Hebei Jihengyuan		1.73	%		0.5	%
Elite (Lang Fang) Textile		1.07	%		1.04	%
Total		27.74	%		31.16	%

Materials and Supplies

Natural Gas

The principal supplies purchased for our business are natural gas. Generally, approximately 95% of the natural gas we purchase is CNG and approximately 5% is LNG.

Our principal CNG supplier has been the Fourth Oil Extraction Plant of the North China Oilfield (the “North China Oilfield”), a subsidiary of PetroChina. Our LNG supplier has been Henan Zhong Yuan Lu Neng Advanced Technology Ltd. Co. (“Henan Zhong Yuan”), a subsidiary of SinoPec. Historically, we have purchased majority of our CNG from North China Oilfield and majority of our total purchases of LNG from Henan Lvneng.

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We have supply contracts (with terms from 1 to 3 years renewable but no fixed price, which price is set indirectly by the PRC National Development and Reform Commission (“NDRC”) irregularly and can be passed along to the end customers) with these suppliers. To prepare for growth, we have also entered into agreements with new suppliers to meet our growing demands. These contractual relationships with our suppliers allow us to pursue natural gas distribution projects in a wide range of operational locations.

The wholesale price of natural gas is agreed upon between the suppliers and us with reference to the wellhead price which is determined by NDRC with approval from the PRC State Council, distance of transportation, purification fees and the supplier’s operating costs. The wellhead price of natural gas is with a 10% allowance for upward or downward adjustments as a result of negotiations between suppliers and distribution companies, such as Beijing Gas. Generally, we are only required to pay for the actual quantity purchased and there is no penalty should we purchase less than the stated amount.

Piping, Machinery and Equipment

Piping, machinery and equipment constitute 60-70% of our construction expenditure. We purchase such supplies through a bidding process which is administered by the procurement committee. Potential suppliers are evaluated on their proposed terms including technical specifications, price, payment terms and post-sale services and the procurement committee keeps a scoring system based on these parameters. After validation of the various suppliers’ service and capabilities for stable supply, we acquire the needed materials and parts from the supplier offering the best terms.

We purchase pipes of various size and thickness domestically for installation in different segments of our natural gas pipeline infrastructure according to specifications that comply with PRC standards and regulations. Payments for equipment, pipes and machinery are purchased with credit terms ranging from 30 to 90 days. We generally do not purchase gas appliances except gas meters which we purchase in bulk directly from manufacturers in China and maintain a limited inventory of them. We also provide repair and maintenance service to the gas appliances supplied. We generally provide a one-year warranty of our gas distribution system to our customers, during which time we provide free check-ups of the pipeline and repair for any appliances we provided.

Competition

Since our inception, we have focused on supplying natural gas to small and medium sized cities in the PRC where the average urban residents in the city proper is 300,000 and below, where the natural gas penetration rate is typically 0%, and where we are able to obtain exclusivity for natural gas distribution from the local government. In entering into these small and medium sized cities, we are generally authorized to be the sole supplier of natural gas by the local governments pursuant to franchise agreements for a typical term of 25 to 30 years. This differs from the bigger natural gas distribution companies which have focused on a few areas with large populations. The larger cities are very competitive markets that tend to offer less flexibility for advantageous pricing arrangements. Due to our smaller city focus where the operating cost is low and competition is much less intense, we believe we generate profit margins and returns at or above industry-average levels.

As we compete principally with small- to medium- sized private companies in the natural gas distribution industry, the information about our competition and competitive position is limited. Based on the information available to us, we estimate that there are approximately 200 small- to medium- sized private gas distribution companies in the PRC. Most of these companies target local towns, rather than take the approach that we do, of targeting cities in different provinces. Also, most of these companies operate an average of three or four natural gas distributions systems, as compared to more than 35 natural gas distribution systems that we operate; therefore, we believe we are one of the largest players among our peer businesses that target the natural gas market in smaller cities.

Based on the division of the administrative districts in the PRC as of December 31, 2005, it has been estimated that there are approximately 2,862 smaller cities in the PRC with urban dwellers in the city proper between 100,000 to 300,000. Among them, approximately 800 smaller cities have the potential to be supplied with natural gas.

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The following are our natural gas competitors in China:

	Ticker	2010  Revenue (in US$ millions)		2010 Net Income (in US$ millions)
Towngas China Co., Ltd. (Panva Gas) (1)	1083.HK		438.44		64.09
ENN Energy Holdings Limited (Xinao Gas Holdings Ltd.) (2)	2688.HK		1,649.28		148.98
China Gas Holdings Limited(3)	0384.HK		1,501.76		128.77

(1) Towngas China Company Ltd., formerly Panva Gas Holding Limited, is supplier of gas, including liquefied petroleum gas (“LPG”) and natural gas in eight Chinese provinces, where over 40 companies of the Group are providing gas fuel services. 

(2) ENN Energy Holdings Limited, formerly Xinao Gas Holdings Limited, is principally engaged in the investment in, and the operation and management of, gas pipeline infrastructure and the sale and distribution of piped and bottled gas in China with operations in four divisions: gas connection, sales of piped gas, distributions of bottled LPG and sales of gas appliances.

(3) China Gas Holdings Limited (“China Gas”) is an investment holding company. The Company is an operator of natural gas services principally engaged in the investment, operation and management of city gas pipeline infrastructure, long-distance, high-pressure pipelines, distribution of natural gas to residential, commercial, industrial and vehicle users, construction and operation of oil stations, and gas stations, as well as liquefied natural Gas (“LNG”) liquefaction plants, and development and application of oil and natural gas related technologies. The Company has four operating divisions: property investment, financial and securities investment, gas connection and sales of piped gas.

Safety and Quality Control

Safety Control

We are focused on safety, have implemented a safety system and have set up a safety department to oversee safety issues for all of our operations. We carry out routine inspection of our branch pipelines, customers’ inlets, gas meters and gas appliances at the customers’ premises twice annually. These semi-annual inspections are free unless major repairs are required in which case we charge the customers for labor, replacement parts and other materials used in the repairs.

We believe in educating users about safety procedures. Before gas is actually supplied, we provide a thorough explanation of safety procedures to end users, hold regular seminars, and distribute brochures and booklets on safety. We have a 24-hour telephone help line for inquiries and reporting of emergency matters.

In order for us to monitor the operations of the pipelines for abnormal gas usage, gas leakages, or any other irregularities, we collect information about the temperature, pressure and volume of gas from key points along the local pipelines. The information is collected in the control center located in the head office of each operational location for analysis. We use process control instruments known as Supervisory Control and Data Acquisition Systems, in which a number of small detectors are installed along the pipelines to collect information and that data is then processed electronically in real time at the control center. Each project company conducts a major inspection of its pipelines, processing station(s) and other equipment at least once annually. If gas leakages or any other irregularities are detected, we will take remedial action immediately.

Due to the strict implementation of safety control procedures, there have been no major accidents which have resulted in serious injury or death since our inception.

Quality Control

Quality control begins in the design and construction phase of the natural gas supply infrastructure. Our quality control team regularly makes inspection visits and conducts tests to ensure that any construction work meets our required standards as well as national and local regulations.

We also have strict quality control procedures for the sourcing of raw materials. We only purchase from our approved list of qualified suppliers and such suppliers have fulfilled the relevant requirements in accordance with national standards.

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In order to monitor the quality of gas purchased by us, we obtain gas composition reports regularly from our gas suppliers that contain data on important measures such as the heat content and composition of impurities in our gas supply. We also conduct regular tests on the gas purchased in order to verify its quality.

Insurance

We currently do not carry any product liability or other similar insurance, and we have only basic property insurance covering our plants, manufacturing equipment and office buildings.

We maintain social insurance for our staff and employees in accordance with relevant requirements under PRC law.

Government Regulations

Pricing Regulations

We purchase natural gas from natural gas wholesalers, which are state-owned enterprises and which must comply with PRC natural gas pricing regulations. The wholesale price of natural gas payable by distribution companies, such as Beijing Gas, to the suppliers of natural gas is comprised of three components, the wellhead price, the pipeline transportation tariff and the purification fee. The wellhead price is fixed by NDRC, with a 10% allowance for upward or downward adjustments for negotiation between suppliers and distribution companies. The pipeline transmission tariffs are determined by reference to the investment costs of the relevant long distance pipeline, depreciation, wear and tear and the distance of delivery. The purification fee is based on the actual purification costs of the suppliers. Both the pipeline transmission tariffs and the purification fee must also be approved by the NDRC.

The price we charge our residential customers for natural gas is based on the wholesale price plus cost and a profit margin of 10% to 15% and must be approved by the local price bureau.

Operational and Construction Permits

In the PRC, companies in the gas distribution business must also obtain an operational permit from the local municipal government to begin operation. In addition, a construction permit must be obtained if such gas distribution company also engages in construction. In both cases, the local municipal government will review the qualifications and experience of the management and technical staff of the distribution company and consider whether the distribution company is capable of fulfilling the operational and construction standards.

As of December 31, 2010, Beijing Gas and most of our project companies and branch offices have the necessary operational permits. We believe failure to obtain such permits in time for those projects will not have a materially adverse effect on our operations.

Safety Regulations

As a natural gas distributor, Beijing Gas is regulated by the Administrative Rules on the City Gas Safety jointly promulgated by the PRC Ministry of Construction, standards set by Standard Bureau and Fire Safety Bureau of PRC Ministry of Public Security effective in May 1991. According to such rules, the manufacture, storage, transportation, operation, usage of city gas, design and construction of gas-related projects, and the manufacture of gas-related facilities shall be subject to relevant safety requirements and qualifications. Fuel service station standards are subject to regulation by the PRC’s Ministry of Construction, General Administration of Quality Supervision, and Bureau of Inspection and Quarantine. Required certificates are issued upon satisfactory inspection of service stations. In addition, there are various standards that must be met for filling stations, including handling and storage of gas, tanker handling, and compressor operation. These standards are regulated by local construction and gas operations regulating authorities. Inspections are carried out and certificates for the handling of dangerous agents are issued by relevant local authorities. As of December 31, 2010, most of our project companies have received such certificates. We believe failure to obtain such certificates in time for those projects will not have a materially adverse effect on our operations. 

Environmental Assessment

Under China’s Environmental Regulations, each of our project location should obtain an environmental assessment report which asses the environmental impact of the operations of the project. The report must be approved by the relevant authorities. As of December 31, 2010, most of our project companies have obtained such reports. We believe failure to obtain such reports in time for those projects will not have a materially adverse effect on our operations.

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Income Taxes

Pursuant to the tax laws of PRC, general enterprises are subject to income tax at an effective rate of 33%. Beijing Gas is in the natural gas industry, whose development is encouraged by the government. However, PRC income tax regulations provide that any company operating in the natural gas industry enjoys a favorable tax rate. In addition, Beijing Gas has been approved as a high technology company and as such has been enjoying preferential income tax treatment under the PRC’s income tax policies. Under these policies, Beijing Gas was exempt from corporate income taxes for the first two years commencing from its first profitable year, and thereafter will be entitled to a 50% tax reduction for the succeeding three years. Our first profitable tax year was 2003. Accordingly, our income is subject to a reduced tax rate of 7.5% from 2005 to 2007. Effective January 1, 2008, the PRC government implemented a new 25% tax rate for all enterprises regardless of whether the enterprise is domestic or foreign. However, the PRC government has established a set of transition rules to allow enterprises that had already began to enjoy tax exemptions prior to January 1, 2008 to continue enjoying the tax exemptions until fully utilized. The subsidiaries of Beijing Gas are subject to the effective rate of 15% - 25%. 

Foreign Currency Control

Under certain regulations in the form of public notices issued by the PRC State Administration of Foreign Exchange, or SAFE, our shareholders who are PRC resident entities or individuals are subject to certain registration requirements due to the status of GAS (BVI) and Sino Gas under Chinese law as offshore special purpose companies, or SPCs. These regulations would prohibit Beijing Gas from distributing dividends or profits to GAS (BVI) and/or Sino Gas as SPCs unless we comply with the registration requirements set forth by SAFE. As of the date hereof, Mr. Liu Yu Chuan, our President, Chief Executive Officer and Chairman of the Board, has completed the registration with the SAFE and has been issued a SAFE certificate in August 2006. We are in the process of determining whether there are additional shareholders who are subject to the SAFE regulations and whose compliance status will have a material effect on our ability to remit any of our profits out of the PRC as dividends or otherwise.

Employees

As of December 31, 2010, we had approximately 535 full-time employees, including approximately 63 management personnel, and 468 employees in finance, accounting, and operations.

As required by applicable Chinese law, we have entered into employment contracts with all of our employees. We have also entered into a confidentiality agreement with all of our employees under which such employees are prohibited from disclosing confidential information of the Company or using it for other purposes than the benefit of the Company. Directors, officers, mid-level managers and some key employees in sales and R&D are required to sign a non-compete agreement which prohibits them from competing with the Company while they are employees of the Company and not working for a competitor within one year of termination and working in the industry for two years after their employment with the Company is terminated. 

Our employees in China participate in a state pension arrangement organized by Chinese municipal and provincial governments. We are required to contribute to the arrangement at the rate of 20% of the average monthly salary. In addition, we are required by Chinese law to cover employees in China with other types of social insurances. Our total contribution may amount to 30% of the average monthly salary of an employee. We have purchased social insurances for all of our employees.

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Item 1A. Risk Factors

An investment in our common stock is speculative and involves a high degree of risk. You should carefully consider the risks described below and the other information in this Annual Report on Form 10-K before purchasing any shares of our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties may also adversely impair our business operations. If any of the events described in the risk factors below actually occur, our business, financial condition or results of operations could suffer significantly. In such case, the value of your investment could decline and you may lose all or part of the money you paid to buy the shares of common stock.

Risks Related to Our Business

Disruptions in the capital and credit markets related to the current national and worldwide financial crisis, which may continue indefinitely or intensify, could adversely affect our results of operations, cash flows and financial condition, or those of our customers and suppliers.

The current disruptions in the capital and credit markets may continue indefinitely or intensify, and adversely impact our results of operations, cash flows and financial condition, or those of our customers and suppliers. Disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed to conduct or expand our businesses or conduct acquisitions or make other discretionary investments, as well as our ability to effectively hedge our currency or interest rate. Such disruptions may also adversely impact the capital needs of our customers and suppliers, which, in turn, could adversely affect our results of operations, cash flows and financial condition.

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

The basic business model of our business is to purchase natural gas from our suppliers, and sell such natural gas to our industrial and residential customers for a profit.

As we do not own natural gas reserves, we depend on natural gas supply from a small number of suppliers. While we typically enter into multiple-year gas supply contracts with our suppliers, the supply contracts are subject to review every twelve months. If key terms of these supply contracts are changed after the annual review, or if our suppliers breach any of the key terms of the supply contracts, we will not be able to deliver the natural gas to our customers. While we have not experienced any shortage of supply in the past, we cannot assure you that natural gas will continue to be available to us. In the event that our current suppliers are unable to provide us with the natural gas we require, we may be unable to find alternative sources, or find alternative sources at reasonable prices. In such an event, our business and financial results would be materially and adversely affected.

If it were determined that our spin-off of Pegasus Tel, Inc. in August 2008 violated federal or state securities laws, we could incur monetary damages, fines or other damages which could have a material, adverse effect on our cash flow, financial condition and prospects.

We may have inadvertently violated the federal and state securities laws in connection with our spin-off of Pegasus Tel., Inc. (“Pegasus”) to our stockholders in August 2008. As we previously reported, on August 18, 2008, we consummated a spin-off of Pegasus, a Delaware corporation and a wholly-owned subsidiary of Sino Gas, to Sino Gas’ stockholders of record as of August 15, 2008 (“Spin-off”). In connection with the Spin-off, on May 7, 2007, Sino Gas caused Pegasus to file a Registration Statement on Form 10-SB (File No.: 0-52628) with the SEC to register the Pegasus common stock under Section 12(g) of the Securities Exchange Act of 1934 and, on November 28, 2007, Sino Gas filed with the SEC an Information Statement on Schedule 14C to inform shareholders of record that it was effecting the Spin-off. The ratio of distribution of the Spin-off was one (1) share of common stock of Pegasus for every twelve (12) shares of common stock of Sino Gas (1:12). Fractional shares were rounded up to the nearest whole-number. An aggregate of 2,215,136 shares of Pegasus common stock were issued pursuant to the Spin-off to an aggregate of 167 Sino Gas stockholders.

In the course of its review of our Registration Statement on Form S-1, the staff of the SEC provided comments requesting further information about the Spin-off and indicated its concern that the Pegasus Shares may have been issued without proper registration or an available exemption from registration. Under Staff Legal Bulletin No. 4 (“SLB 4”) promulgated by the Division of Corporation Finance (the “Division”) of the Securities and Exchange Commission (the “SEC”), the Division expressed its view that the shares of a subsidiary spun off from a reporting company are not required to be registered under the Securities Act of 1933, as amended (the “Securities Act”) when the following five (5) conditions are met: (i) the parent shareholders do not provide consideration for the spun-off shares; (ii) the spin-off is pro-rata to the parent shareholders; (iii) the parent provides adequate information about the spin-off and the subsidiary to its shareholders and to the trading markets; (iv) the parent has a valid business purpose for the spin-off; and (iv) if the parent spins-off “restricted securities,” it has held those securities for at least two (2) years.

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If it were determined that the Spin-off did not satisfy the conditions for an exemption from registration, it would mean that the issuance of the Pegasus Shares violated Section 5 of the Securities Act and potentially the state securities laws of the U.S. states in which the holders of record for the Spin-off resided. The consequences of such a finding could be the imposition by the SEC and relevant state regulators of monetary fines or other sanctions as provided under relevant federal and state securities laws. Such regulators could also require us to make a rescission offer, which is an offer to repurchase the securities, to the holders of Pegasus Shares.

A finding that the issuance of the Pegasus Shares was in violation of federal or state securities law could also give certain current and former holders of the Pegasus Shares a private right of action to seek a rescission remedy under Section 12(a)(2) of the Securities Act. In general , this remedy allows a successful claimant to sell its shares back to the parent company in return for their original investment.

We are unable to quantify the extent of any monetary damages that we might incur if, monetary fines were imposed, rescission were required or one or more other claims were successful. However, we can give no assurance that the damages resulting from any such action or claims will not have a material, adverse effect on our cash flow, financial condition and prospects. As of the date of this Annual Report on Form 10-K, we are not aware of any pending or threatened claims that the Spin-Off violated any federal or state securities laws.

Based upon facts known to us at this time, we do not believe that assertion of such claims by any of our current or former holders of the Pegasus Shares is probable. However, there can be no assurance that any such claim will not be asserted in the future or that the claimant in any such action will not prevail. The possibility that such claims may be asserted in the future will continue until the expiration of the applicable federal and state statutes of limitations, which generally vary from one (1) to three (3) years from the date of sale. Claims under the anti-fraud provisions of the federal securities laws, if relevant, would generally have to be brought within two (2) years of discovery, but not more than five (5) years after occurrence.

The price of natural gas is subject to uncertain government regulations and market conditions.

The price of natural gas is subject to uncertain government regulations and market conditions in the PRC which are subject to change or fluctuations. While our costs for natural gas are subject to control by the PRC government and we have not experienced any significant price fluctuations over the past few years, we can not assure you that the price of natural gas will not vary significantly in the future. Numerous factors, most of which are beyond our control, drive the price and supply of natural gas. Some of these factors are: general international and domestic political and economic conditions, wars, OPEC actions, industry capacity utilization and government regulations. The war in Iraq and uncertain international political conditions could drive the price of natural gas upwards, thus reducing our profit margins in selling the natural gas to our customers. Any production restrictions imposed by OPEC on crude oil and natural gas could also reduce the inventory of the natural gas and drive the price upwards, reducing our profits. The price at which we sell to customers will be subject to approval by the Chinese government and is thus heavily regulated. Although in the past three (3) years there were no significant changes in regulations, we cannot assure you this will be the case in the future. Any change in PRC governmental regulations such as labor law regarding the minimum wage could materially and adversely affect our profits.

Our success depends on our ability to identify and develop operational locations and negotiate and enter into favorable franchise agreements with local governments at the operation locations.

Our success depends on our ability to identify new operational locations in small-and -medium-sized cities in China and negotiate and enter into favorable franchise agreements with local governments that grant us long-term exclusive right to develop the natural gas distribution network and supply natural gas in the operational location. Our failure to identify and develop new operational locations and obtain the exclusive rights to be the developer of natural gas distribution networks and distribute natural gas in such operational locations would curb our revenue growth and may adversely impact our financial condition and operating results.

Our success depends on our ability to obtain large industrial supply contracts and master residential supply contracts with large quantity of end users.

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Our success depends on our ability to obtain large industrial supply contracts and master residential supply contracts with a large quantity of end users. Our failure to obtain large industrial supply contracts and master residential supply contracts with a large quantity of end users will adversely affect our ability to generate revenue and our growth potential and may adversely impact our financial condition and operating results.

Our inability to fund our capital expenditure requirements may adversely affect our growth and profitability.

Our business is capital intensive. Our continued growth is dependent upon our ability to generate more revenue from our existing distribution systems and raise capital from outside sources. We believe that in order to continue to capture additional market share, we will have to raise more capital to fund the construction and installation of the natural gas distribution network for our customers under existing contracts and for new customers. In order to expand our operation, we expect that we will need additional financing for acquisition and expansion in terms of debt financing or equity financing. Our ability to obtain needed financing at any time may depend on a number of factors, including our financial condition and results of operations, the condition of the PRC economy and the natural gas industry in the PRC, and conditions in relevant financial markets in the United States, the PRC and elsewhere in the world. In the future we may be unable to obtain the necessary financing on a timely basis and on acceptable terms, and our failure to do so may adversely affect our financial position, competitive position, growth and profitability.

We may not be able to effectively control and manage our growth.

From August 2003 to December 2010, we have entered into twenty-nine (29) franchise agreements to provide natural gas to certain newly developed residential communities, and we expect that we will secure more of such franchise agreements in the years to come.

If our business and markets grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. In addition, we may face challenges in managing expanding natural gas distribution network and service offerings and in integrating acquired businesses with our own. Our business expansion has resulted, and will continue to result, in substantial demands on our management, operational, technological and other resources. To manage and support our growth, we must improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain additional qualified technical and management personnel as well as other administrative and sales and marketing personnel, particularly as we expand into new markets. We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified technical and management personnel and integrate new communities into our operations. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse impact on our financial condition and results of operations.

The nature of our natural gas operations is highly risky and we may be subject to civil liabilities as a result of our business of gas operations.

Our natural gas operations are subject to potential hazardous accidents to the gathering, processing, separation, storage and delivery of natural gas, such as pipeline ruptures, explosions, product spills, leaks, emissions and fires. These potential hazardous accidents 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 suspension or shutting down of operations at the affected facilities of residential areas. Consequently, we may face civil liabilities in the ordinary course of our business. These liabilities may result in us being required to make indemnification payments in accordance with the applicable contracts and regulations. At present, we do not carry any insurance to cover such liabilities in the ordinary course of our business. Although we have not faced any civil liabilities in the past since we started the current line of business in the ordinary course of our natural gas operations, there is no assurance that we will not face such liabilities in the future. If such liabilities occur in the future, they may adversely and materially affect our operations and financial condition.

Changes in the regulatory environment could adversely affect our business.

The distribution of natural gas to industrial and residential customers and operation of filling stations are highly regulated in the PRC requiring registrations with the government for the issuance of licenses required by various governing authorities in the PRC. For example, to operate in our line of business, we are required to obtain and maintain licenses such as the Natural Gas Business License and the franchise Business License. In addition, there are various standards that must be met for filling stations including handling and storage of natural gas, tanker handling, and compressor operation which are regulated by the government. The costs of complying with regulations may increase which may in turn harm our business. Furthermore, future changes in environmental laws and regulations in the PRC could occur that could result in stricter standards and enforcement, larger fines and liability, and increased capital expenditure requirement and operating costs, any of which could have a material adverse effect on our financial condition or results of operations.

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We may not be able to effectively protect our proprietary technology, which could harm our business and competitive position.

Our success depends, in part, on our ability to protect our proprietary technologies. At present, we use an unpatented proprietary natural gas compression process that allows us to effectively and economically compress natural gas and distribute it. This process was developed by us based on a patented technology co-owned by our Chairman and Chief Executive Officer, Mr. Yu-Chuan Liu, and another individual who is not associated with our company. We cannot assure you that we are, and will be able to effectively protect our technology, and our current or potential competitors do not have, and will not obtain or develop similar compression process, the occurrence of either of which could harm our business and competitive position.

Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in the PRC may not be as effective as in the United States or other developed countries. Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce our rights or defend us, or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation may require significant expenditure of cash and management efforts and could harm our business, financial condition and results of operations. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, competitive position, and business prospects.

We may be exposed to intellectual property infringement and other claims by third parties, which, if successful, could cause us to pay significant damage awards and incur other costs.

At present, we use an unpatented, proprietary natural gas compression process that allows us to effectively and economically compress natural gas and distribute it. This process was developed by us based on a patented technology co-owned by our Chairman and Chief Executive Officer, Mr. Yu-Chuan Liu, and another individual who is not associated with our company. In developing the process, we did not obtain and have not obtained authorization from such individual to use the patented technology. We believe that the technology we use is significantly improved and distinguished from the original patented technology, and any infringement claim related to the original patented technology would be unlikely to succeed. However, we cannot assure you that our assessment is and will be correct. In addition, as litigation becomes more common in the PRC in resolving commercial disputes, we face a higher risk of being the subject of intellectual property infringement claims. The validity and scope of claims relating to natural gas compression technology and related devices and machines patents involve complex technical, legal and factual questions and analysis and, therefore, may be highly uncertain. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability, including damage awards to third parties, court orders requiring us to seek licenses from third parties, to pay ongoing royalties, or to redesign our products or subject us to injunctions preventing us from providing gas services to our customers as required by various contracts we entered. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation.

Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

We have a limited operating history. We commenced our current line of business of offering natural gas to customers in certain cities in China in 2003. Our limited operating history may not provide a meaningful basis on which to evaluate our business. Although our revenues and profits have grown since we started our current business, we cannot assure you that we will maintain our profitability or that we will not incur net losses in the future. We will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our potential failure to:

· raise adequate capital for expansion and operations;

· implement our business model and strategy and adapt and modify them as needed;

· increase awareness of our brands, protect our reputation and develop customer loyalty;

· manage our expanding operations and service offerings, including the integration of any future acquisitions;

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· maintain adequate control of our expenses; and

· anticipate and adapt to changing conditions in the natural gas utility market in which we operate as well as the impact of any changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics.

If we are not successful in addressing any or all of these risks, our business may be materially and adversely affected.

We do not have key man insurance on our Chairman and CEO, Mr. Liu, on whom we rely for the management of our business.

We depend, to a large extent, on the abilities and participation of our current management team, but have a particular reliance upon Mr. Yu Chuan Liu. The loss of the services of Mr. Liu, for any reason, may have a material adverse effect on our business and prospects. We cannot assure you that the services of Mr. Liu will continue to be available to us, or that we will be able to find a suitable replacement for Mr. Liu. We do not carry key man life insurance for any key personnel.

In addition, our future success also depends upon the continuing services of the other members of our senior management team, including our Marketing Director, Zhi Min Zhong; our Vice President and Chief Engineer, Shu Kui Bian; and our Chief Financial Officer, Yugang Zhang. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and senior technology personnel in our line of business is intense in China, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or senior technology personnel, or attract and retain high-quality senior executives or senior technology personnel in the future. Such failure could materially and adversely affect our future growth and financial condition.

We do not presently maintain product liability insurance, and our property equipment insurance does not cover their full value, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us.

We currently do not carry any product liability or other similar insurance. While product liability lawsuits in the PRC are not common and we have never experienced significant failures of our products, we cannot assure you that we would not face such liability in the event of the failure of any of our products. We only carry basic property insurance to cover our real property, natural gas pipelines, storage facilities and equipment. However, we do not have other insurance such as business liability or disruption insurance coverage for our operations in the PRC.

We do not maintain a reserve fund for warranty or defective equipment claims. Our costs could substantially increase if we experience a significant number of warranty claims.

Currently, we provide one (1) year service warranty for the end user equipment, such as gas indoor pipes and gas meters to our customers after we have installed the gas distribution systems and commenced gas supply for them. The warranties require us to repair and replace defective components. Since we started our current line of business, we have received a very limited number of warranty claims for our productsthat only involved minor repairs and whose costs were negligible (around $250 in total). Consequently, the costs associated with our warranty claims have historically been very low. Therefore, we have not established any reserve funds for potential warranty claims. However, if we experience any increase in warranty claims or if our repair and replacement costs associated with warranty claims increase significantly, it would have a material adverse effect on our financial condition and results of operations.

Risks Related to Doing Business in the PRC.

We face the risk that changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.

All of our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including level of government involvement in economic activities, stage of national development, and control of foreign exchange.

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While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy.

The PRC’s economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, we cannot assure you that this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation of laws and regulations, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, we cannot assure you that the government will continue to pursue such policies or that such policies may not be significantly changed, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC’s political, economic and social life.

The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.

We conduct substantially all of our business through our subsidiary, Beijing Gas, established in China. Beijing Gas is generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. 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 arrangements with customers in the event of the imposition of new laws or regulations, or new interpretation of existing laws and regulations. Beijing Gas and any future PRC subsidiaries are considered foreign invested enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations governing foreign invested enterprises. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.

A slowdown or other adverse developments in the PRC economy may materially and adversely affect our customers, demand for our services and our business.

We are a holding company. All of our operations are conducted in the PRC and all of our revenues are generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue. The use of natural gas for commercial and residential consumption in the PRC is relatively new and growing, but we do not know how sensitive we are to a slowdown in economic growth or other adverse changes in the PRC economy which may affect demand for natural gas. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for natural gas and materially and adversely affect our business.

Inflation in the PRC could negatively affect our profitability and growth.

While the PRC economy has experienced rapid growth in recent years, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products and services rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austerity policy can lead to a slowing of economic growth. In October 2004, the People’s Bank of China, the PRC’s central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. In 2007, the People’s Bank of China raised the interest rates again. Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products and services.

Beijing Gas is subject to restrictions on paying dividends and making other payments to us.

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We are a holding company incorporated in the State of Utah and do not have any assets or conduct any business operations other than our investments in our subsidiaries. As a result of our holding company structure, we rely primarily on dividends payments from our subsidiary in China. However, PRC regulations currently permit payment of dividends only out of retained earnings, as determined in accordance with PRC accounting standards and regulations. The “retained earning” has the same meaning under both US GAAP and PRC accounting standards in general, except that under PRC regulations, minimum ten percent (10%) of net profit after tax has to be set aside as the reserve fund. The upper limit of the reserve fund is fifty percent (50%) of the total registered capital of the Company. Only after such set-aside reserve fund is satisfied, can dividends be paid out of retained earnings. Thus, the impact of such set-aside reserve fund on the Company is the restriction upon the Company’s ability to pay dividends to shareholders. For the most recently completed fiscal year, we have satisfied the set-aside reserve fund requirement and dividends could have been paid out of retained earnings. However, this year, we do not have plans to distribute dividends. Our subsidiary and affiliated entity in China are also required to set aside a ten percent (10%) of their after-tax profits according to PRC accounting standards and regulations to fund certain reserve funds. The PRC government also imposes controls on the conversion of Renminbi (the Chinese currency) into foreign currencies and the remittance of currencies out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. See “Government control of currency conversion may affect the value of your investment” herein. Furthermore, if our subsidiary or affiliated entity in China incurs debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiary is unable to receive the revenues due from our operations, we may be unable to pay dividends on our common stock. As of now, we have not attempted to distribute and remit any dividends from our subsidiaries in China and therefore, we have not experienced restrictions.

Governmental control of currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of Renminbi (“RMB”), the Chinese currency, into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in RMB, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, and interest payments, 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 governmental authorities is required where RMB 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 may also 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 certain of our expenses as they come due.

The fluctuation of the Renminbi may materially and adversely affect your investment.

The value of the RMB against the U.S. Dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC’s political and economic conditions. As we rely entirely on revenues earned in the PRC’s, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. Dollars we receive from an offering of our securities into RMB for our operations, appreciation of the RMB against the U.S. Dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our RMB into U.S. Dollars for the purpose of making payments for dividends on our common stock or for other business purposes and the U.S. Dollar appreciates against the RMB, the U.S. Dollar equivalent of the RMB we convert would be reduced. In addition, the depreciation of significant U.S. Dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. Dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately twenty-one percent (21%) appreciation of the RMB against the U.S. Dollar between July 21, 2005 and March 24, 2011. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. Dollar.

The discontinuation of any preferential tax treatment currently available to us and the increase in the enterprise income tax in the PRC could in each case result in a decrease of our net income and materially and adversely affect our results of operations.

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The PRC government has provided various incentives to foreign-invested enterprises and domestic companies operating in a national level economic and technological development zone, including reduced tax rates and other measures. For example, Beijing Gas, which is registered and operating in a high-tech zone in Beijing, has been qualified as a “high or new technology enterprise.” As a result, it is entitled to a preferential enterprise income tax rate of fifteen percent (15.0%) so long as it continues to operate in the high-tech zone and maintains its “high or new technology enterprise” status. Beijing Gas received a two (2) year exemption from the enterprise income tax for its first two (2) profitable years of operation, which were 2003 and 2004. Beijing Gas was thereafter entitled to a preferential enterprise income tax rate of seven and a half percent (7.5%) for the succeeding three (3) years (with an exceptional tax rate of nine percent (9.0%) for 2005), which expired on December 31, 2007. However, we cannot assure you that the current preferential tax treatments and the current level of the enterprise income tax enjoyed by our PRC operating subsidiary will continue, and any legislative changes to the tax regime could discontinue any preferential tax treatment and increase the enterprise income tax rate applicable to our principal subsidiaries in the PRC. Specifically, the PRC Enterprise Income Tax Law (the “EIT Law”), was enacted on March 16, 2007. Under the EIT Law, effective on January 1, 2008, China adopted a uniform tax rate of twenty-five percent (25.0%) for all enterprises (including foreign-invested enterprises) and revoke the current tax exemption, reduction and preferential treatments applicable to foreign-invested enterprises. However, the current preferential tax rate of fifteen percent (15.0%) applicable to high and new technology enterprises and the current preferential tax treatments for all enterprises (including foreign-invested enterprises) will be grandfathered for a period of five (5) years following the effective date of the EIT Law until January 1, 2013. The EIT Law applies to all of our PRC operating subsidiaries, including Beijing Gas, which is currently both a high and new technology enterprise and a foreign-invested enterprise. Any future increase in the enterprise income tax rate applicable to our PRC operating subsidiaries or other adverse tax treatments, such as the discontinuation of preferential tax treatments, would have a material adverse effect on our results of operations and financial condition.

Dividends payable by us to our foreign investors may become subject to withholding taxes under PRC tax laws.

Under the EIT Law, dividends payable to foreign investors which are “derived from sources within the PRC” may be subject to income tax at the rate of twenty percent (20%) by way of withholding. Since we are a holding company and substantially all of our income will come from dividends that we receive from our PRC subsidiaries, dividends that we declare from such income may be deemed “derived from sources within the PRC” for purposes of the EIT Law and therefore subject to a twenty percent (20%) withholding tax. While the EIT Law stipulates that such taxes may be exempted or reduced, since no rules or guidance concerning the new tax law have been issued yet, it is unclear under what circumstances, and to what extent, such tax would be exempted or reduced. One example of a limitation on the twenty percent (20%) withholding tax is the way in which, pursuant to a treaty for the avoidance of double taxation, income tax levied by the PRC authorities on U.S. investors may not exceed ten percent (10%) of the gross amount of the dividends, provided that we are deemed to be a PRC resident enterprise under the new tax law. If we are required under the EIT Law to withhold PRC income tax on our dividends payable to our foreign shareholders, the value of your investment in our common stock may be materially and adversely affected.

Gains on the sales of our shares may become subject to PRC income taxes.

Under the EIT Law, our foreign corporate shareholders may be subject to a twenty percent (20%) income tax upon any gains they realize from the transfer of their shares, if such income is regarded as income from “sources within the PRC.” What will constitute “sources within the PRC” and whether or not there will be any exemption or reduction in taxation for our foreign corporate investors, however, are unclear since no rules or guidance concerning the new tax law has been issued yet. If our foreign shareholders are required to pay PRC income tax on the transfers of their shares, the value of your investment in our common stock may be materially and adversely affected.

Recent PRC State Administration of Foreign Exchange (“SAFE”) regulations regarding offshore financing activities by PRC residents, have undertaken continuous changes which may increase the administrative burden we face and create regulatory uncertainties that could adversely affect the implementation of our acquisition strategy, and a failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.

Recent regulations promulgated by the PRC State Administration of Foreign Exchange, or SAFE, regarding offshore financing activities by PRC residents have undergone a number of changes which may increase the administrative burden we face.

In October 2005, SAFE promulgated regulations in the form of public notices, which require registrations with, and approval from, SAFE on direct or indirect offshore investment activities by PRC resident individuals. The SAFE regulations require that if an offshore company directly or indirectly formed by or controlled by PRC resident individuals, known as “SPC”, intends to acquire a PRC company, such acquisition will be subject to strict examination by the SAFE. Without registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise. Gas (BVI) is deemed a SPC under these SAFE regulations. As such, our shareholders who are PRC residents, must comply with the registration and disclosure requirements provided under the SAFE regulations. Mr. Yu Chuan Liu, our Chairman and Chief Executive Officer, has completed the registration with the SAFE and has been issued a SAFE certificate was issued by SAFE to Beijing Gas in August 2006. We have determined that there are about a dozen of additional shareholders who are subject to the SAFE regulations and whose compliance status will have a material effect on our ability to remit any of our profits out of the PRC as dividends or otherwise. In addition, we have agreed with the Investors of this round of financing that within ninety (90) days of the closing such additional shareholders will file registration with SAFE, and obtain SAFE certificates. The failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.

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Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could adversely affect our operations.

In 2002, a breakout of SARS in China and other parts of Asia resulted in major disruptions to the economy of China and Asia. A renewed outbreak of SARS or another widespread public health problem in the PRC, where all of the Company’s revenue is derived, could have an adverse effect on our operations. Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that would adversely disrupt our operations.

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.

Because our principal assets are located outside of the United States and nearly all of our directors and all of our officers reside outside of the United States, it may be difficult for you to enforce your rights based on U.S. Federal Securities Laws against us, our officers, or our directors in the U.S. or to enforce a U.S. Court Judgment against us or our directors or officers in the PRC.

All of our five directorsand all of our officers reside outside of the United States. In addition, our operating subsidiaries are located in the PRC and substantially all of our assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.

We may face obstacles from the communist system in the PRC.

Foreign companies conducting operations in PRC face significant political, economic and legal risks. The Communist regime in the PRC, including a cumbersome bureaucracy, may hinder Western investment.

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

The PRC historically has not adopted a western style of 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 PRC. 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.

Risks Related to Our Common Stock.

Our officers, directors and affiliates control us through their positions and stock ownership and their interests may differ from other stockholders.

Our officers, directors and affiliates beneficially own approximately 55.4% of our Common Stock. Yu chuan Liu, our Chairman, and Chief Executive Officer, beneficially owns approximately 24.0% and Mr. Quandong Sun, a director, beneficially owns 19.8%of our Common Stock. As a result, Mr. Liu and Mr. Sun are able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporation transactions including business combinations. Yet Mr. Liu and Mr. Sun’s interests may differ from other stockholders. Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity of our common stock which can in turn affect the market price of our common stock. Please refer to “Security Ownership of Certain Beneficial Owners and Management” of this Annual Report on Form 10-K for more information regarding beneficial ownership of securities of our management.

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We are not likely to pay cash dividends in the foreseeable future.

We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiary in the PRC. In addition, our operating subsidiary, from time to time, may be subject to restrictions on its ability to make distributions to us, including as a result of restrictions on the conversion of local currency into U.S. Dollars or other hard currency and other regulatory restrictions.

There is currently a limited trading market for our common stock.

Our common stock is quoted on the Over-the-Counter Bulletin Board (the “OTCBB”). However, our bid and asked quotations have not regularly appeared on the OTCBB for any consistent period of time. There is no established trading market for our common stock and our common stock may never be included for trading on any stock exchange or through any other quotation system (including, without limitation, the NASDAQ Stock Market). You may not be able to sell your shares due to the absence of a trading market.

Our Common Stock may be considered to be a “penny stock” and, as such, the market for our Common Stock may be further limited by certain SEC rules applicable to penny stocks.

To the extent the price of our common stock remains below $5.00 per share, we have net tangible assets of $2,000,000 or less, or if we fall below certain other thresholds, our common shares will be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell our common shares and limit the liquidity of our securities.

Our common stock is illiquid and subject to price volatility unrelated to our operations.

The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, we are incorporated in non-U.S. jurisdictions, we conduct substantially all of our operations in China, and all of our officers reside outside the United States.

We conduct substantially all of our operations in China through our wholly owned subsidiaries in China. All of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. As a result of all of the above, our public stockholders may have more difficulty in protecting their interests through actions against our management, directors or major stockholders than would stockholders of a corporation doing business entirely within the United States.

A large number of shares will be eligible for future sale and may depress our stock price.

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We are required under the Registration Rights Agreement to register for sale by the investors and certain other parties a total number of 12,681,255 shares of Common Stock, including 1,771,074 shares of common stock which are issuable upon (i) exercise of warrants issued to the Placement Agent in the Private Financing, and (ii) shares of Common Stock issued based on the “Make Good” provisions of the Stock Purchase Agreement. As these shares are placed on the market for sale, it will increase the supply of stocks for sale, and therefore depress the selling price of our stock. On February 11, 2010, our registration statement on Form S-1, registration no. 333-147998 was declared effective by the SEC, pursuant to which 5,705,138 shares of our common stock are eligible for sale through the registration statement.

Sales of substantial amounts of common stock, or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stock at prices that may be below the then current market price of the common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.

The exercise of certain warrants will dilute the investment by current investors.

Currently our outstanding warrants include: (i) series A warrants to purchase an aggregate of 241,708 shares of common stock at $3.84 per share, (ii) series C warrants to purchase an aggregate of 3,083,588 shares of common stock at $3.375 per share, (iii) series G warrants to purchase an aggregate of 109,489 shares of common stock at $3.84 per share, and (iv) warrants to purchase 3,898,687 shares of common stock accompanying 8% senior secured convertible notes at $0.744 per share. Under the existing warrants, a total of 7,333,473 common shares will need to be issued by us if the warrant holders decide to exercise the warrants. If this happens, the investment of our current shareholders would be significantly diluted.

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We have offices at all operational locations. The facilities are added with each new project or operational location as part of the execution of the project.

All land in China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. A “land use right” allows the holder the right to use the land for a specified long-term period of time and confers to the holder all the incidents of ownership of the land during that period. In the case of land used for industrial purposes, the land use rights are generally granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. We hold land use rights for two parcels of land registered under their names, and lease land use rights from third parties for additional parcels of land that are used for its gas distribution projects. In addition, we lease office buildings and warehouse facilities for our business operations.

Set forth below is the detailed information regarding these land use rights registered under the names of Beijing Gas or its subsidiaries:

Registered owner of land  use right	Location & certificate of land use right	Usage	(approximate)  square meters		Date of Issuance or Grant	Expiration  Date
Beijing Gas	South side of Huang He Road, Cai Yuan Town, Wu Qiao County Wu Guo Yong (2003) Zi Di Chu No. 208	Other  commercial  use		1,520	November 25, 2003	November 25, 2043
Yu Tian Country Zhong Ran Wei Ye Gas Ltd.	Between East side of Yu Zun West Road and South side of Guan Qu, Yu Tian County Yu Tian Guo Yong (2004) Zi Di No. 097	Industrial use		2,674.5	June 8, 2004	May 21, 2054
Xiahuayuan Jinli Gas Ltd.	East side of Xinchen Road in Xiahuayuan District of Zhangjiakou City	Commercial use		3,320	2008	2048

In addition to the land use rights described above, we have the right to use an aggregate of approximately 36,283 square meters for our operations either through grants or transfers of land use rights or lease arrangements. The rights range in duration from six to 20 years. The documentation of some of these land use rights have not yet been completed. We expect to complete the documentation for these land use rights in the near future.

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As of December 31, 2010, we own 1,525 km of high-pressure underground pipeline. We also own and operate 39 natural gas stations with accompanying buildings, gas compression facilities and other equipment, including 29 cars, 17 trucks, 47 containers (3000 m 3), 5 containers (4500 m 3), and 76 containers (300 m 3).

We believe that all our properties and equipment have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.

Item 3. Legal Proceedings

To our knowledge, there is no material litigation pending or threatened against us.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is quoted on the OTC Bulletin Board under the symbol SGAS.OB.. Since our September 7, 2006 reverse merger with GAS Investment China Co., Ltd. (“Gas (BVI)”), there has been some minimal trading activity in our shares. The following table provides the high and low sales prices for our common stock as reported for the past two years.

Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.

CALENDAR QUARTER ENDED	HIGH  BID(S)		LOW  BID(S)
First Quarter of 2009	$	0.40	$	0.06
Second Quarter of 2009	$	0.50	$	0.13
Third Quarter of 2009	$	0.50	$	0.31
Fourth Quarter of 2009	$	1.21	$	0.46
First Quarter of 2010	$	1.05	$	0.72
Second Quarter of 2010	$	0.95	$	0.52
Third Quarter of 2010	$	0.58	$	0.29
Fourth Quarter of 2010	$	0.50	$	0.38

As of March 25, 2011, there were 657 holders of record of our common stock.

To date, we have neither declared nor paid any cash dividends on shares of our common stock. We presently intend to retain earnings to finance the operation and expansion of our business and do not anticipate declaring cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities.

None.

Item 6. Selected Financial Data

Not required.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes of Beijing Gas appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” in this Annual Report on Form 10-K.

Overview

We are engaged in the development of natural gas distribution systems and the distribution of natural gas to residential and industrial customers in small and medium-sized cities in China, through our indirectly-owned subsidiaries in the PRC, Beijing Gas and its subsidiaries.

Beijing Gas is organized as a holding company with twenty-seven subsidiaries, known as project companies, in four provinces, and four branches offices in Beijing, as shown on the corporate structure chart provided below. The project companies are the operating subsidiaries of Beijing Gas. Each project company operates as a local natural gas distributor in a city or county, known as an operational location, under an exclusive franchise agreement between Beijing Gas and the local government or entities in charge of gas utility, pursuant to which Beijing Gas formed the project company to operate the natural gas distribution project in the operational location. These exclusive franchise agreements last between 20-30 years.

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In addition, Beijing Gas holds a 40% equity interest in Beijing Zhong Ran Xiang Ke Oil and Gas Technology Co. Ltd. (“Beijing Zhong Ran Xiang Ke”), a PRC joint venture entity engaged in the business of development, licensing and sale of oil and gas technologies and equipment, and sale of self-produced products.

Through its subsidiaries, Beijing Gas is a natural gas distributor, principally engaging in the investment, operation and management of city gas pipeline infrastructure, in the distribution of natural gas to residential and industrial users, in the construction and operation of natural gas distribution networks, and in the development and application of natural gas related technologies. Beijing Gas and it subsidiaries own and operate natural gas distribution systems in 35 small and medium size cities serving approximately 183,500 residential and seven industrial customers. Our facilities include approximately 1,525 km of pipeline and delivery networks with a daily capacity of approximately 120,000 cubic meters of gas. We own and operate natural gas distribution systems primarily in Hebei, Jiangsu, Jilin, Anhui, Yunnan and Beijing.

Below is our corporate structure as of March 25, 2011:

 (1) See “Organizational History of Gas (BVI) and Beijing Gas” under “Description of Business” of this prospectus regarding the subsidiaries of Beijing Gas.

Executive Summary

Economic & Industrial Trend

We generate revenue from two sources: (i) connection fees for constructing connections to our natural gas distribution network and (ii) sales of natural gas. Our connection activities are closely related to the development of the real estate industry in our targeted cities in China, given the fact that almost all of our connection fees are from new residential apartments. Natural gas facilities in new apartments are often required by local governments, who aim to promote the use of natural gas to improve local residents’ quality of life.

We have experienced high growth of our connection activities since inception of our business due to the Chinese real estate boom in the past years. However, in 2007, the Chinese government implemented a series of policies and regulations to curb inflation and to slow the growth of the property market. These policies, together with the worldwide financial crisis in 2008, have resulted in a slowdown of the real estate market in China and our business, in turn, has been affected in 2008. Starting in 2008, the Chinese government changed its policies and prioritized working to boost the economy. The Chinese government adopted new policies to address the slowdown of the real estate market, such as reducing stamp duties and transactions fees, lowering interest rates, and loosening bank lending policies. The Chinese government also decided to inject a stimulus package to boost the overall economy, and this stimulus package allocated funds for mass housing projects. We saw signs of recovery of the real estate market in China at the beginning of 2009, and experienced increased activities in the third and fourth quarters of 2009. Starting in April 2010, the Chinese government issued new policies to curb the rise of housing prices in certain cities. The new initiatives from the government resulted in lower transaction volumes during the second and third quarters of 2010. However, the transaction volumes started to pick up again in the fourth quarter of 2010.

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Even with the up and down nature of the Chinese real estate market over the past two years, we believe that the future growth trend of the real estate market will not change because of the continuous urbanization in China. Moreover, the Chinese government, at both the national and the local level, continues to strongly support the use of clean energy, particularly natural gas.

There are three pillars in the Chinese economy: (i) domestic consumption (both private and public), (ii) net exports, and (iii) domestic investment. The Chinese Government’s RMB 4 trillion stimulus package has had great impacts on China’s domestic production and investments in the past two years. In 2009, GDP growth rebounded to 7.9% in the second quarter from 6.1% in the first quarter, which represented a 10-year low. In the third quarter and the fourth quarter of 2009, China’s economic growth accelerated to 9.1% and 10.7% respectively. China’s GDP grew by 8.7 percent in 2009, exceeding the target 8%. The GDP growth rate remained strong through the first two quarters of 2010. China’s GDP grew 11.9%, and 10.3% in the first and second quarters of 2010, respectively, from the same periods in 2009. Furthermore, China’s GDP increased by 9.6%, and 9.8% during the third and fourth quarters of 2010 respectively as compared to the same period of 2009. 

Our gas users are composed of industrial and residential users. Gas sales to residential users are much less affected by economic and industrial factors and should maintain stable growth in the future, due to the increasing pool of our residential customers. Gas sales to industrial users are subject to the operating performance of the end industrial user. As we develop into more cities, we expect to add more industrial users in the coming year if capital requirements are available.

Material Opportunities

The gas distribution market is quite fragmented in the small (population less than 300,000) to medium (population between 300,000 to 1,000,000) sized cities. We are exploring potential project targets. The size of the projects varies from small cities to medium-sized cities. Many small-sized city markets are still untapped or undeveloped. The development of these markets is generally considered one of the major growth components of the Company.

Most medium-sized or large cities have already been developed by large distributors or are still operated by state-owned companies. Acquisition opportunities exist for those still run by state-owned companies, as the central government encourages suppliers to turn them into privately-owned companies. The acquisition of these markets would have a material impact on the Company, increasing the Company’s assets and revenues significantly. The Company intends to raise money for accretive acquisitions when they become available.

Material Challenges

Numerous small-to-medium sized cities left undeveloped, but competition is growing, as there are many small new players in the market attracted by the profitability and growth potential of the business.In addition, we are also facing competitions from stronger competitors, as large city markets are getting saturated and our competitors are beginning to expand into smaller cities.

We face limited opportunities in developing into first-tier cities in China, as most of them have already been taken by other large gas distributors, such as Xin’ao Gas Co. Ltd. (the largest distributor in China) in the past decade.

Still, potential users in small and medium-sized cities need to be educated about the benefits of natural gas. It takes some time for them to get to know how natural gas can improve the quality of life. This is especially true for new markets, where there is no use of natural gas. Small cities tend to be more reluctant to use of new energies than large cities and residents depend more on coal, rather than natural gas.

China’s energy market is highly regulated by the government, with regard to purchase price and sale price of natural gas. Whenever there is an adjustment to purchase price by the government, gas distributors increase the sale price correspondingly, subject to a public hearing and government approval. The increase of natural gas prices in China is lagging behind that in the international markets. The Chinese government has seldom adjusted the price of natural gas and we cannot rule out the possibility of an increase in natural gas prices by the government in the future. Even though we could adjust the sale price accordingly after the increase in purchase price, thereby passing the increase onto the end users, the fact remains that such price increases would make natural gas more expensive, as compared to other alternative energies, and in turn hinder our business development.

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Risks in Short-Term and Long-Term

In each of the cities we are developing and aiming to develop, the real estate market is the major factor that impacts us. Most of our residential customers are new home buyers. If the real estate market turns downward, the demand for new homes could decrease, resulting in fewer natural gas connections, which would negatively impact our business.

To reduce the Company’s dependence on connection fees, the Company is looking at opportunities to diversify its business by expanding into related industries, such as pipelines and gas stations. However, we do not expect to develop into those areas in full in the near future.

RESULTS OF OPERATIONS

Year Ended Dec 31, 2010 Compared to Year Ended Dec 31, 2009

In the year ended December 31, 2010, net revenues were $32,174,248, representing an increase of 16.61% from that of the previous year, and gross profit was $12,363,335, representing an increase of 30.50% from that of the previous year. Operating income in 2010 was $7,287,235, representing a significant increase of 43.83% from the previous year. 

	For the 12 months ended December 31,
	2010			2009			Change
	US$			US$			%
Net Revenues		32,174,248			27,591,501			16.61	%
Gross Profit		12,363,335			9,474,001			30.50	%
Operating Income		7,287,235			5,066,476			43.83	%
Net Income		4,041,663			4,047,584			-	%
Gross Margin		38.43	%		34.34	%
Net Margin		12.56	%		14.67	%

Net Revenues

We generate revenues from two sources: connection fees for constructing connections to our natural gas distribution network, and sales of natural gas.

Total net revenues for the year ended December 31, 2010 were $32,174,248, compared to $27,591,501 for the same period in 2009, representing an increase of 16.61%. The increase was due to the increases of both gas sales, and the connection fees. In 2010, we connected 38,750 new residential households to our gas distribution network, resulting in total connection fees of $13,435,175. Gas sales during the twelve months ended December 31, 2010 were $18,739,073. In comparison, we connected 32,681 new residential households to our gas distribution network throughout 2009, resulting in total connection fees of $11,887,546. Gas sales during the same period in 2009 were $$15,703,955.

	For the 12 months ended December 31,
	2010					2009					Change
(In $ million)	US$		%			US$		%			%
Net Revenues		32.17		100	%		27.59		100	%		16.61	%
Connection Fees		13.44		41.76	%		11.89		43.08	%		13.02	%
Gas Sales		18.74		58.24	%		15.70		56.92	%		19.33	%

Our net revenues for the year ended December 31, 2010 increased by 16.61% compared to the same period of last year, which largely resulted from the following factors:

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1) Increase of connection fees from residential customers. We were able to connect more residential households during the twelve months ended Decembrer 31, 2010 as compared to the same period of last year.

2) Increase of gas sales. Gas sales to residential users continued to grow significantly. Gas sales to industrial customers increased moderately compared to the previous year. Gas sales to industrial users started to pick up in the third quarter of this year, which were able to offset the slow start in the first half of this year. Lower sales from industrial users in the first half of this year were due to the following factors: (1) The severe weather conditions in China affected the logistics of gas delivery in the first quarter of 2010, and the Chinese government prioritized the delivery gas to residential users during the severe weather during this period. (2) There were adjustments of production lines in two of our industrial users in the second quarter of 2010, and they were not back to operations until September 2010. This adjustment in operations caused the reduction of gas consumption in these two industrial users during this period.

Connection Fees

Connection fees in 2010 were $13.44 million, representing an increase of 13.02% over the year 2009. Connection fees in 2010 accounted for approximately 41.76% of total net revenue compared to approximately 43.08% for the same period in 2009.Almost all connection fees in the twelve months ended December 31, 2010 were from the development of new residential users. 

	For the 12 months ended December 31,
(in US$ millions)	2010					2009					Change
	US$		%			US$		%			%
Connection Fees		13.44		100	%		11.89		100	%		13.02	%
Residential Users		13.43		99.98	%		11.84		99.63	%		13.41	%
Industrial Users		0.01		0.02	%		0.05		0.37	%			%

Gas Sales

Gas sales were $18.74 million in 2010, accounting for 58.24% of total net revenue in 2010, representing an increase of 19.33% over the year 2009. Gas sales to residential users increased 34.06%, from $7.41 million in 2009 to $9.93 million in 2010. Gas sales to industrial and commercial users increased 6.17%, from $8.29 million in 2009 to $8.81 million in 2010.

	For the 12 months ended December 31,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Gas Sales		18.74		100	%		15.70		100	%		19.33	%
Residential Users		9.93		53.00	%		7.41		47.17	%		34.06	%
Industrial and Commercial Users		8.81		47.00	%		8.29		52.83	%		6.17	%

Cost of Revenues

Cost of revenues in 2010, which includes cost of connection and cost of gas sales, was $19.81 million, an increase of $1.69 million, or 9.35%, from $18.12 million in 2009.

	For the 12 months ended December 31,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Cost of Revenues		19.81		100	%		18.12		100	%		9.35	%
Connection Cost		2.69		13.60	%		3.29		18.17	%		(18.18)	%
Gas Cost		17.12		86.40	%		14.82		81.83	%		15.46	%

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Cost of Connection

The cost of connection decreased 18.18% to $2.69 million during the year ended December 31, 2010 from $3.29 million for the same period in 2009. During the twelve months ended December 31, 2010, we incurred lower costs of raw materials, parts, and installation and maintenance fees as compared to the same period of 2009.

Cost of connection includes depreciation of major pipelines, the cost of courtyard pipelines, valves, gas meters, and installation and maintenance fees.

Cost of Gas Sales

The cost of gas sales increased 15.46% to $17.12 million during the year ended December 31, 2010 from $14.82 million during the same period in 2009. This increase in cost of gas sales is largely due to the increase of gas sales during this period.

The cost of natural gas sales includes the purchase and transportation of natural gas and depreciation of delivery equipment.

Gross Profit

	For the 12 months ended December 31,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Gross Profit		12.36		100	%		9.47		100	%		30.50	%
Connection		10.74		86.88	%		8.59		90.72	%		24.97	%
Gas		1.62		13.12	%		0.88		9.28	%		84.54	%

During the year ended December 31, 2010, gross profit was $12.36 million, representing an increase of approximately 30.50% from the same period of 2009. Gross profit from connection fees is $10.74 million for 2010, accounting for 86.88% of total gross profit. In comparison, gross profit from connection fees was $8.59 million for 2009, accounting for 90.72% of total gross profit. Gross profit from gas sales was $1.62 million, accounting for 13.12% of total gross profit, compared to $0.88 million, 9.28% of total gross profit in the same period in 2009.

Gross margin during the year ended December 31, 2010 is 38.43%, compared to 34.34% during the same period in 2009.

Gross margin for connection fees for the year 2010 was 79.95%, compared to 72.30% in 2009. The decrease in the cost of connection contributed to the improvement of gross margin.

Gross margin for sales of natural gas was 8.66% in 2010, compared to 5.6% during the same period of 2009. The increase was primarily due to improvement of delivery cost for the twelve months ended December 31, 2010.

Selling,General and Administrative Expenses

Our selling, General and administrative expenses expenses in the year ended December 31, 2010 were $5.08 million and approximately 15.8% of our net revenues, compared with $4.41 million, or 16.0% of net revenues in the same period of 2009. We incurred approximately $100,000 for engaging Ernst & Yong on SOX compliance and internal control consultation during the twelve months ended December 31, 2010.

Operating Income

The operating income in 2010 was $7.29 million, representing an increase of 43.8% compared to the operating income of $5.06 million in 2009.The increase was driven by the increase of sales, and improvement of gross margin from both connection fee revenue and gas sales during this period.

Other Income (Expense)

Other Expense was $2.05 million for the year ended December 31, 2010, compared with Other Income of $0.08 million for the same period of 2009.The significant increase was due to the amortization costs of convertible bonds and interest expense of convertible bonds. We completed a convertible debt financing in the last quarter of 2009, which resulted in costs associated with the financing, such as interest discount-warrants, beneficial conversion feature, and debt issuance cost. Included in interest expense of $2.71 million for the twelve months ended December 31, 2010 was $0.48 million in convertible bonds coupon expense and $1.51 million non-cash flow amortization expense of convertible bonds.

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Income tax

Income tax was $1.20 million in 2010, compared to $1.09 million in 2009.

Net Income

Net income for the year ended December 31, 2010 was $4.04 million, a slight decrease of 0.015% from $4.05 million in the same period in 2009.Driven by the increase of sales, and improvement of gross margin from both connection fee revenue and gas sales during this period, operating income achieved improvement of 43.83% to $7.29 million compared to the operating income of $5.07 million for the same period of 2009. However, the increase in operating income was offset by the additions of amortization costs of convertible bonds. Excluding these non-cash and non-operational items of amortization expense of convertible bonds in the total of $1.51 million, our adjusted net income in the twelve months ended December 31, 2010 would have been $5.55 million.

Liquidity and Capital Resources

Cash and cash equivalents were $3.58 million as of December 31, 2010, a decrease of $6.24 million as compared to $9.82 million of cash and cash equivalents as of December 31, 2009.

Cash sourced in operating activities for the year ended December 31, 2010 was $6.29 million, a decrease of $1.54 million from $7.83 million during the same period of 2009. Such increase was mainly due to the change in net income, adjusted for non-cash expense items and changes in working capital.

Cash used in investing activities for the year ended December 31, 2010 was $16.07 million, an increase of $2.02 million from $14.05 million during the same period of 2009. Such increase was mainly due to the increase of property, plant and equipment and construction in progress.

 Cash sourced in financing activities for the year ended December 31, 2010 is $3.38 million. We borrowed $1.38 million from local bank during 2010.On December 17, 2010, the Company, among with its wholly owned subsidiaries Sino Gas Construction, entered into a Subscription Agreement with AMP Capital Asian Giants Infrastructure Fund (“AGIF”), under the terms of which Sino Gas Construction issued to AGIF 48,039 number of ordinary shares that represents 49% of the total issued capital of Sino Gas Construction for a consideration of US$2.0 million.

Based on our past performance and current expectations, we believe we can meet our cash needs for the next twelve months. In particular, we will utilize our cash and cash equivalents, as well as cash generated from operations to satisfy our working capital needs, capital expenditures and other liquidity requirements associated with our operations for the next 12 months. However, the Company may require additional financing to complete an unanticipated transaction or satisfy its daily cash needs in the event that financial circumstances of the Company change. At that time, in the event we are not able to obtain a sufficient line of credit or other form of financing, our ability to operate our business could be significantly impacted and our financial condition and our results of operations could suffer.

Accounts Receivable

Accounts receivable as of December 31, 2010 were $9.50 million, representing an increase of $4.47 million from $5.04 million as of December 31, 2009.

Notes Receivable

Notes receivable of $0.23 million as of December 31, 2010. 

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Inventory

Inventory of $0.48 million as of December 31, 2010 comprised spare parts and natural gas.

Fixed Assets

Fixed Assets as of December 31, 2010 was $ 55.17 million, an increase of $3.07 million from $52.10 million in 2009. The table below is a breakdown of our fixed assets at cost:

	2010		2009
At Cost
Gas Pipelines	$	44,512,342	$	43,518,519
Motor Vehicles		6,067,524		5,775,903
Machinery & Equipment		1,542,016		1,482,599
Buildings		2,316,729		1,005,517
Leasehold Improvements		475,099		80,113
Office Equipment		256,419		238,673
Less Accumulated depreciation		(5,241,647)		(4,329,313	)
	$	49,928,482	$	47,772,011

Bank Loans

Short term Bank loans as of December 31, 2010 were $7.86 million, an increase of 4.94 million from that as of December 31, 2009. Long term Bank loans as of December 31, 2010 were $3.02 million, representing a decrease of $3.56 million compared to $6.58 million as of December 31, 2009.

For more information concerning bank loans see Note 8 to the consolidated financial statements of the Company included herein.

Accounts Payables

Accounts payables as of December 31, 2010 was $11.11 million, representing an increase of $2.55 million from that as of December 31, 2009.

Other Payables

Other payables – current as of December 31, 2010 – were $3.69 million, representing a decrease of $2.65 million from that as of December 31, 2009. $1.86 million was reclassified to Other payable – non-current this year.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 8.Financial Statements and Supplementary Data

Our financial statements begins on page F-1 of this Annual Report.

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Management’s Report of Disclosure Controls and Procedures

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Our management is responsible for establishing and maintaining adequate disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act and have designed disclosure controls and procedures or caused disclosure controls and procedures to be designed under its supervision in order 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, as applicable. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Due to its inherent limitations, disclosure controls and procedures may not prevent or detect material misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, our management conducted its evaluation of the effectiveness of our Company’s disclosure controls and procedures as of December 31, 2010. Based on that evaluation, our management concluded that, as of December 31, 2010, our Company’s disclosure controls and procedures were effective. 

Management’s Report of Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and have designed internal control over financial reporting or caused internal control over financial reporting to be designed under its supervision in order 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, as applicable. Due to its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We performed an evaluation of the effectiveness of our internal control over financial reporting that is designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer using the criteria in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Tread way Commission (COSO), and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

· pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

· 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

· 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.

A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness; yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

Under the supervision of and with the participation of our Chief Executive Officer and our Chief Financial Officer, our management conducted its evaluation of the effectiveness of our Company’s internal control over financial reporting as of December 31, 2010. Based on that evaluation, our management concluded that, as of December 31, 2010, our Company’s internal control over financial reporting was not effective due to the following significant deficiencies:

(1) Our Internal Audit Department has not taken a full active role in the conduct of its activities due to insufficient resources.

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(2) Our Company did not formulate a comprehensive Related Party Transactions Policy and develop a master list of all Related Parties.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Management’s Plan for Remediation of significant deficiencies

Our management has worked, and will continue to work, to address these -deficiencies in our internal control over financial reporting. Implementations of certain remedial measures include the following:

(1) All the employees are now required to sign an affidavit acknowledging that the employee has read and will intend to comply with the Code. We are going to continue modify the Code, and will arrange respective on-going training to all the employees with the update of the Code. 

(2) In 2010, the management engaged an Internal Audit Manager to take the active role of Internal Audit Function of the Company. With the assistance of third party professional, the roles and responsibilities of the internal audit department together with the risk-based internal audit plan have been formulated. 

(3) We will try to develop a comprehensive Related Party Transactions Policy and a master list of all Related Parties before the end of second quarter of 2011.

Changes in Internal Control over Financial Reporting

During the fourth quarter of the year ended December 31, 2010, there was no change in our internal controls over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Management

Directors and Executive Officers

Directors and Executive Officers	Position/Title	Age
Yuchuan LIU	President, Chief Executive Officer, Director and Chairman of the Board	45
Zhicheng ZHOU	Chief Operating Officer, Director	45
Zhimin ZHONG	Marketing Director	54
Shukui BIAN	Vice President & Chief Engineer	45
Yugang ZHANG	Chief Financial Officer	38
Guowei CHEN	Director	53
Quandong SUN	Director	43
Zhongsheng LIU	Director	50

There are no family relationships among our directors or executive officers.

All our directors hold office until the next annual meeting of our shareholders, and until their successors have been qualified after being elected or appointed. Officers serve at the discretion of our board of directors.

Set forth below is the biographical information about our directors and executive officers:

Mr. Yuchuan Liu. Mr. Liu was appointed our Chairman, Chief Executive Officer and President on September 7, 2006. Mr. Liu graduated from North Industrial University, Beijing, PRC with a B.S. degree in electrical engineering. Mr. Liu has been a licensed Senior Engineer in the PRC since 1997. Mr. Liu was the Chairman of the Board of Directors and General Manager of Beijing Zhong Ran Wei Ye Gas Co., Ltd. between 2003-2006 and he was the Chairman of the Board of Beijing Xiang Ke Jia Hua Petroleum and Natural Gas Co., Ltd. between 2000 and 2003. Prior to that, Mr. Liu served as CEO of Lang Fang Zhong Gong Petroleum and Natural Gas Technology Co., Ltd. from 1997 to 1999. Prior to that, Mr. Liu served as the Chief of the Research and Development Department of Petro China from 1983 to 1997. We believe that Mr. Yuchuan Liu, the founder of the Company, has the most extensive knowledge and experience in natural gas industry within the Company, and this experience qualifies him to be Chairman of the Board of Directors.

Mr. Zhicheng Zhou. Mr. Zhou was appointed our Chief Operating Officer on October 19, 2006. Previously, Mr. Zhou served as the Director and General Manager of Beijing Chenguang Gas Co., Ltd. from late 2002 to 2007. Prior to that, Mr. Zhou served as the Associate General Manager and later General Manager of Beijing Zhong Ran Xiang Ke Petroleum and Oil Technology Co., Ltd. between 2001 and 2002. Mr. Zhicheng Zhou, the COO of the Company, has extensive knowledge and experience in natural gas industry. He has well-developed operational and managerial skills and we believe these qualify him to be a Director of the Company.

Mr. Zhimin Zhong.Mr. Zhong was appointed our Marketing Director on September 7, 2006.Mr. Zhong graduated from Nanjing University with a B.S. in philosophy. Mr. Zhong was the Marketing Director for Beijing Zhong Ran Wei Ye Gas Co., Ltd., between 2004-2006. Mr. Zhong was Vice President of Shen Zhen Guo Qi Real Estate Co. Ltd. from 1995 to 2004. Prior to that, Mr. Zhong served as a government official in several cities in Jiang Xi Province between 1978 and 1995.

Mr. Shukui Bian.Mr. Bian was appointed our Vice President and Chief Engineer on September 7, 2006. Mr. Bian graduated from Daqing Petroleum Institute with a B.S. and from Petroleum University with a M.S. He served as Vice President of Beijing Zhong Ran Xiang Ke Petroleum and Oil Technology Co., Ltd. between 2000 and 2007. Prior to that, Mr. Bian had been with North China Oilfield’s first refinery factory for fourteen years. Mr. Bian was one of the industry experts that drafted The National Standards of Natural Gas Usage in Cities in China.

Mr. Yugang Zhang.Mr. Yugang Zhang was appointed Chief Financial Officer on August 25, 2008. Mr. Zhang was the Area Financial Controller for Asian Operation of Smufit-Stone Container Enterprises Inc., a U.S. company, from June 2003 to July 2008. Prior to that, from March 2001 to May 2003, he worked as the Plant Controller of the same company in Mansfield, MA. From September 2000 to March 2001, he was the Assistant Controller and Accounting Manager for FAE Worldwide, Inc. in Boston, MA. From February 1999 to September 2000, he was a Staff Accountant for Braver CPAs & Co., P.C. of Chestnut Hill, MA. Mr. Zhang obtained an MBA from Clark University in Massachusetts with a full-tuition scholarship in 1997 and graduated from the Mechanical Engineering School of Harbin Institute of Technology in Harbin with a Bachelor’s degree in mechanical engineering in 1993. 

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Mr. GuoweiChen.Mr. Chen was appointed our Director on September 7, 2006 and a member of the audit committee of our Board of Directors and a member of the compensation committee of our Board of Directors on October 19, 2006. Mr. Chen graduated from East China College of Metallurgy with a major in Accounting. Since March 2006, Mr. Chen has been the General Manager and Chairman of the Board of Shen Zhen Jia Xin Real Estate Development Co., Ltd. Prior to that, he was the General Manager of Hang Zhou Steal Group from 2001 to February 2006. Mr. Chen is very experienced in general and financial management. Mr. Chen, a seasoned professional in general and financial management, was previously the Chairman of the Board of a real estate company in China. We believe that his experience qualifies him to be a Director of the Company.

Mr. QuandongSun.Mr. Sun was appointed our Director on September 7, 2006 and a member of the audit committee of our Board of Directors and a member of the compensation committee of our Board of Directors on October 19, 2006. Mr. Sun graduated from Shanghai Maritime University with a B.S. Mr. Sun has been Chairman of Jidong Shipping Co., Ltd. since 1995. Prior to that, Mr. Sun served as Manager in the Shipping Department of Shekou Shipping Co., Ltd. between 1987 to 1994. Mr. Quandong Sun, a seasoned professional in general management, was chairman of another company in China. We believe his experience qualifies him to be a Director of the Company.

Mr. Zhongsheng Liu. Mr. Liu was appointed our Director on May 19, 2009 and will serve for two years. From December 2008 until present, he served as Executive Vice President of China Merchants Investment (Fund) Management Co. From January 2006 to December 2008, he served as general manager of Zhengzhou Office of the China Great Wall Asset Management Corporation. From July 2004 to January 2006, he served as General Manager of the market development department of China Great Wall Asset Management Corporation. From January 2001 to July 2004, he served as general manager of asset management department of China Great Wall Asset Management Corporation. Mr. Liu obtained a bachelor’s degree in mine construction and a second bachelor’s degree in engineering management, both from Shenyang Northeast University in 1983 and 1990, respectively. He also obtained a doctorate degree of management from the Financial Science Research Institute of Ministry of Finance in 2005. Mr. Zhongsheng Liu, a doctor of management, is Executive Vice President of one of China’s top investment management companies. We believe that his various working experience and educational background qualify him to be a Director of the Company.

Mr. Liu Yuchuan, with extensive experience in business development, and knowledge of the China’s natural gas industry, was elected as both our Chairman of Board and CEO to efficiently manage the Company. We currently do not have a lead independent director.

During the last ten years, none of our directors and executive officers (including those of our subsidiaries) has: 

· Had a 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.

· Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.

· Been 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.

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

In 2010, the Board of Directors had held 4 meetings, and the attendance rate of the directors was 100%.

Board Composition and Committees

43

Our board of directors currently consists of five members: Yuchuan Liu, Zhongsheng Liu, Guowei Chen, Quandong Sun, and Zhicheng Zhou. Zhongsheng Liu, and Guowei Chen are “independent” as that term is defined by SEC rules.

Compensation Committee

Our Compensation Committee comprises three members and is responsible for the administration of all salary, bonus and incentive compensation plans for our officers and key employees. The members of our Compensation Committee are Zhongsheng Liu, Guowei Chen and Quandong Sun. Zhongsheng Liu and Guowei Chen are “independent” as that term is defined by SEC rules.

Audit Committee Financial Expert

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

Audit Committee

Our board of directors appointed an audit committee on October 19, 2006. Our current audit committee members are Quandong Sun, GuoweiChen, and Zhongsheng Liu. Zhongsheng Liu and Guowei Chen are “independent” as that term is defined by SEC rules. At the present time, we believe that the members of our audit committee are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. Our company, however, recognizes the importance of good corporate governance and intends to identify and appoint an audit committee comprised entirely of independent directors, including at least one financial expert, in the near future.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our executive officers, directors and beneficial owners of more than ten percent (10%) to report their beneficial ownership of equity interests in the company to the SEC. Their initial reports are required to be filed using the SEC’s Form 3, and they are required to report subsequent purchases, sales, and other changes using the SEC’s Form 4, which must be filed within two business days of most transactions. Officers, directors, and persons owning more than 10% of our capital shares are required by SEC regulations to furnish us with copies of all of reports they file pursuant to Section 16(a).

Code of Ethics

We have adopted Code of Conduct and Ethics (“Code”) in 2008. For a copy of the Code, please write to: Mr. Yugang Zhang, CFO, Sino Gas International Holdings, Inc., No.18 Zhong Guan Cun Dong St., Haidian District, Beijing, PRC 100083.

Item 11. Executive Compensation

Mr. Yuchuan Liu was appointed chairman of the board, president and chief executive officer on September 7, 2006. The compensation amounts paid to Mr. Liu reflect compensation paid to him by the operating subsidiaries of Sino Gas and its subsidiaries during the reported periods.

Summary Compensation Table

Name and Principal Underlying Positions	Year	Salary		Bonus		Option Awards	Stock Awards	All Other Compensation	Total
Yuchuan Liu	2009	$	110,000	$	65,000				$	175,000
President & CEO	2010	$	113,300	$	*64,200				$	177,500
Yugang Zhang	2009	$	131,500	$	43,500				$	175,000
Chief Financial Officer	2010	$	133,200	$	*44,300				$	177,500
Zhicheng Zhou	2009	$	90,000	$	85,000				$	175,000
Chief Operating Officer	2010	$	103,700	$	*73,800				$	177,500

* The bonuses have not been paid and are estimates only.

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The salary of each officer is part of his agreement with the Company. The amounts of the bonuses of the executives are not performance based. Each executive is guaranteed compensation paid in Local Currency Renminbi of approximately $177,500 per year. At the end of the calendar year, if the actual paid compensation of an executive for the calendar year is less than $177,500, the difference shall be paid as a “bonus” during the following year. Due to exchange rate fluctuations the bonus figures listed in the Summary Compensation Table represent estimates only.

Our Compensation Committee comprises three members and is responsible for the administration of all salary, bonus and incentive compensation plans for our officers and key employees. The members of our Compensation Committee are Zhongsheng Liu, Guowei Chen and Quandong Sun.

Outstanding Equity Awards

None.

Equity Compensation Plan

The board of directors of the Company adopted a stock option plan on November 19, 2007 and reserved 1,460,000 shares of our common stock as options to be issued under the plan. No options have been issued under the plan for 2008. The company revoked the stock option plan in December 2008.

Retirement, Post-Termination and Change in Control Description

The Company currently does not have retirement, post-termination and change in control arrangements for its officers.

Compensation of Directors

Directors and employees are not currently additionally compensated for their services as a director. Our director compensation consists of cash only. Each director is paid an annual retainer of $10,000. All our directors hold office until the next annual meeting of our shareholders, and until their successors have been qualified after being elected or appointed.

Name	Fees Earned  or Paid in  Cash ($)		Stock Awards  ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	Non-Qualified Deferred  Compensation Earnings ($)	All Other Compensation ($)		Total ($)
Yuchuan Liu
Zhicheng Zhou
Yong Li*	$	7,500						$	7,500
Guowei Chen	$	10,000						$	10,000
Quandong Sun	$	10,000						$	10,000
Zhongsheng Liu	$	10,000						$	10,000

* Yong Li was appointed director in February 2010 and resigned in January 2011.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth, as of March 30, 2011, certain information with respect to the beneficial ownership of our equity securities, by (i) any person or group with more than 5% of any class of our voting securities, (ii) each director, (iii) our chief executive officer and each other executive officer and (iv) all executive officers and directors as a group. The table reflects the ownership of our equity securities by the foregoing parties after the 304.44-for-1 reverse stock-split of our common stock.

45

As of the date of this Annual Report on Form 10-K, we have outstanding (i) 27,156,617 shares of common stock, (ii) no shares of series A convertible preferred stock, (iii) 4,590,094 shares of series B convertible preferred stock and 95,418 shares of series B-1 preferred stock, (iv) series A warrants to purchase an aggregate of 241,708 shares of common stock at $3.84 per share, (v) series C warrants to purchase an aggregate of 3,083,588 shares of common stock at $3.375 per share, and (vi) series G warrants to purchase an aggregate of 109,489 shares of common stock at $3.84 per share. The warrants are exercisable until September 2012. The warrants have cashless exercise provisions entitling the holders to obtain shares equal to the product of (1) the nominator is the difference between the market value of all the exercised shares on the date of exercise and the exercise price of all the exercised shares and (2) the denominator is the market price per share on the date of exercise. As of the date of this report, there are also outstanding 8% senior secured convertible notes convertible into 9,746,719 shares of the Company’s common stock and accompanying warrants to issue 3,898,687 shares of the Company’s common stock. The senior secured convertible notes are convertible at $0.62 per share. The warrants are exercisable until November 30, 2012 at an exercise price of $0.744, and have a cashless exercise feature if a registration statement covering all of the shares of common stock issuable upon exercise of the warrants is not effective upon the 18-month anniversary of the issue date of the warrants.

Shares of Series B convertible preferred stock vote together with shares of common stock on all matters upon which stockholders are entitled to vote. On those matters upon which the series B convertible preferred stock votes together with the common stock as a single class, each share of series B convertible preferred stock carries a number of votes equal to the number of shares of common stock that would be issuable upon conversion. Each holder of series B convertible preferred stock shall be entitled to notice of any stockholders’ meeting in accordance with our bylaws. Series B-1 preferred stock have the same rights and privileges as series B preferred stock.

In determining beneficial ownership of the common stock, the number of shares shown includes shares which the beneficial owner may acquire upon exercise of warrants or options which may be acquired within 60 days. In determining the percent of common stock owned by a person on March 30, 2011, (a) the numerator is the number of shares of the class beneficially owned by such person, including shares which the beneficial ownership may acquire within 60 days upon conversion of the series B convertible preferred stock or exercise of the warrants, option and conversion of the senior secured convertible notes and accompanying warrants, and (b) the denominator is the sum of (i) the total shares of that class outstanding on March 30, 2010, and (ii) the total number of shares issuable from the conversion of senior secured convertible notes and accompanying warrants for such person. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares.

Except as otherwise stated, the address of the directors and executive officers listed in the table is:

c/o Beijing Zhong Ran Wei Ye Gas Co., Ltd.

N0.18 Zhong Guan Cun Dong St.

Haidian District

Beijing, China 10083 

46

	Amount and Nature of Beneficial Ownership					Percent of Class
Shareholder	Series B Preferred Stock (1)		Common Stock (2)			Series B Preferred Stock			Common Stock
Owner of More than 5% of Class
Eloten Group Ltd.	-			6,524,174	(4)(5)	-				24	%
Leading King Investment Limited	-			5,384,923	(6)(7)	-				19.8	%
Vision Opportunity Master Fund, Ltd. and Vision Capital Advantage Fund, L.P.		4,380,413		2,451,446	(8)		93.7	%		9	%
T. Rowe Price Small-Cap Value Fund, Inc.		-		1,732,210	(9)		-			6.4	%
Jayhawk Private Equity Fund, LP and Jayhawk
Private Equity Co-Invest Fund, LP		-		3,841,753	(10)		-			12.7	%
Directors and Executive Officers
Yuchuan Liu		-		6,637,043	(4)(5)(11)		-			24.3	%
Quandong Sun		-		5,384,923	(6)(7)		-			19.8	%
Zhimin Zhong		-		393,581	(3)		-			1.4	%
Zhicheng Zhou		-		112,869	(12)		-			*
Shukui Bian		-		173,962	(3)		-			*
Zhongsheng Liu		-		-			-			-
Guowei Chen		-		-			-			-
Yugang Zhang		-		112,847	(13)		-			*
Yong Li		-		-			-			-
All Directors and Executive Officers		-		12,815,225			-			45.5	%

* indicates less than 1%.

(1) The Series B convertible preferred stock and the warrants are assumed to be non-convertible and non-exercisable within 60 days of their date of issuance. There are conversion restrictions placed on series B preferred stock and warrants to avoid the series B preferred stock holders and warrant holders owning more than 9.9% of total common stock for each individual series B preferred stock holder or warrant holder. Series B preferred stock holder can waive the restriction upon 61 days notice to the Company. Warrant holders cannot waive such restriction.

(2) Only shares of common stock are listed because of restrictions imposed on series B and B-1 preferred shares and warrants as stated in (1) above.

(3) Shares of common stock issued to Gas (BVI) as a result of the consummation of the share exchange agreement are beneficially attributed to each of the Gas (BVI) shareholders based on each shareholder’s percentage ownership interest in Gas (BVI) immediately prior to execution of the share exchange agreement.

(4) Includes 6,524,174 common shares issued upon conversion of series A convertible preferred stock to Eloten Group Ltd., which are beneficially attributed to Mr. Liu Yu Chuan. Mr. Liu and his wife hold an aggregate of 100% ownership interest in Eloten Group Ltd. Also, includes 112,869 common shares issuable upon conversion of 8% senior secured convertible notes and warrants.

(5) Includes 108,286 shares of common stock beneficially attributed to Eloten Group Ltd. based on Eloten Group Ltd.’s ownership interest in Gas (BVI).

(6) Includes 5,384,923 common shares issued upon conversion of series A convertible preferred stock to Leading King Investment Limited, which are beneficially attributed to Mr. Sun Quan Dong. Mr. Sun holds 50% ownership interest in Leading King Investment Limited.

(7) Includes 89,377 shares of common stock beneficially attributed to Leading King Investment Limited based on Leading King Investment Limited’s ownership interest in Gas (BVI). Mr. Sun holds a 50% ownership interest in Leading King Investment Limited.

47

(8) According to Schedule 13G/A filed with the SEC on February 16, 2010, Adam Benowitz is the managing member of Vision Capital Advisors, LLC, investment manager of both funds, whose address is: 20 W. 55th Street, 5th Floor, New York, NY 10019. The ownership breakdowns for both Vision Opportunity Master Fund (“VOMF”) and its affiliate, Vision Capital Advantage Fund (“VCAF”) are as follows: (i) common stock, VOMF, 1,892,197, VCAF, 559,249; (ii) preferred B stock, VOMF 3,381,107, VCAF, 999,306.

(9) The business address is: 100 East Pratt Street, Baltimore, MD 21202.

(10) Includes 2,419,355 and 967,742 shares of common stock issuable upon conversion of 8% senior secured convertible notes and accompanying warrants. The business address is: 5410 W. 61st Place, Suite 100, Mission, KS 66205.

(11) Includes 112,869 common shares issuable upon conversion of 8% senior secured convertible notes and warrants.

(12) Includes 112,869 shares of common stock issuable upon conversion of 8% senior secured convertible notes and exercise of warrants.

(13) includes 112,847 shares of common stock issuable upon conversion of 8% senior secured convertible notes and exercise of warrants.

Item 13. Certain Relationships and Related Transactions, and Director Independence

None.

Item 14. Principal Accounting Fees and Services

Aggregate fees billed by the Company’s current principal accountants, Samuel H. Wong & Co., LLP, for audit services related to the most recent fiscal year, and for other professional services billed in the most recent fiscal year, were as follows:

Type of Fee	Fiscal Year 2010		Fiscal Year 2009
Audit Fees (1)	$	135,000	126,000
Audit-Related Fees		—	—
Tax Fees (2)		4,500	4,500
All Other Fees		—	—
Total	$	139,500	130,500

(1) Comprised of the audit of the Company’s annual financial statements and reviews of the Company’s quarterly financial statements, as well as consents related to and reviews of other documents filed with the Securities and Exchange Commission.

(2) Comprised of preparation of all federal and state corporate income tax returns for the Company and its subsidiaries.

48

ITEM 15. EXHIBITS

Exhibit Number
3.1	Articles of Incorporation, as amended on November 14, 2006 incorporated by reference from Form 10-Q filed on August 20, 2007
3.2*	Bylaws
3.3*	Certificate of Designations authorizing the Series A Convertible Preferred Stock
3.4*	Amended and Restated Certificate of Designations authorizing the Series B Convertible Preferred Stock
4.1**	Series B Stock Purchase Agreement, dated as of September 7, 2006, by and among, Dolce Ventures, Inc., Vision Opportunity Master Fund, Ltd. and each of the other investors party thereto
4.2**	Registration Rights Agreement, dated as of September 7, 2006, by and between, Dolce Ventures, Inc., Vision Opportunity Master Fund, Ltd.
4.3**	Lock-Up Agreement, dated as of September 7, 2006, by and among, Dolce Ventures, Inc., Leading King Investment Limited, Eloten Group, Ltd., Cheng Fang and certain other parties named therein
4.4*	Form of Series A Warrant
4.5*	Form of Series B Warrant
4.6*	Form of Series C Warrant
4.7*	Form of Series D Warrant
4.8*	Form of Series J Warrant
4.9**	Share Exchange Agreement dated as of September 7, 2006, by and between, Dolce Ventures, Inc., Yu-chuan Liu, and each of the other parties named therein
4.10**	Stock Purchase Agreement dated as of August 24, 2006, by and between, Gas Investment China Co., Ltd. and each of the other parties named therein
4.11**	Consulting Agreement dated August 8, 2006, by and between Kuhns Brothers, Inc. and Dolce Ventures, Inc.
4.12**	Engagement Letter dated Feb 15, 2006, by and between, Beijing Zhong Ran Wei Ye Gas Co., Ltd. and Kuhns Brothers, Inc.
4.13**	Escrow Agreement dated September 7, 2006, by and between, Gas Investment China Co., Ltd., Vision Opportunity Master Fund, Ltd. and Kramer Levin Naftalis & Frankel LLP
4.14****	Securities Purchase Agreement dated as of September 7, 2007 by and among the Company and the investors named therein
4.15****	Registration Rights Agreement dated as of September 7, 2007 by and among the Company and the investors named therein
4.16****	Make Good Escrow Agreement dated as of September 7, 2007 by and between the Company, the investors and Manufacturers and Traders Trust Company, as escrow agent
4.17***	Series B Stock Purchase Agreement, dated as of October 20, 2006, by and among, Dolce Ventures, Inc., and each of the other investors named therein

49

4.18***	Registration Rights Agreement, dated as of October 20, 2006, by and between, Dolce Ventures, Inc., and each of the other investors named therein
4.19***	Form of Lock-Up Agreement, by and among, Docle Ventures, Inc., and certain other parties named therein
4.20	Securities Purchase Agreement dated as of November 30, 2009, between Sino Gas International Holdings, Inc. and certain purchasers incorporated by reference from exhibit 10.1 to Form 8-K/A filed on January 19, 2010
4.21	Pledge Agreement dated as of November 30, 2009 between Sino Gas International Holdings, Inc. and certain purchasers incorporated by reference from exhibit 10.2 to Form 8-K filed December 4, 2009
4.22	Guaranty dated as of November 30, 2009 between Chairman and CEO of Sino Gas International Holding, Inc. and certain purchasers incorporated by reference from exhibit 10.3 to Form 8-K filed December 4, 2009
4.23	Voting Agreement dated as of November 30, 2009 between a majority of the outstanding common stock of Sino Gas International Holding, Inc. and certain purchasers incorporated by reference from exhibit 10.4 to Form 8-K filed December 4, 2009
4.24	Form of Lock-Up Agreement between Yuchuan Liu, CEO of Sino Gas International Holding, Inc. and certain purchasers incorporated by reference from exhibit 10.5 to Form 8-K filed December 4, 2009
10.1	Urban Gas Development Agreement with Jinzhou Town incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.2	Municipal Public Utilities Franchise Agreement with Yutian County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.3	Urban Gas Development Agreement with Yutian County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.4	Urban Gas Development Agreement with Wuqiao County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.5	The Agreement on Developing the Pipeline Gas Project with Xintang County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.6	Urban Gas Development Agreement with Linzhang County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.7	Urban Gas Development Agreement with Ningjin County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.8	Urban Gas Development Agreement with Luquan County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.9	Gas Supply Contract- Henan Zhongyuan Lvneng High-Tech Co., Ltd. incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.10	Gas Supply Contract-PetroChina Huabei Oilfield Company incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.11	Gas Supply Contract-Tianjin Dagang Oilfield Transportation Co., Ltd. incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998

50

10.12	Gas Supply Contract-Hebei Natural Gas Co., Ltd. incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.13	Gas Supply Contract-Xinjiang Guanghui LNG Development Co., Ltd. incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.14	Pipe Gas Franchise Agreement for Baishan City incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.15	Pipe Gas Franchise Agreement for Si County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.16	Pipe Gas Franchise Agreement for Xiahuayuan District incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.17	Pipe Gas Franchise Agreement for Yu County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.18	Pipe Gas Franchise Agreement for Wuhe County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.19	Pipe Gas Franchise Agreement for Zaoqiang County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.20	The Cooperation Agreement on Gas Project in Xinji Town incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.21	The Cooperation Agreement with Chengan County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.22	Urban Gas Development Agreement with Nangong Town incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.23	Pipe Gas Franchise Agreement for Pei County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.24	Urban Gas Development Agreement with Gucheng County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.25	Urban Pipe Natural Gas Project Development Agreement with Sihong County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.26	Urban Gas Development Agreement with Changli County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.27	Urban Gas Development Agreement with Shenzhou Town incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.28	Urban Gas Development Agreement with Longyao County incorporated by reference from SB-2 filed on January 11, 2008, file number 333-147998
10.29	Shareholders’ Agreement among Yunnan Investment Group, Sino Gas International Holdings, Inc. and Qujing Development Investment Co. Ltd. dated April 22, 2008 incorporated by reference from Form 10-K filed on March 31, 2009.

51

10.30	Equity Interest Transfer Agreement dated among Beijing Zhong Ran Wei Ye Gas Co. Ltd. Wuhan ShiCheng Estate Development Co. Ltd. and Song Tiegang etc. dated April 23, 2008 incorporated by reference from Form 10-K filed on March 31, 2009
10.31	Subscription Agreement dated December 17, 2010 (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on December 23, 2010)
10.32	Shareholders Agreement dated December 17, 2010 (incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed on December 23, 2010)
16.1*	Letter dated September 7, 2006 from Dolce Ventures, Inc. to Robison, Hill & Co.
16.2*	Letter dated September 12, 2006 from Robison, Hill & Co. to the SEC
21.1+	List of Subsidiaries
23.1+	Consent of Auditor
31.1+	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2+	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1+	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*	Incorporated by reference from Form 8-K filed September 7, 2006
**	Incorporated by reference from Form 8-K/A filed on November 28, 2007
***	Incorporated by reference from Form 8-K/A filed on November 27, 2007
****	Incorporated by reference from Form 8-K filed September 13, 2007
+	Filed herewith

52

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SINO GAS INTERNATIONAL HOLDINGS, INC.
Date: March 31, 2011	By:	/s/ Yuchuan Liu
		Yuchuan Liu
		Chairman of the Board, Director, President and Chief Executive Officer
Date: March 31, 2011	By:	/s/ Yugang Zhang
		Yugang Zhang
		Chief Financial Officer
		(Principal Accounting and Financial Officer)

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Yuchuan Liu and Yugang Zhang, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Title	Date
/s/ Yuchuan Liu	Chief Executive Officer, Chairman of the Board, Director, and President	March 31, 2011
Yuchuan Liu	(Principal Executive Officer)
/s/ Yugang Zhang	Chief Financial Officer	March 31, 2011
Yugang Zhang	(Principal Accounting and Financial Officer)
/s/ Guowei Chen	Director	March 31, 2011
Guowei Chen
/s/ Quandong Sun	Director	March 31, 2011
Quandong Sun
/s/ Zhongsheng Liu	Director	March 31, 2011
Zhongsheng Liu
/s/ Zhicheng Zhou	Director and Chief Operating Officer	March 31, 2011
Zhicheng Zhou

53

Sino Gas International Holdings, Inc.

Audited Consolidated Financial Statements

December 31, 2009 and 2010

(Stated in US Dollars)

Sino Gas International Holdings, Inc.

Content	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Income	F-5
Consolidated Statements of Stockholders’ Equity	F-7
Consolidated Statements of Cash Flows	F-8
Notes to Consolidated Financial Statements	F-9

F-1

To:        The Board of Directors and Stockholders of

Sino Gas International Holdings, Inc.

Report of Independent Registered Public Accounting Firm

We have audited the accompanying consolidated balance sheets of Sino Gas International Holdings, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sino Gas International Holdings, Inc as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

San Mateo, California	Samuel H. Wong & Co., LLP
March 26, 2011	Certified Public Accountants

F-2

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of December 31, 2010 and 2009

 (Stated in US Dollars)

ASSETS		12/31/2010		12/31/2009
Current Assets	Notes
Cash & cash equivalents	2(e)	$	3,582,330	$	9,820,890
Restricted cash	3		-		126,400
Notes receivable			226,867		351,021
Accounts receivable	2(f),4		9,504,229		5,036,609
Other receivables			1,127,981		1,686,115
Related party receivable			408,361		-
Inventory			482,594		416,931
Advance to suppliers	2(g)		3,621,147		4,814,420
Prepaid expenses and taxes			264,481		446,840
Total Current Assets			19,217,990		22,699,226
Non-Current Assets
Investment	2(h),5		12,794,384		7,031,333
Property, plant & equipment, net	2(j),7		49,928,482		47,772,011
Construction in progress	2(m)		19,336,428		13,357,395
Intangible assets, net	2(k),9		533,730		539,724
Goodwill	2(l),8		1,677,975		1,677,975
Deposit			1,239,548		-
Total Non-current Assets			85,510,547		70,378,438
Total Assets		$	104,728,537	$	93,077,664
LIABILITIES & STOCKHOLDERS’ EQUITY
LIABILITIES
Current Liabilities
Bank loans	10	$	7,864,727	$	2,925,174
Accounts payable			11,105,790		8,560,120
Other payables - current portion	11(a)		3,691,923		6,339,571
Accrued liabilities			1,635,217		453,335
Unearned revenue	2(n)		106,868		620,860
Total Current Liabilities			24,404,525		18,899,060
Non-current Liabilities
Long-term bank loans	10		3,024,895		6,581,641
Non-current Convertible Bonds	12		5,641,117		4,329,101
Other payables - non-current portion	12(b)		1,859,499		-
Total Non-current Liabilities			10,525,511		10,910,742
Total Liabilities		$	34,930,036	$	29,809,802

See Accompanying Notes to Financial Statements

F-3

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of December 31, 2010 and 2009

 (Stated in US Dollars)

STOCKHOLDERS’ EQUITY			12/31/2010		12/31/2009
	Notes
Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,590,094 and 4,579,839 shares issued and outstanding as of December 31, 2010 and 2009 respectively.		11	$	4,590	$	4,580
Additional paid in capital - Preferred Stock B				5,335,894		5,323,972
Preferred Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares issued and outstanding as of December 31, 2010 and 2009 respectively.		11		95		95
Additional paid in capital - Preferred Stock B-1				132,662		132,662
Common Stock US$0.001 par value; 250,000,000 shares authorized; 27,156,617 and 26,769,313 shares issued and outstanding as of December 31, 2010 and 2009 respectively.		11		27,156		26,769
Additional paid in capital - Common Stock				23,933,033		22,513,732
Additional paid in capital - Warrants Series: A, B, J, C, D				311,110		311,110
Additional paid in capital - Warrants Series: E, G				47,946		47,946
Additional paid in capital - Warrants Series: F, R				-		107,652
Additional paid in capital - Convertible Bonds Detachable Warrants				223,367		223,367
Additional paid in capital - Beneficial Conversion Feature				8,094,814		8,094,814
Statutory reserve		2(w)		4,819,762		4,612,191
Retained earnings				17,977,181		14,143,089
Minority Interest				1,004,500		-
Accumulated other comprehensive income		2(x)		7,886,391		7,725,883
Total Stockholders’ Equity				69,798,501		63,267,862
Total Liabilities & Stockholders’ Equity			$	104,728,537	$	93,077,664

See Accompanying Notes to Financial Statements

F-4

Sino Gas International Holdings, Inc.

Consolidated Statements of Income

For the year ended December 31, 2010 and 2009

 (Stated in US Dollars)

	Notes		12/31/2010			12/31/2009
Sales		2(r)	$	32,174,248		$	27,591,501
Cost of revenue		2(s)		19,810,913			18,117,500
Gross Profit				12,363,335			9,474,001
Operating Expenses
Selling expenses				1,776,315			1,032,629
General and administrative expenses				3,299,785			3,374,896
Total operating expenses				5,076,100			4,407,525
Operating Income				7,287,235			5,066,476
Other Income/(Expense)
Investment income		2(s)		800,745			461,014
Other income				56,275			64,774
Other expense				(136,654	)		(36,214	)
Impairment loss				(73,457	)		-
Interest income				14,841			75,302
Interest expense				(2,706,784	)		(489,111	)
Total other income/(expense)				(2,045,034	)		75,765
Earnings from continued operation				5,242,201			5,142,241
Income tax		2(t),14		(1,200,096	)		(1,094,657	)
Gain/(loss) from discontinued operation, net of tax		18		(442	)		-
Net income			$	4,041,663		$	4,047,584
Income available to common stockholders for basic EPS			$	4,041,663		$	4,047,584
Interest expense for convertible bonds, net of tax				1,995,453			234,180
Income available to common stockholders for diluted EPS			$	6,037,116		$	4,281,764
Earnings Per Share		2(z),16
-Basic			$	0.15		$	0.15
-Diluted			$	0.15		$	0.14
Weighted Average Shares Outstanding
-Basic				27,013,799			26,235,980
-Diluted				27,013,799			30,815,819

See Accompanying Notes to Financial Statements

F-5

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of and for the year ended December 31, 2010 and 2009

(Stated in US Dollars)

	Preferred Stock B									Preferred Stock B-1						Common Stock
	Shares Outstanding			Amount			APIC - Preferred Stock B			Shares Outstanding		Amount		APIC - Preferred Stock B-1		Shares Outstanding			Amount			APIC - Common Stock
Balance at January 1, 2009		4,579,839			4,580			5,323,972			95,418		95		132,662		25,269,313			25,269			23,196,304
Net Income		-			-			-			-		-		-		-			-			-
Issuance of 2007 Make Good Common Stock		-			-			-			-		-		-		1,500,000			1,500			(1,500	)
Re-allocation of Beneficial Conversion Feature		-			-			-			-		-		-		-			-			(681,072	)
Issuance of Convertible Bonds		-			-			-			-		-		-		-			-			-
Appropriate of Retained Earnings		-			-			-			-		-		-		-			-			-
Foreign Currency Translation Adjustment		-			-			-			-		-		-		-			-			-
Balance at December 31, 2009		4,579,839			4,580			5,323,972			95,418		95		132,662		26,769,313			26,769			22,513,732
Balance at January 1, 2010		4,579,839			4,580			5,323,972			95,418		95		132,662		26,769,313			26,769			22,513,732
Net Income		-			-			-			-		-		-		-			-			-
Conversion of Preferred Stock B		(170,742	)		(171	)		(198,484	)		-		-		-		170,742			171			198,484
Reversal of conversion		180,997			181			210,406			-		-		-		(180,997	)		(181	)		(210,406	)
Conversion of Convertible Bonds		-			-			-			-		-		-		322,581			322			199,678
Shares Based Compensation		-			-			-			-		-		-		75,000			75			35,925
Cancellation of Common Stock		-			-			-			-		-		-		(22	)		-			-
Expiration of IR Firm’s Warrants		-			-			-			-		-		-		-			-			92,468
Expiration of Warrants F&R		-			-			-			-		-		-		-			-			107,652
Issuance of Subsidiary’s 49% Equity		-			-			-			-		-		-		-			-			995,500
Appropriation of Retained Earnings		-			-			-			-		-		-		-			-			-
Foreign Currency Translation Adjustment		-			-			-			-		-		-		-			-			-
Balance at December 31, 2010		4,590,094			4,590			5,335,894			95,418		95		132,662		27,156,617			27,156			23,933,033

See Accompanying Notes to Financial Statements

F-6

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of and for the year ended December 31, 2010 and 2009

(Stated in US Dollars)

	Common Stock
	APIC - Warrants Series: A,B,J,C,D		APIC - Warrants Series: E,G		APIC - Warrants Series: F,R			APIC - Convertible Bonds Detachable Warrants		APIC - Beneficial Conversion Feature		Statutory Reserve		Retained Earnings			Minority Interest		Accumulated Other Comprehensive Income		Total
Balance at January 1, 2009		311,110		47,946		107,652			-		7,002,292		3,956,728		10,069,896			-		7,676,844		57,855,350
Net Income		-		-		-			-		-		-		4,047,584			-		-		4,047,584
Issuance of 2007 Make Good Common Stock		-		-		-			-		-		-		-			-		-		-
Re-allocation of Beneficial Conversion Feature		-		-		-			-		-		-		681,072			-		-		-
Issuance of Convertible Bonds		-		-		-			223,367		1,092,522		-		-			-		-		1,315,889
Appropriate of Retained Earnings		-		-		-			-		-		655,463		(655,463	)		-		-		-
Foreign Currency Translation Adjustment		-		-		-			-		-		-		-			-		49,039		49,039
Balance at December 31, 2009		311,110		47,946		107,652			223,367		8,094,814		4,612,191		14,143,089			-		7,725,883		63,267,862
Balance at January 1, 2010		311,110		47,946 47,946		107,652			223,367		8,094,814		4,612,191		14,143,089			-		7,725,883		63,267,862
Net Income		-		-		-			-		-		-		4,041,663			-		-		4,041,663
Conversion of Preferred Stock B		-		-		-			-		-		-		-			-		-		-
Reversal of Common Stock		-		-		-			-		-		-		-			-		-		-
Conversion of Convertible Bonds		-		-		-			-		-		-		-			-		-		200,000
Shares Based Compensation		-		-		-			-		-		-		-			-		-		36,000
Cancellation of Common Stock		-		-		-			-		-		-		-			-		-		-
Expiration of IR Firm’s Warrants		-		-		-			-		-		-		-			-		-		92,468
Expiration of Warrants F&R		-		-		(107,652	)		-		-		-		-			-		-		-
Issuance of Subsidiary’s 49% Equity		-		-		-			-		-		-		-			1,004,500		-		2,000,000
Appropriation of Retained Earnings		-		-		-			-		-		207,571		(207,571	)		-		-		-
Foreign Currency Translation Adjustment		-		-		-			-		-		-		-			-		160,508		160,508
Balance at December 31, 2010		311,110		47,946		-			223,367		8,094,814		4,819,762		17,977,181			1,004,500		7,886,391		69,798,501

Comprehensive Income	12/31/2009		12/31/2010		Total
Net Income	$	4,047,584	$	4,041,663	$	8,089,247
Other Comprehensive Income
Foreign Currency Translation Adjustment		49,039		160,508		209,547
Total	$	4,096,623	$	4,202,171	$	8,298,794

See Accompanying Notes to Financial Statements

F-7

Sino Gas International Holdings, Inc.

Consolidated Statements of Cash Flows

For the year ended December 31, 2010 and 2009

 (Stated in US Dollars)

Cash Flows from Operating Activities	12/31/2010			12/31/2009
Net Income	$	4,041,663		$	4,047,584
Adjustments to reconcile net income to net cash from operations:
Shares base compensation		36,000			-
Expiration of Warrants		92,468			-
Bad debt provision		45,127			15,081
Depreciation expense		912,334			1,179,860
Amortization expense of intangible assets		25,438			32,306
Amortization expense of convertible bonds		1,512,016			-
Loss/(gain) from discontinued operation		442			-
Changes in operating assets and liabilities:
Withdraw/(deposit) in restricted time deposits		126,400			107,879
Decrease/(increase) in accounts and other receivables		(3,830,460	)		2,062,585
Decrease/(increase) in inventory		(65,663	)		(69,590	)
Decrease/(increase) in prepayments		1,375,633			(1,866,148	)
Decrease/(increase) in related party receivable		(408,361	)		-
Increase/(decrease) in accounts and other payables		2,425,411			2,321,136
Cash Sourced/(Used) in Operating Activities		6,288,448			7,830,693
Cash Flows from Investing Activities
Increase in deposit		(1,239,548	)		-
Disposal of discontinued operation		75			-
Increase of investment in equity		(5,763,051	)		(1,872,324	)
Purchase of property, plant & equipment		(3,069,321	)		(15,918,753	)
Purchase of intangible assets		(19,445	)		(56,752	)
Decrease/(increase) in construction in progress		(5,979,032	)		3,798,077
Cash Sourced/(Used) in Investing Activities		(16,070,322	)		(14,049,752	)
Cash Flows from Financing Activities
Proceeds/(settlement) of bank loans		1,382,806			7,318,376
Proceeds from issuance of convertible bonds		-			6,042,966
Discount of convertible bonds		-			(1,713,866	)
Increase in additional paid in capital from issuance of convertible bonds		-			1,315,890
Proceeds from sales of subsidiary’s equity		2,000,000
Cash Sourced/(Used) in Financing Activities		3,382,806			12,963,366
Net increase in cash & cash equivalents for the periods		(6,399,068	)		6,744,307
Effect of currency translation		160,508			49,040
Cash & cash equivalents at the beginning of periods		9,820,890			3,027,543
Cash & cash equivalents at the end of periods	$	3,582,330		$	9,820,890
Supplementary cash flows information
Interest received	$	14,841		$	75,302
Interest paid	$	1,075,241		$	254,931
Income tax paid	$	1,273,676		$	1,324,184

See Accompanying Notes to Financial Statements

F-8

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

Sino Gas International Holdings, Inc. (the “Company”) was incorporated under the laws of the State of Utah on August 19, 1983 as Evica Resources, Inc. The Company changed its name to American Arms, Inc. on April 5, 1984, and then changed its name to Dolce Ventures, Inc. on May 21, 2002, and ultimate changed its name to Sino Gas International Holdings, Inc. on November 17, 2006.

On September 7, 2006, the Company underwent a reverse-merger with Gas Investment China Co., Ltd. (“Gas (BVI)”), an International Business Company incorporated in the British Virgin Islands, and its wholly owned subsidiary Beijing Zhong Ran Weiye Gas Co., Ltd. (“Beijing Gas”), involving an exchange of shares whereby the Company issued an aggregate of 14,361,646 shares to the shareholders of Gas (BVI) in exchange for all of the issued and outstanding shares of Gas (BVI). For financial reporting purposes, this transaction is classified as a recapitalization of Sino Gas International Holdings, Inc. (Legal acquirer, accounting acquiree) and the historical financial statements of Gas Investment China Co. Ltd. (Legal acquiree, accounting acquirer)

The Company’s primarily business operations are conducted through Beijing Gas. Beijing Gas is a natural gas services operator, principally engaging in the investment, operation, and management of city gas pipeline infrastructure, in the distribution of natural gas to residential and industrial users, in the construction and operation gas stations, and in the development and application of natural gas related technologies. Beijing Gas develops its operating subsidiaries, known as project companies. Each project company operates as a local natural gas distributor in a city or county. Pursuant to an exclusive franchise agreement with the local government or entities responsible for administering and/or regulating gas utilities, each project company is granted the exclusive right to develop and operate natural gas distribution systems and distribute natural gas at the operational location.

Beijing Gas holds an equity interest of 85% to 100% on its subsidiaries, and an individual shareholder nominally holds the remainder of the equity interest in such project company. Each such individual shareholder has relinquished any and all rights, power and interest of Beijing Gas in the respective project companies under enforceable contracts. This structure was intended to comply with a PRC law that required a limited liability company to have at least two shareholders,

The Company owns and operates natural gas distribution systems in 35 small and medium size cities serving approximately 183,500 residential and seven industrial customers. The Company’s facilities include approximately 1,525 kilometers of pipeline and delivery networks (including delivery trucks) with a daily capacity of approximately 120,000 cubic meters of natural gas.

The common stock of the Company is currently quoted on the National Association of Securities Dealers’ Over-the-Counter Bulletin Board under the symbol “SGAS”.

Basis of Presentation and Organization

The Company’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the People’s Republic of China (“PRC”) or in the accounting standards used in the places of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company’s subsidiaries to present them in conformity with US GAAP.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

F-9

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

(a) Method of Accounting

The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements.

(b)  Use of estimates

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America 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 periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.

(c) Economic and political risks

The Company’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environment in the PRC, and by the general state of the PRC economy.

The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment, and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to law and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.

(d)  Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries (the “Group”). Significant inter-company transactions have been eliminated in consolidation. Investments in which the company has a 20 percent to 50 percent voting interest and where the company exercises significant influence over the investor are accounted for using the equity method.

The Company owned its subsidiaries after inception and continued to acquire equity interest throughout the reporting periods. The following table depicts the identities of the consolidating subsidiaries as of December 31, 2010:-

F-10

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Name of Company	Place of Incorporation	Date of Incorporation	Beneficiary Interest %	Equity Interest %	Registered Capital
GAS Investment China Co., Ltd.	The British Virgin Islands	6/19/2003	100	100	USD 10,000,000
Sino Gas Construction, Ltd.	The British Virgin Islands	1/9/2007	51	51	USD 98,039
Sino Gas Investment Development, Ltd.	The British Virgin Islands	1/9/2007	100	100	USD 50,000
Beijing Zhong Ran Weiye Gas Co., Ltd.	PRC	8/29/2001	100	100	RMB 206,000,000
Beijing Chenguang Gas Co., Ltd.	PRC	10/30/2002	100	100	RMB 35,239,600
Guannan Weiye Gas Co., Ltd.	PRC	6/19/2003	100	100	RMB 9,510,000
Ningjin Weiye Gas Co., Ltd	PRC	12/3/2003	100	95	RMB 3,000,000
Yutian Zhongran Weiye Gas Co., Ltd.	PRC	12/19/2003	100	90	RMB 3,000,000
Xingtang Weiye Gas Co., Ltd.	PRC	2/18/2004	100	95	RMB 3,000,000
Wuqiao Gas Co., Ltd.	PRC	6/30/2004	100	95	RMB 2,000,000
Jinzhou Weiye Gas Co., Ltd.	PRC	7/19/2004	100	95	RMB 13,659,877
Sihong Weiye Gas Co., Ltd.	PRC	12/3/2004	100	95	RMB 10,000,000
Sishui Weiye Gas Co., Ltd.	PRC	12/22/2004	100	95	RMB 3,000,000
Langfang Weiye Dangerous Goods Transportation Co., Ltd.	PRC	3/22/2005	100	95	RMB 1,000,000
Linzhang Weiye Gas Co., Ltd.	PRC	7/6/2005	100	85	RMB 1,000,000
Peixian Weiye Gas Co., Ltd.	PRC	8/22/2005	100	90	RMB 45,694,900
Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd.	PRC	9/30/2005	100	100	RMB 2,000,000

F-11

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Longyao Zhongran Weiye Gas Co., Ltd.	PRC	10/13/2005	100	95	RMB 3,000,000
Yuxian Jinli Gas Co., Ltd.	PRC	11/8/2005	100	100	RMB 9,500,000
Hengshui Weiye Gas Co., Ltd.	PRC	12/20/2005	100	100	RMB 3,000,000
Shenzhou Weiye Gas Co., Ltd.	PRC	12/23/2005	100	95	RMB 6,638,035
Changli Weiye Gas Co., Ltd.	PRC	12/8/2006	100	100	RMB 3,000,000
Chenan Chenguang Gas Co., Ltd	PRC	1/23/2007	100	100	RMB 1,500,000
Wuhe Weiye Gas Co., Ltd.	PRC	1/30/2007	100	100	RMB 3,000,000
Xinji Zhongchen Gas Co., Ltd	PRC	2/7/2007	100	100	RMB 3,000,000
Gucheng Weiye Gas Co., Ltd.	PRC	3/21/2007	100	100	RMB 3,000,000
Luquan Chenguang Gas Co., Ltd.	PRC	4/27/2007	100	100	RMB 2,000,000
Shijiazhuang Chenguang Gas Co., Ltd.	PRC	6/14/2007	100	100	RMB 2,000,000
Nangong Weiye Gas Co., Ltd.	PRC	6/25/2007	100	100	RMB 3,000,000
Sixian Weiye Gas Co., Ltd.	PRC	9/3/2007	100	100	RMB 3,000,000
Baishan Weiye Gas Co., Ltd.	PRC	7/13/2007	100	100	RMB 15,000,000
Xinhe Weiye Gas Co., Ltd.	PRC	7/2/2009	100	100	RMB 300,000
Hebei Weiye Gas (Group) Co., Ltd.	PRC	12/18/2009	100	100	RMB 75,439,270
Gaocheng Weiye Gas Co., Ltd.	PRC	1/27/2010	100	100	RMB 200,000

F-12

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

(e)          Cash and Cash Equivalents

The Company considers all cash and other highly liquid investments with initial maturities of three months or less to be cash equivalents.

(f)          Accounts Receivable

Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company extends unsecured credit to customers in the normal course of business and does not accrue interest on trade accounts receivable.

(g)          Advances to Suppliers

Advances to suppliers represent the cash paid in advance for purchasing raw materials. The advances to suppliers are interest free and unsecured.

(h)          Investments in Equity Securities

The equity method of accounting was used to account for the Company’s investment in equity securities for which the Company did not have controlling equity interest. Non-controlling equity interest for the Company is typically a position of less than 50% beneficial ownership.

The consolidated statement of income includes the Company’s share of the post-acquisition results of the investment’s performance for the year. In the consolidated balance sheet, investments in equity securities are stated at the Company’s share of the net assets of the investments plus any potential premium, or less discounts paid at the time of acquisition, and less any identified impairment loss.

The Company did not record any goodwill when it acquired its equity position in Xiangke Oil Gas and Qujing Gas. Accordingly, in accordance with SFAS 142, the Company has not taken an amortization expense of goodwill during the time it has carried stakes in equity security.

(i) Accounting for the Impairment of Long-Lived Assets

The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of assets to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets.

If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

For the year ended December 31, 2010, there was $73,457 impairment loss.

(j)          Property, Plant and Equipment

F-13

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and impairment loss. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the property, plant and equipment are as follows:

Assets Class	Estimated Useful Life
Gas Pipelines (Up to December 31, 2007)	25 years
Gas Pipelines (Starting from January 1, 2008)	50 years
Buildings	25 years
Leasehold Improvements	25 years
Machinery & Equipment	20 years
Motor Vehicles	10 years
Office Equipment	8 years

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income. The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.

(k)          Intangible Assets

Intangible assets are stated at cost less accumulated amortization and impairment loss. Amortization is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the intangibles are as follows:

Asset Class	Estimated Useful Life
Land use rights	20 - 50 years
Franchises	30 years
Accounting software	3 years

(l)          Goodwill

Goodwill impairment tests are performed annually and more frequently whenever events or changes in circumstances indicate goodwill carrying values exceed estimated reporting unit fair values. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations.  

(m)          Construction in Progress

Construction in progress represents the cost of constructing pipelines and is stated at cost. Costs comprise of direct and indirect incremental costs of acquisition or construction. Completed items are transferred from construction in progress to the gas pipelines of fixed assets when they are ready for their intended use. The major cost of construction relates to construction materials, direct labor wages, and other overhead. Construction of pipeline, through which to distribute natural gas, is one of the Group’s principal businesses. The Group builds city main pipeline network and branch pipeline network to make gas connection to resident users, industrial and commercial users, with the objective of generating revenue on gas connection and gas usage fees collected from these customers. These projects, once completed, will significantly increase the gas supply capacity.

(n)Unearned Revenue

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

F-14

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

(o)Financial Instruments

The Company adopted ASC 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements.

ASC 820-10 includes a fair value hierarchy that is intended to increase the consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing an asset or liability based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1–inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2–observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3–instrument valuations are obtained without observable market values and require a high-level of judgment to determine the fair value.

The Company’s financial instruments consist mainly of cash, restricted cash, and debt obligations. Based on the borrowing rates currently available to the Company for loans and similar terms and average maturities, the fair value of debt obligations also approximates its carrying value due to the short-term nature of the instruments. While the Company believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

(p) Foreign Currency Translation

The accompanying financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The financial statements are translated into United States dollars from RMB at year-end exchange rates as to assets and liabilities and average exchange rates as to revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.

	12/31/2010		12/31/2009
Years end RMB : US$ exchange rate		6.6118		6.8372
Average yearly RMB : US$ exchange rate		6.7788		6.8409

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

(r)          Revenue Recognition

The Company has two sources of revenue: (a) sales of natural gas and (b) connection fees for constructing connections of natural gas distribution network. In accordance to FASB ASC 605-10, the Company recognizes gas distribution revenue when natural gas are rendered to customers, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Connection fee is recognized when the outcome of a contract can be estimated reliably and the stage of completion at the balance sheet date can be measured reliably.

F-15

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Payments received before all of the relevant criteria for revenue recognition satisfied are recorded as unearned revenue.

(s)          Cost of Revenue

The cost for distribution of natural gas is comprised of raw materials, delivery cost, and other overhead. The cost of connection fees consists of construction materials, direct labor wages, and other overhead.

(s)          Investment Income

Investment income represents the Company’s share of post-acquisition results of its investment in equity securities for the year.

(t)          Income Taxes

The Company uses the accrual method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available. The Company has implemented Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Income tax liabilities computed according to the United States and People’s Republic of China (PRC) tax laws are provided for the tax effects of transactions reported in the financial statements and consists of taxes currently due plus deferred taxes related primarily to differences between the basis of fixed assets and intangible assets for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future income taxes. A valuation allowance is created to evaluate deferred tax assets, whether it is more likely than not that these items will expire either before the Company is able to realize that tax benefit, or that future realization is uncertain.

In respect of the Company’s subsidiaries domiciled and operated in China and British Virgin Islands, the taxation of these entities is summarized below:

· All of the operating companies are located in the PRC; and GAS Investment China Co., Ltd., Sino Gas Construction, Ltd., and Sino Gas Investment Development, Ltd. are located in the British Virgin Islands. All of these entities are subject to the relevant tax laws and regulations of the PRC, and the British Virgin Islands in which the related entity domiciled. The maximum tax rates of the subsidiaries pursuant to the countries in which they domicile are:

Subsidiary	Country of Domicile	Income Tax Rate
PRC Operating Companies (per Note 2. (d) Principals of Consolidation)	PRC		25.0	%
i.GAS Investment China Co., Ltd. ii.Sino Gas Construction, Ltd. iii.Sino Gas Investment Development, Ltd.	BVI BVI BVI		0.00 0.00 0.00	% % %

F-16

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

· Effective January 1, 2008, PRC government implements a new 25% tax rate for all enterprises regardless of whether domestic or foreign enterprise without any tax holiday, which is defined as “two-year exemption followed by three-year half exemption” hitherto enjoyed by tax payers. As a result of the new tax law, standard 15% tax rate preference terminated as of December 31, 2007. However, PRC government has established a set of transition rules to allow enterprises already started tax holidays before January 1, 2008, to continue enjoying the tax holidays until being fully utilized.

· Since Sino Gas International Holdings, Inc. is primarily a holding company without any business activities in the United States, the Company shall not be subject to United States income tax for the year ended December 31, 2010.

(u) Advertising

The Company expensed all advertising costs as incurred.

(v)           Concentration of Credit Risk

Concentration of credit risk is limited to accounts receivable and is subject to the financial conditions of major customers. The Company does not require collateral or other security to support accounts receivable. The Company conducts periodic reviews of its clients’ financial condition and customers’ payment practices to minimize collection risk on accounts receivable.

(w)           Statutory Reserves

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

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

ii. Allocations to the “Statutory 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 to the discretionary surplus reserve, if approved in the shareholders’ general meeting.

(x)           Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other consolidated financial statements. The Company’s current component of other comprehensive income is the foreign currency translation adjustment.

(y)           Recent Accounting Pronouncements

In June 2009, FASB issued FASB Statement No. 166, Accounting for Transfers for Financial Assets (FASB ASC 860 Transfers and Servicing) and FASB Statement No. 167 (FASB ASC 810 Consolidation), a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation). The Company has adopted the new accounting policies and has determined that there is no material impact to the financial statements presented herein.

F-17

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

On June 30, 2009, FASB issued FASB Statement No. 168, Accounting Standards Codification(TM) (FASB ASC 105 Generally Accepted Accounting Principles) a replacement of FASB Statement No. 162 the Hierarchy of Generally Accepted Accounting Principles. On the effective date of this standard, FASB Accounting Standards Codification(TM) (ASC) became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission (SEC). This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. If an accounting change results from the application of this guidance, an entity should disclose the nature and reason for the change in accounting principle in their financial statements. This new standard flattens the GAAP hierarchy to two levels: one that is authoritative (in FASB ASC) and one that is non-authoritative (not in FASB ASC). Exceptions include all rules and interpretive releases of the SEC under the authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants, and certain grandfathered guidance having an effective date before March 15, 1992. Statement No. 168 is the final standard that will be issued by FASB in that form. There will no longer be, for example, accounting standards in the form of statements, staff positions, Emerging Issues Task Force (EITF) abstracts, or AICPA Accounting Statements of Position. The Company has adopted and implemented the new accounting policy.

In October 2009, the FASB issued ASU No. 2009-13 “Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force”. This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The management is in the process of evaluating the impact of adopting this ASU on the Company’s financial statements.

The FASB issued ASU-2010-09 (Topic 855) to amend guidance on subsequent events to remove the requirement for SEC filers (as defined in ASU 2010-09) to disclose the date through which an entity has evaluated subsequent events. This change alleviates potential conflicts with current SEC guidance. An SEC filer is still required to evaluate subsequent events through the date financial statements are issued, but disclosure of that date is no longer required. The amendments in ASU 2010-09 became effective upon issuance of the guidance. Management adopted this pronouncement as of July 1, 2010.

(z)          Earnings Per Share

The Company computes earnings per share (“EPS”) in accordance with FASB ASC 260 “Earnings per share”. SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., contingent shares, convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.

(AA)          Subsequent Events

The Company evaluates subsequent events that have occurred after the consolidated balance sheet date but before the consolidated financial statements are issued. There are two types of subsequent events:  (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. The Company has evaluated subsequent events, and based on this evaluation, the Company identified a non-recognized subsequent event that would require disclosure to the consolidated financial statements.

F-18

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

3. RESTRICTED CASH

The restricted cash reflects funds received from financing activities that is held in an escrow account in the United States for the purpose of investor relationship activities.

4. ACCOUNTS RECEIVABLE

For natural gas sales, it is due when the gas is sold. Most of residential customers are settled by prepayments with debit cards, while industrial customers are billed and paid according to the contract terms from 10 days to one month.

For construction projects, connection fees are generally collected in installments. First deposits of 30% of total contract sum are received from client when the project commences. Second payment of 30% is received at milestone set out following the contracts. Third payment of 30% is received after the construction is completed. The final sum of the remaining portion normally acts as retention money for quality warranty to the developer. The retention money would be received by the company after the 1 year warranty period.

The Company believes it has provided adequate provisions for doubtful accounts. Doubtful allowance accounts at December 31 2010 and 2009 was 1% of gross account receivables. In the situation, the Company uses all its efforts, such as having internal staff call for payment, filing legal pledges, or even hiring collecting agents to collect the outstanding balance. If the collection is no longer probable, the Company will write off the balance against the allowance for doubtful accounts.

The Company has not experienced any material delinquent accounts that were uncollectible, and has not written off material balance against the allowance for doubtful accounts.

Accounts Receivable
	12/31/2010			12/31/2009
Gross accounts receivable	$	9,600,231		$	5,087,484
Allowance for bad debt		(96,002	)		(50,875	)
Net accounts receivable	$	9,504,229		$	5,036,609

Allowance for Bad Debt
	12/31/2010		12/31/2009
Beginning balance	$	50,875	$	35,794
Addition		45,127		15,081
Reversal		-		-
Ending balance	$	96,002	$	50,875

F-19

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Accounts Receivable Aging Report
	12/31/2010		12/31/2009
<30 Days	$	4,894,088	$	3,639,712
30-60 Days		1,050,245		276,004
60-90 Days		111,355		118,704
90-180 Days		2,265,088		422,179
180-360 Days		230,684		446,515
>360 Days		1,048,771		184,370
Total	$	9,600,231	$	5,087,484

The following are the ten most significant accounts receivable at December 31, 2010:

Jiangsu Zhonghuang Real Estate Co., Ltd	$	675,348
Hebei Zhonggang Steel Co., Ltd.		668,500
Baishan Huixin Real Estate Co., Ltd		618,954
Lianyun Port Zhaolong Home Development Co., Ltd.		585,317
Qinwan Island Yongsheng Qiangwang Real Estate Co., Ltd.		493,663
Baishan Xingda Real Estate Co., Ltd.		430,685
Hebei Dihua Longzhou New Town Development Co., Ltd.		425,905
Changli Golden Coast Real Estate Co., Ltd.		364,197
Baishan Yongsheng Real Estate Co., Ltd.		361,067
Jiangshu Zhengzhong Zhiye Co., Ltd.		268,308
Total	$	4,891,944

5. RELATED PARTY RECEIVABLE

The related party receivable $408,361 was due from the Company’s founder and CEO Mr. Liu Yuchuan. The Company borrowed $3,024,895 (RMB 20,000,000) from China Development Bank. The loan was securitized by the CEO’s personal home property, which carried a $408,361 (RMB 2,700,000) mortgage. Because the Bank required the mortgage loan to be settled before it would collateralize on it, the Company paid the entire mortgage on behalf of the CEO. This payment was interest free.

6. INVESTMENT

Ref.			12/31/2010		12/31/2009
	(1)	Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.	$	6,054,228	$	5,290,855
	(2)	Qujing City Fuel Gas Co., Ltd.		3,490,726		1,711,227
	(3)	Tongshan Hengxin Jiaye Gas Co., Ltd.		3,219,181		-
	(4)	China Construction Bank		30,249		29,251
		Total	$	12,794,384	$	7,031,333

F-20

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

(1). The Company through its wholly owned subsidiary Beijing Gas invested $1,642,152 (RMB 13,465,648) on Xiangke Oil Gas in the acquisition of 40% equity position. The $6,054,228 investment as of December 31, 2010 consisted of principal and accumulated post-acquisition investment income attributed to Xiangke Oil Gas’ operation results.

The following tabulation presented the condensed balance sheet and statement of income ofXiangke Oil Gas as of and for the year ended December 31, 2010:-

Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.
Condensed Balance Sheets			Condensed Statements of Income
Assets	12/31/2010			12/31/2010
Current assets	$	11,185,589	Revenue	$	15,534,241
Non-current assets		20,708,416	Cost of revenue		10,946,208
Total assets		31,894,004	Gross profit		4,588,033
Liabilities			Operating expenses		2,404,563
Current liabilities		12,667,599	Operating income		2,183,470
Non-current liabilities		4,537,342	Other income/(expenses)		(357,745	)
Total liabilities		17,204,941	Earnings before tax		1,825,725
Net Assets		14,689,063	Income tax		(404,846	)
Total Liabilities & Net Assets	$	31,894,004	Net income	$	1,420,879

(2). Along with two local partners in Qujing city, the second largest city in Yunnan province of P.R.C, Beijing Gas established Qujing City Fuel Gas Co., Ltd. with registered capital of $4,387,761 (RMB 30,000,000). Beijing Gas’ original investment of $1,746,764 (RMB 11,700,000) presented 39% equity ownership of Qujing Gas.

On December 17, 2010, the Company, among with its wholly owned subsidiaries Gas Construction and Beijing Gas, entered into a Subscription Agreement with AMP Capital Asian Giants Infrastructure Fund (“AGIF”), under the terms of which Gas Construction issued to AGIF 48,039 number of ordinary shares that represents 49% of the total issued capital of Gas Construction for a consideration of US$2.0 million. In addition, pursuant to the Subscription Agreement, the equity interest in Qujing Gas held by Beijing Gas was transferred to Gas Construction so that Gas Construction has become the beneficial holder of 39% equity interest in Qujing Gas.

After the close of the equity subscription, shareholders of Qujing Gas amended the Articles of Incorporation to raise the level of registered capital. On December 28, 2010, Gas Construction invested additional $1,525,000 into Qujing Gas. The $3,490,726 investment as of December 31, 2010 consisted of principal and accumulated post-acquisition investment income attributed to Qujin Gas’ operation results.

The following tabulation presented the condensed balance sheet and statement of income ofQujing Gas as of and for the year ended December 31, 2010:-

F-21

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Qujing City Fuel Gas Co., Ltd.
Condensed Balance Sheets			Condensed Statements of Income
Assets	12/31/2010			12/31/2010
Current assets	$	17,792,452	Revenue	$	4,529,481
Non-current assets		9,846,526	Cost of revenue		3,548,119
Total assets		27,638,978	Gross profit		981,362
Liabilities			Operating expenses		149,119
Current liabilities		10,617,997	Operating income		832,243
Non-current liabilities		11,343,356	Other income/(expenses)		5
Total liabilities		21,961,353	Earnings before tax		832,248
Net Assets		5,677,625	Income tax		236,369
Total Liabilities & Net Assets	$	27,638,978	Net income	$	595,880

The Company’s investment income for the year ended December 31, 2010 was presented as follows:-

	Net Income		Equity Interest %			Investment Income
Xiangke Oil Gas	$	1,420,879		40	%	$	568,352
Qujing Gas		595,880		39	%		232,393
						$	800,745

(3). On April 23, 2008, Beijing Gas entered into an agreement to acquire 100% equity interest in Tongshan Hengxin Jiaye Natural Gas Co., Ltd. (“Tongshan Gas”), for a purchase price of $4,660,000 (RMB 32,600,000). Tongshan is a regional natural gas distributor and developer of natural gas distribution networks in Jiangsu province of PRC. As of December 31, 2010, the Company has not finished the registration of equity transfer with Tongshan City Industrial and Commercial Administration. Therefore, acquisition payments of $3,219,181 for Tongshan Gas was classified as investment as of date.

(4). The investment of $30,249 (RMB 200,000) with China Construction Bank was a long-term investment fund.

7. PROPERTY, PLANT AND EQUIPMENT

Property, Plant, and Equipment consisted of the follows at December 31, 2010 and 2009:-

12/31/2010	At Cost		Accumulated Depreciation		Net
Gas Pipelines	$	44,512,342	$	2,563,156	$	41,949,186
Motor Vehicles		6,067,524		1,873,107		4,194,417
Machinery & Equipment		1,542,016		347,088		1,194,928
Buildings		2,316,729		271,630		2,045,099
Leasehold Improvements		475,099		69,242		405,857
Office Equipment		256,419		117,424		138,995
Total	$	55,170,129	$	5,241,647	$	49,928,482

F-22

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

12/31/2009	At Cost		Accumulated Depreciation		Net
Gas Pipelines	$	43,518,519	$	2,228,672	$	41,289,847
Motor Vehicles		5,775,903		1,506,012		4,269,891
Machinery & Equipment		1,482,599		267,076		1,215,523
Buildings		1,005,517		176,335		829,182
Leasehold Improvements		80,113		59,409		20,704
Office Equipment		238,673		91,809		146,864
Total	$	52,101,324	$	4,329,313	$	47,772,011

Gas pipelines purchased prior to 2008 were depreciated over their 25 years useful lives. Starting from 2008, the Company purchased new quality of pipelines under a 50 years warranty. The new gas pipelines were depreciated over their 50 years useful lives.

Depreciation expenses included in the consolidated statements of income for the twelve months ended December 31, 2010 and 2009 were $912,334 and $1,179,860 respectively.

8. GOODWILL

Goodwill was related to the acquisitions of Beijing Chenguang Gas Co., Ltd. (“Chengguang Gas”), Yuxian Weiye Gas Co., Ltd. (“Yuxian Gas”) and Guannan Weiye Gas Co., Ltd. (“Guannan Gas”). Management annually reviewed the carrying value of goodwill using the sum of the discounted cash flows to determine if an impairment charge is necessary. The Company has determined no impairment to goodwill as of date.

	12/31/2010		12/31/2009
Yuxian Gas	$	10,954	$	10,954
Guannan Gas		409,963		409,963
Chengguang Gas		1,257,058		1,257,058
	$	1,677,975	$	1,677,975

9. INTANGIBLE ASSETS

Intangible assets consisted of the follows at December 31, 2010 and 2009:-

12/31/2010	At Cost		Accumulated Amortization		Net
Land Use Rights	$	559,082	$	69,649	$	489,433
Franchises		405,214		372,035		33,179
Accounting Software		39,334		28,216		11,118
	$	1,003,630	$	469,900	$	533,730

F-23

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

12/31/2009	At Cost		Accumulated Amortization		Net
Land Use rights	$	543,117	$	52,318	$	490,799
Franchises		402,211		371,740		30,471
Accounting Software		38,858		20,404		18,454
	$	984,185	$	444,462	$	539,724

Land use rights represent the right to use and develop land in accordance to zoning laws granted by the local PRC government less accumulated amortization. Under PRC law, the company is permitted to sell, transfer, or mortgage its land use rights.

Under exclusive franchises agreements between the Company and PRC local government and entities in charge of gas utility, the Company operated as a local natural gas distributor in a city or county. Amortization expenses included in the consolidated statements of income for the twelve months ended December 31, 2010 and 2009 were $25,438 and $32,306 respectively.

10. LOANS

a. SHORT-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			12/31/2010		12/31/2009
China Minsheng Banking Corp., Ltd. - Pinganli Branch	11/15/2011		6.67	%	$	1,058,713	$	-
Bank of Dalian - Beijing Branch	12/14/2011		4.63	%		4,537,343		-
Bank of Communications - Zhongguancun Branch	12/14/2011		5.94	%		2,268,671		-
Bank of Dalian - Beijing Branch	12/24/2010		5.31	%		-		2,925,174
Total					$	7,864,727	$	2,925,174

The loan provided by China Minsheng Bank Corp., Ltd. was guaranteed by the shareholder and CEO Mr. Liu Yuchuan.

The loans provided by Bank of Dalian were secured by the Company’s subsidiary Chengguang Gas’ registered capital of $5,329,804 (RMB 35,239,600), CEO Mr. Liu Yuchuan and COO Mr. Zhou Zhicheng’s personal home properties, which have been appraised at total fair market value of $933,254 (RMB 6,380,854).

b. LONG-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			12/31/2010		12/31/2009
Bank of Communications - Zhongguancun Branch	12/14/2011		5.94	%	$	-	$	4,387,761
China Development Bank - Beijing Branch	12/24/2012		5.40	%		3,024,895		2,193,880
Total					$	3,024,895	$	6,581,641

The Company obtained the loans from Bank of Communications and China Development Bank via a collateralized agent Zhongyuan Guoxin Credit Guarantee Co., Ltd (“Guarantor”). Guarantor guaranteed to the Banks the entire principal and accrued interest. The Company pledged all Beijing Gas’ subsidiaries and deposited $1,028,464 (RMB 6,800,000), which was classified as non-current asset deposits, to the guarantor, and was required to pay 2% of the outstanding loans as financial service to the guarantor per annum. Because the Company lacked the favorable credit history to directly establish credit facility with the banks, the pursuance of a credit collateralization from guarantor was a financing solution of choice.

F-24

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

11. OTHER PAYABLES

(a).          Current other payables consisted of the following at December 31, 2010 and 2009:-

Ref.			12/31/2010		12/31/2009
	(1)	Amount due to Employees	$	954,455	$	1,219,131
	(2)	Tax Payable		692,861		695,890
	(3)	Payables to Subcontractors		2,044,607		2,247,036
	(4)	Payable outstanding for the acquisition of Baishan Gas Co., Ltd.		-		2,177,514
		Total	$	3,691,923	$	6,339,571

(1). Amounts due to employees included accrual payroll, welfare payable, continued education training program cost and individual travel advance. They were all unsecured, interest free, and have no fixed repayment terms.

(2).      The tax payable consisted of value added tax, sales tax, income tax and local tax payables.

(3).      All the payables to subcontractors were unbilled liabilities.

(4) The outstanding payment was related to the acquisition of Baishan Gas Co., Ltd.’s assets on July 9, 2007.

(b).          Non-current other payables at December 31, 2010 and 2009:-

Ref.			12/31/2010		12/31/2009
	(1)	Payable outstanding for the acquisition of Baishan Gas Co., Ltd.	$	1,859,499	$	-
		Total	$	1,859,499	$	-

(1). After assessment of the installment, the Company did not believe the obligation to be satisfied within one year from December 31, 2010. Therefore, the Company reclassified this payable to long-term liability.

12. CONVERTIBLE BONDS AND BOND WARRANTS

a.      $5,349,982 Convertible Bond with 3,451,601 Detachable Warrants

On November 30, 2009, the Company completed a financing transaction with certain purchasers issuing (i) $5,349,982 of the 8% senior secured convertible notes (the “Bonds”) with conversion price of $0.62 to purchase an aggregate of 8,629,003 shares of the Company’s common stock and (ii) 3,451,601 warrants to purchase an aggregate of 3,451,601 shares of the Company’s common stock, which will expire in November 30, 2012 (both the “Bonds” and “Warrants”)

b.      $692,984 Convertible Bond with 447,086 Detachable Warrants

On December 23, 2009, the Company completed a financing transaction with certain purchasers issuing (i) $692,984 of the 8% senior secured convertible notes (the “Bonds”) with conversion price of $0.62 to purchase an aggregate of 1,117,716 shares of the Company’s common stock and (ii) 447,086 warrants to purchase an aggregate of 447,086 shares of the Company’s common stock, which will expire in December 23, 2012 (both the “Bonds” and “Warrants”)

F-25

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Pledge Agreement and Guaranty

The notes are secured by the pledge of 100% of the shares of the Company’s wholly owned subsidiary Gas Investment China Co., Ltd. and a guaranty from Mr. Liu Yuchan, the chairman of the board of directors and CEO of the Company.

Event of Default

Upon an event of default in any payment of interest or principal of the bonds, the principal, accrued and unpaid interest, and any additional amounts owing in respect of the bonds, will be due and payable at the option of the bondholders. In addition, the bondholders have the right to convert these notes and then all accrued and unpaid interest at any time.

Redemption

Bondholders may require the Company to repurchase the notes in whole or in part at an amount equal to 100% of the aggregate principal amount of the notes plus a premium such that the total cash yield to maturity of the note is 15% per annum, upon the occurrence of any change of control transaction or if the Company’s common stock ceases to be quoted for trading or listed for trading on either the OTC Bulletin Board or a subsequent market and such delisting is not cured within 30 days.

The Company has the right to redeem either 50% or 100% of the outstanding principal amount of these notes on or after one year from the issuance days.

The convertible bonds payable, net consisted of the followings:-

			12/31/2010
Ref.			5.3M Bonds			692K Bonds			Total
	(1)	Convertible Bonds Payable - principal	$	5,349,982		$	692,984		$	6,042,966
	(2)	Less: Interest Discount - Warrants		(178,950	)		(44,417	)		(223,367	)
	(3)	Less: Interest Discount - Beneficial Conversion Feature		(869,270	)		(223,252	)		(1,092,522	)
	(4)	Less: Bond Discount - Issuance Cost		(503,766	)		(91,382	)		(595,148	)
	(5)	Accretion of Interest Discount - Warrants		53,545			12,034			65,579
	(6)	Accretion of Interest Discount - Beneficial Conversion Feature		869,270			223,252			1,092,522
	(7)	Accretion of Bond Discount - Issuance Cost		150,735			24,758			175,493
	(8)	Accretion of Interest Discount - Redemption		336,168			39,426			375,594
	(9)	Conversion of Convertible Bonds into Common Stock		(200,000	)		-			(200,000	)
		Convertible Bonds Payable, net	$	5,007,714		$	633,403		$	5,641,117

F-26

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

			12/31/2009
Ref.			5.3M Bonds			692K Bonds			Total
	(1)	Convertible Bonds Payable - principal	$	5,349,982		$	692,984		$	6,042,966
	(2)	Less: Interest Discount - Warrants		(178,950	)		(44,417	)		(223,367	)
	(3)	Less: Interest Discount - Beneficial Conversion Feature		(869,270	)		(223,252	)		(1,092,522	)
	(4)	Less: Bond Discount - Issuance Cost		(503,766	)		(91,382	)		(595,148	)
	(5)	Accretion of Interest Discount - Warrants		3,804			236			4,040
	(6)	Accretion of Interest Discount - Beneficial Conversion Feature		144,878			12,403			157,281
	(7)	Accretion of Bond Discount - Issuance Cost		10,709			485			11,194
	(8)	Accretion of Interest Discount - Redemption		23,884			773			24,656
		Convertible Bonds Payable, net	$	3,981,271		$	347,830		$	4,329,101

  (1).          The principal amounts listed above represent the face amount of the convertible notes.

(2). The proceeds were allocated between the convertible bonds and warrants based on their relative fair value. For more information pertaining the calculation of fair value of convertible bonds detachable warrants, see Note 13 Capital Stock.

(3). Because the conversion price of bonds is $0.62, which was lower than the fair market value of common stock at issuance day, beneficial conversion feature was applied.

(4). The issuance cost consisted of commission to placement agent and legal expense.

(5). The interest discount of warrants was amortized over the whole period applying effective annual interest rate.

(6). The bonds were convertible at the option of the holders into shares of common stock. However, Rule 144 minimum of six months holding period requirement for a resale of securities was required, therefore, the beneficial conversion feature was amortized over six months period.

(7). The debt issuance cost was amortized over 36 months period applying effective annual interest rate.

(8). Based on 15% per annum redemption rate, the redemption values were determined to be $1,123,496 and $145,527 for the $5,349,982 and $692,984 convertible bonds respectively.

(9). Principle of $200,000 was converted into 322,581 shares common stock on August 24, 2010

Included in interest expense of $2,706,784, was $483,437 convertible bonds coupon expense and $1,512,016 non-cash flow amortization expense of convertible bonds.

13. CAPITAL STOCK

The authorized capital stock consists of (i) 250,000,000 shares of common stock, par value $0.001 per share, of which 27,156,617 shares are issued and outstanding, and (ii) 100,000,000 shares of preferred stock, par value $0.001 per share. The preferred stock consists of (a) series A convertible preferred stock, with 20,000,000 shares authorized and 0 shares are issued and outstanding; (b) series B convertible preferred stock, with 5,000,000 shares authorized and 4,590,094 shares are issued and outstanding; and (c) series B-1 convertible preferred stock, with 3,000,000 shares authorized and 95,418 shares are issued and outstanding.

F-27

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

The following is a summary of the material terms of its capital stock. This summary is subject to and qualified in its entirety by its Articles of Incorporation, as amended and corrected, certificates of designations for its series A, series B, and series B-1 convertible preferred stock, its by-laws and by the applicable provisions of Utah law.

Common Stock

The Company is authorized to issue 250,000,000 shares of common stock, with a par value of $0.001. There are 27,156,617 shares of common stock issued and outstanding at December 31, 2010. All shares of common stock have one vote per share on all matters including election of directors, without provision for cumulative voting. The common stock is not redeemable and has no conversion or preemptive rights. The common stock currently outstanding is validly issued, fully paid and non-assessable. In the event of liquidation of the company, the holders of common stock will share equally in any balance of the company’s assets available for distribution to them after satisfaction of creditors and preferred shareholders, if any. The holders of common stock are entitled to equal dividends and distributions per share with respect to the common stock when, as and if, declared by the board of directors from funds legally available.

Preferred Stock

In addition to the 250,000,000 shares of common stock, the Company is authorized to issue 100,000,000 shares of preferred stock, with a par value of $0.001 per share. Shares of the preferred stock may be issued from time to time in one or more classes or series, each of which class or series shall have such distinctive designation or title as shall be fixed by the board of directors prior to the issuance.

On August 30, 2006, the Company’s board of directors designated 20,000,000 shares of its preferred stock as series A convertible preferred stock and 5,000,000 shares of its preferred stock as series B convertible preferred stock. On August 31, 2006, the Company filed certificates of designations for the series A and series B convertible preferred stock with the Office of the Secretary of State of Utah. On September 6, 2006, the board of directors amended the designations of the Series B convertible preferred stock and the Company filed an amended certificate of designations for the Series B convertible preferred stock with the Office of the Secretary of State of Utah. The board of directors created the series A convertible preferred stock to allow the Company to consummate the share exchange transaction with the Gas (BVI) Shareholders and the series B convertible preferred stock in connection with its private financing transactions. Each of the shares of series A convertible preferred stock was automatically converted into one share of its common stock upon the effectiveness of its reverse stock-split on November 17, 2006. On September 12, 2007, the Company’s board of directors designated 3,000,000 shares of its preferred stock as series B-1 convertible preferred stock with the same right and privilege as series B convertible preferred stock, and 95,418 shares of series B-1 preferred stock were issued in connection with the September financing transaction. Therefore, at December 31, 2010, the Company has no shares of series A convertible preferred stock issued and outstanding, and has 4,590,094 and 95,418 shares of series B and series B-1 convertible preferred stock issued and outstanding respectively.

Conversion

The Company issued 14,361,646 of its common shares upon the automatic conversion of its series A convertible preferred shares after the 304.44-for-1 reverse stock-split on November 17, 2006. The Company no longer has any series A convertible preferred shares outstanding.

Each share of the series B convertible preferred stock will become convertible into common stock, at the option of its holder after the 304.44-for-1 reverse stock-split, based on the then applicable conversion rate, which is initially one share of series B convertible preferred stock for one share of common stock.

Financing Transactions

F-28

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 200

The tabulation below presents the financial transactions summary occurred in the years 2006 and 2007:-

 

	Financial Transactions
	9/7/2006			10/20/2006			5/15/2007			9/7/2007
Gross proceeds	$	6,876,800		$	2,404,800		$	3,000,000		$	18,766,700
Used to Purchase Shell		(675,000	)		-			-			-
Commissions to Placement Agent		(673,786	)		(235,000	)		(265,867	)		(1,241,805	)
Legal Counsel & Related Expenses		(426,978	)		-			(146,374	)		(232,028	)
Paid to Transfer Agent		-			(10,000	)		-			-
Used to Purchase Back Warrants A & B		-			-			-			(3,500,000	)
Net proceeds	$	5,101,036		$	2,159,800		$	2,587,759		$	13,792,867

The following table depicts the issued and outstanding shares of Common Stock, Preferred Stock, and Warrants at December 31, 2010.

	Authorized Shares		Shares issued and outstanding
Common Stock		250,000,000		27,156,617
Convertible Preferred Stock A		10,000,000		-
Convertible Preferred Stock B		5,000,000		4,590,094
Convertible Preferred Stock B-1		3,000,000		95,418

	Strike Price	Contractual Life	ExpirationDate	Shares issued and outstanding	Weighted Average Fair Value
Series A Warrants	$3.84	60 Months	9/6/2011	241,708	$0.70
Series C Warrants	$3.38	60 Months	9/6/2011	3,083,589	$0.81
Series G Warrants	$3.84	48 Months	9/6/2011	109,489	$0.44
5.3 M Convertible Bonds Detachable Warrants	$0.744	36 Months	11/30/2012	3,451,601	$0.05
692K Convertible Bonds Detachable Warrants	$0.744	36 Months	12/23/2012	447,086	$0.11

(a).          271,074 and 271,074 shares Series F and R warrants have been expired on September 6, 2010.

(b).          100,000 shares warrants to IR firm CCG Elite have been expired on November 1, 2010.

The Company used the Black-Scholes model to calculate the values of Warrants. The following shows the assumptions that were employed in the model:-

F-29

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

	Warrants A	Warrants C	Warrants G	5.3M CB Warrants	692K CB Warrants
Weighted average fair value	$0.70	$0.81	$0.44	$0.05	$0.11
Strike price	$3.84	$3.38	$3.84	$0.744	$0.744
Risk-free interest rate	4.18%	4.18%	4.18%	1.12%	1.51%
Expected volatility	40.00%	40.00%	40.00%	12.84%	12.84%
Years to maturity	5.00	5.00	4.00	3.00	3.00

Since there is no net cash settlement arrangement for the warrants, they should be classified as equity instrument in accordance with EITF 00-19. Thus, subsequent changes in fair value should not be recognized.

F-30

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Total Capitalization

The following table depicts an analysis of total capitalization for the issuance of Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional Paid in Capital at December 31, 2010:

	Preferred Stock B				Preferred Stock B-1				Common Stock
Name of Shareholders	Number of Shares outstanding		Capital		Number of Shares outstanding		Capital		Number of Shares outstanding		Capital		Additional Paid in Capital		% of Equity Holdings
Manager / Insider		-	$	-		-	$	-		12,653,661	$	12,653	$	4,064,862		47	%
Investors		4,590,094		4,590		95,418		95		14,502,956		14,503		25,919,150		53	%
Beneficial Conversion Feature		-		-		-		-		-				8,094,814		-
		4,590,094	$	4,590		95,418	$	95		27,156,617	$	27,156	$	38,078,826		100	%

F-31

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

14. INCOME TAX

January 1, 2008, the PRC government implemented a new income tax laws for all enterprises. The new law imposed a 25% income tax rate on Company’s subsidiary Beijing Gas. As such, Beijing Gas provided a $778,480 income tax expense for the year ended December 31, 2008. Subsequently, in 2009, the Beijing was granted by the PRC government a 10% income tax exemption. The exemption is the result of Beijing Gas new recognition as a high-tech green energy enterprise. In accordance with this exemption, Beijing Gas will enjoy a 15% tax rate. Consequently, the PRC government has refunded $229,527, (a 10% income tax provision) to Beijing Gas from its 2008 payment. The Company has accounted for this transaction as a reduction of its 2009 income tax expense.

The following table details the difference between the actual tax provisions and the amounts of tax exemption obtained from PRC government for the twelve month periods ended December 31, 2010 and 2009 respectively.

	12/31/2010		12/31/2009
Provision for income tax - PRC subsidiaries	$	1,200,096	$	1,324,184
Tax exemption - granted by PRC government		-		(229,527	)
Income tax	$	1,200,096	$	1,094,657

Income before taxes and provision for taxes consisted of the following for the twelve month periods ended December 31, 2010 and 2009:-

	12/31/2010			12/31/2009
Income (loss) before taxes:
US	$	(2,382,270	)	$	(523,809	)
BVI		(70,824	)		(524,994	)
PRC		7,695,295			6,191,044
Total income before tax	$	5,242,201		$	5,142,241
Provision for taxes:
US Federal	$	-		$	-
US State		-			-
PRC		1,200,096			1,094,657
Total provision for taxes	$	1,200,096		$	1,094,657
Effective tax rate		22.90	%		21.29	%

15. SEGMENT INFORMATION

The Company has contracted with customers usually in two revenue segments altogether, one is for the construction and installation of gas facilities and another one is the subsequent sales of natural gas to the customers through the gas facilities the Company constructs. However, the respective gas facilities contracts and gas supply contracts have separately provided for the basis of revenue recognition and distinctive from each other for the relevant cost-and-revenue to be incurred and hence separate calculation and subsequent payment of fees for respective business without any interdependence on each other in this respect.

For management purposes, the company is currently organized into two major operating divisions: (a) sales of natural gas and (b) installation of gas facilities/construction. These principal operating activities are the basis on which the Company reports its primary segment information.

F-32

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Financial Position Segment Report
As of December 31, 2010
	Gas Distribution		Gas Pipeline Installation		Shell, BVIs, & Eliminations		Total
Assets
Current Assets	$	10,911,426	$	6,825,815	$	1,480,749	$	19,217,990
Non-Current Assets		31,563,653		50,456,168		3,490,726		85,510,547
Total Assets		42,475,079		57,281,983		4,971,475		104,728,537
Liabilities
Current Liabilities		3,202,219		21,202,306		-		24,404,525
Non-current Liabilities		1,381,096		9,144,415		-		10,525,511
Total Liabilities		4,583,315		30,346,721		-		34,930,036
Net Assets		37,891,764		26,935,262		4,971,475		69,798,501
Liabilities & Equities	$	42,475,079	$	57,281,983	$	4,971,475	$	104,728,537

Operation Result Segment Report
For the year ended December 31, 2010
	Gas Distribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total
Sales Revenue	$	27,358,655		$	17,114,639		$	(12,299,046	)	$	32,174,248
Cost of Revenue		25,736,411			6,373,548			(12,299,046	)		19,810,913
Gross Profit		1,622,244			10,741,091			-			12,363,335
Operating Expense		575,459			3,810,189			690,452			5,076,100
Operating Income/(Loss)		1,046,785			6,930,902			(690,452	)		7,287,235
Other Income/(Loss)		(268,337	)		218,338			(1,995,035	)		(2,045,034	)
Earnings before tax		778,448			7,149,240			(2,685,487	)		5,242,201
Income tax		(117,841	)		(1,082,255	)		-			(1,200,096	)
Gain/(loss) from discontinued operation, net of tax		-			-			(442	)		(442	)
Net Income	$	660,607		$	6,066,985		$	(2,685,929	)	$	4,041,663

F-33

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

Financial Position Segment Report
As of December 31, 2009
	Gas Distribution		Gas Pipeline Installation		Shell, BVIs, & Eliminations		Total
Assets
Current Assets	$	12,361,628	$	8,090,196	$	2,247,402	$	22,699,226
Non-Current Assets		27,839,832		42,538,606		-		70,378,438
Total Assets		40,201,460		50,628,802		2,247,402		93,077,664
Liabilities
Current Liabilities		1,695,239		16,762,395		441,426		18,899,060
Non-current Liabilities		1,002,095		9,908,647		-		10,910,742
Total Liabilities		2,697,334		26,671,042		441,426		29,809,802
Net Assets		37,504,126		23,957,760		1,805,976		63,267,862
Liabilities & Equities	$	40,201,460	$	50,628,802	$	2,247,402	$	93,077,664

Operation Result Segment Report
For the year ended December 31, 2009
	Gas Distribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total
Sales Revenue	$	21,881,002		$	14,320,249		$	(8,609,750	)	$	27,591,501
Cost of Revenue		21,001,941			5,628,157			(8,512,598	)		18,117,500
Gross Profit		879,061			8,692,092			(97,152	)		9,474,001
Operating Expense		329,942			3,262,447			815,136			4,407,525
Operating Income/(Loss)		549,119			5,429,645			(912,288	)		5,066,476
Other Income/(Loss)		6,959			68,806			-			75,765
Earnings before tax		556,078			5,498,451			(912,288	)		5,142,241
Income tax		(100,539	)		(994,118	)		-			(1,094,657	)
Net Income	$	455,539		$	4,504,333		$	(912,288	)	$	4,047,584

The Company’s operations are located in the PRC. All revenue is from customers in the PRC. All of the Company’s assets are located in the PRC. Sales of natural gas and gas pipeline construction are carried out in the PRC. Accordingly, no analysis of the Company’s sales and assets by geographical market is presented. No other measures of segment profit or loss and assets have been provided or reviewed by the company’s chief operating decision maker.

F-34

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

16. EARNINGS PER SHARE

Components of basic and diluted earnings per share were as follows:

	Ref		2010		2009
Net Income			$	4,041,663	$	4,047,584
Preferred Dividends				-		-
Constructive Preferred Dividends				-		-
Income Available to Common Stockholders for Basic EPS			$	4,041,663	$	4,047,584
Interest Expense for Convertible Bonds, net of tax				1,995,453		234,180
Income Available to Common Stockholders for Diluted EPS			$	6,037,116	$	4,281,764
Original Shares				26,769,313		25,269,313
Addition to Common Stock				244,486		966,667
Basic Weighted Average Shares Outstanding				27,013,799		26,235,980
Potentially Dilutive Securities:
Addition to Common Stock from Conversion of Preferred Stock B		(1)		-		4,579,839
Addition to Common Stock from Conversion of Preferred Stock B-1		(2)		-		-
Addition to Common Stock from Conversion of Convertible Bonds		(3)		-		-
Addition to Common Stock from Exercise of Warrants		(4)		-		-
Diluted Weighted Average Shares Outstanding				27,013,799		30,815,819
Earnings Per Share
-Basic			$	0.15	$	0.15
-Diluted			$	0.15	$	0.14
Weighted Average Shares Outstanding
-Basic				27,013,799		26,236,980
-Diluted				27,013,799		30,815,819

(1). The application of conversions’ of preferred stock B to common stock was anti-dilutive for the year ended December 31, 2010.

(2). The application of conversions of preferred stock B-1 to common stock was anti-dilutive for the year ended December 31, 2010.

(3). The average price of the Company’s common stock was $0.66 for the year ended December 31, 2010, which was higher than the conversion price $0.62 of the convertible bonds. However the conversion of the convertible bonds to common stock would have been anti-dilutive; therefore, they have been excluded from diluted earnings per share.

(4). The exercise of warrants to common stock was anti-dilutive for the year ended December 31, 2010.

F-35

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of and for the years ended December 31, 2010 and 2009

17.              SHARE BASED COMPENSATION

For the year ended December 31, 2010, the Company recorded an expense of $36,000 under the general and administrative account for the issuance of 50,000 and 25,000 shares common stock at $0.52 and $0.40 per share on July 7, 2010 and October 15, 2010 respectively. The shares were issued to investor relation firm for services rendered in connection with the investor relationship activities.

18.              DISCONTINUED OPERATION

The Company closed operation of its wholly owned subsidiary Guyuan Gas Co., Ltd. in July 2010. The Company has accounted for the disposition of the assets of discontinued operation in accordance with SFAS 144 (FASB ASC360), “Accounting for the Impairment or Disposal of Long-Lived Assets”. A loss of $442 was recorded in the Company’s statement of operations for the twelve months ended December 31, 2010. The following table is a summary of Guyuan Weiye Gas Co., Ltd.’s financial position and result of operations as of and for the twelve months ended December 31, 2010.

Guyuan Weiye Gas Co., Ltd.
Condensed Balance Sheet			Condensed Statement of Income
Assets			Sales revenue	$	-
Current assets	$	28,814	Cost of sales		-
Non-current assets		-	Gross Profit		-
Total assets		28,814
			Operating Income		-
Liabilities
Current liabilities		-	Income tax		-
Total liabilities		-	Loss from discontinued operation, net of tax		(442	)
Net Assets	$	28,814	Net Income	$	(442	)

F-36