Unassociated Document

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x	Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2009

o	Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 000-51364

SINO GAS INTERNATIONAL HOLDINGS, INC.

(Name of small business issuer in its charter)

Utah	32-0028823
(State or other jurisdiction of incorporation or organization)	(I.R.S. 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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 ¨ No ¨

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

As of May 18, 2009, the Registrant had 25,269,313 shares of common stock outstanding.

Sino Gas International Holdings, Inc.

Table of Contents

		Page
PART I -	FINANCIAL INFORMATION	2

Item 1.	Financial Statements	2

	Notes to Financial Statements (Unaudited)	8

Item 2.	Management's Discussion and Analysis or Plan of Operation	37

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	43

PART II -	OTHER INFORMATION	44

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Submission of Matters to a Vote of Security Holders.	44

Item 5.	Other Information	44

Item 6.	Exhibits	44

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SINO GAS INTERNATIONAL HOLDINGS, INC

CONSOLIDATED REVIEWED FINANCIAL STATEMENTS

MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in US dollars)

Sino Gas International Holdings, Inc.

CONTENTS	PAGES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		1

CONSOLIDATED BALANCE SHEETS		2 – 3

CONSOLIDATED STATEMENTS OF INCOME		4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY		5 – 6

CONSOLIDATED STATEMENTS OF CASH FLOWS		7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8 – 36

To:	The Board of Directors and Stockholders of

Sino Gas International Holdings, Inc.

Report of Independent Registered Public Accounting Firm

We have reviewed the accompanying consolidated interim balance sheets of Sino Gas International Holdings, Inc. as of March 31, 2009 and December 31, 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three-month periods ended March 31, 2009 and 2008. These consolidated interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

South San Francisco, California	Samuel H. Wong & Co., LLP
May 2, 2009	Certified Public Accountants

SINO GAS INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

		3/31/2009		12/31/2008
ASSETS

Current Assets	Notes
Cash & cash equivalents	2(e)	$	1,979,435	$	3,027,543
Restricted cash	3		229,937		234,279
Notes receivable			50,676		109,422
Accounts receivable	2(f),4		5,936,238		6,013,621
Advance to suppliers	2(g)		3,951,591		3,024,518
Other receivables	2(f)		3,107,162		3,028,368
Inventory			311,620		347,341
Prepayment and others			305,882		370,593
Total Current Assets			15,872,542		16,155,686

Non-Current Assets
Investment	2(h),5		5,165,490		5,159,009
Property, plant & equipment, net	2(j),6		32,754,404		33,033,118
Construction in progress	2(l)		18,735,603		17,155,473
Intangible assets, net	2(k),7		2,194,260		2,193,252
Total Non-current Assets			58,849,757		57,540,852

Total Assets		$	74,722,299	$	73,696,538

LIABILITIES & STOCKHOLDERS' EQUITY

LIABILITIES

Current Liabilities
Bank loans	8	$	2,191,189	$	2,188,439
Accounts payable			6,443,994		6,350,092
Other payables	9		5,911,487		6,174,871
Accrued liabilities			188,552		189,090
Unearned revenue	2(m)		1,741,741		938,696
Total Current Liabilities			16,476,962		15,841,188

Total Liabilities		$	16,476,962	$	15,841,188

See Accompanying Notes to Financial Statements and Accountant’s Report

SINO GAS INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

	Notes	3/31/2009		12/31/2008
STOCKHOLDERS' EQUITY

Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,579,839 shares issued and outstanding as of March 31, 2009 and December 31, 2008	10	$	4,580	$	4,580

Additional paid in capital - Preferred Stock B			5,323,972		5,323,972
Additional paid in capital - Warrants Series: A, B, J, C, D			311,110		311,110

Preferred Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares issued and outstanding as of March 31, 2009 and December 31, 2008	10		95		95

Additional paid in capital - Preferred Stock B-1			132,662		132,662
Additional paid in capital - Beneficial Conversion Feature			7,002,292		7,002,292

Common Stock US$0.001 par value; 250,000,000 shares authorized; 25,269,313 shares issued and outstanding as of March 31, 2009 and December 31, 2008	10		25,269		25,269

Additional paid in capital - Common Stock			23,196,304		23,196,304
Additional paid in capital - Warrants Series: E, G			47,946		47,946
Additional paid in capital - Warrants Series: F, R			107,652		107,652

Statutory reserve	2(v)		3,956,728		3,956,728
Retained earnings			10,415,533		10,069,896
Accumulated other comprehensive income	2(x)		7,721,194		7,676,844
Total Stockholders' Equity			58,245,337		57,855,350

Total Liabilities & Stockholders' Equity		$	74,722,299	$	73,696,538

See Accompanying Notes to Financial Statements and Accountant’s Report

SINO GAS INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Stated in U.S. Dollars)

	Notes	3/31/2009			3/31/2008
Sales revenues		$	5,037,692		$	4,342,116
Cost of revenues			(3,773,212	)		(2,975,472	)
Gross Profit			1,264,480			1,366,645

Operating Expense
Selling and marketing expenses			203,072			181,704
General and administrative expenses			512,447			833,451
Total operating expense			715,519			1,015,154

Operating Income			548,961			351,490

Other Income/(Expense)
Investment income	2(q)		-			-
Other income			161			-
Other expense	17		(5,729	)		(845	)
Interest income			1,850			33,166
Interest expense			(41,452	)		(60,467	)
Total other income/(expense)			(45,170	)		(28,146	)

Earnings from continued operation			503,791			323,344
Income tax	2(r),11		(158,155	)		(174,017	)
Gain/(Loss) from discontinued operation, net of tax	15		-			-

Net income		$	345,637		$	149,327

Constructive Preferred Dividend - Amortization of Beneficial Conversion			-			-
Income Available to Common Stockholders		$	345,637		$	149,327

Earnings per share	2(z),16
Basic		$	0.014		$	0.009
Diluted		$	0.012		$	0.007

Weighted Average Shares Outstanding	16
Basic			25,269,313			17,165,894
Diluted			29,944,570			22,017,096

See Accompanying Notes to Financial Statements and Accountant’s Report

SINO GAS INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

	Preferred Stock B												Preferred Stock B-1
	Shares Outstanding			Amount			Additional Paid In Capital-Preferred Stock B		Additional Paid in Capital-Wa rrants Series: A, B, J, C, D		Additional Paid in Capital-Beneficial Conversion Feature		Shares Outstanding		Amount		Additional Paid In Capital- Preferred Stock B-1		Additional Paid in Capital-Beneficial Conversion Feature
Balance, January 1, 2008		4,971,859			4,972			5,323,972		311,110		6,920,263		95,418		95		132,662		82,029
Net Income		-			-			-		-		-		-		-		-		-
Conversion of Preferred Stock B to Common Stock		(392,020	)		(392	)		-		-		-		-		-		-		-
Issuance of Common Stock		-			-			-		-		-		-		-		-		-
Appropriation of Retained Earnings		-			-			-		-		-		-		-		-		-
Foreign Currency Translation Adjustment		-			-			-		-		-		-		-		-		-
Balance, December 31, 2008		4,579,839			4,580			5,323,972		311,110		6,920,263		95,418		95		132,662		82,029

Balance, January 1, 2009		4,579,839			4,580			5,323,972		311,110		6,920,263		95,418		95		132,662		82,029
Net Income		-			-			-		-		-		-		-		-		-
Conversion of Preferred Stock B to Common Stock		-			-			-		-		-		-		-		-		-
Issuance of Common Stock		-			-			-		-		-		-		-		-		-
Appropriation of Retained Earnings		-			-			-		-		-		-		-		-		-
Foreign Currency Translation Adjustment		-			-			-		-		-		-		-		-		-
Balance, March 31, 2009		4,579,839			4,580			5,323,972		311,110		6,920,263		95,418		95		132,662		82,029

See Accompanying Notes to Financial Statements and Accountant’s Report

SINO GAS INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

	Common Stock
	Shares Outstanding		Amount		Additional Paid In Capital		Additional Paid in Capital-Warrants Series: E,G		Additional Paid in Capital-Warrants Series: F,R		Statutory Reserve		Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance, January 1, 2008		24,877,271		24,877		23,196,304		47,946		107,652		3,258,201		9,167,930			2,268,593		50,846,606
Net Income		-		-		-		-		-		-		1,600,493			-		1,600,493
Conversion of Preferred Stock B to Common Stock		392,020		392		-		-		-		-		-			-		-
Issuance of Common Stock		22		-		-		-		-		-		-			-		-
Appropriation of Retained Earnings		-		-		-		-		-		698,527		(698,527	)		-		-
Foreign Currency Translation Adjustment		-		-		-		-		-		-		-			5,408,250		5,408,250
Balance, December 31, 2008		25,269,313		25,269		23,196,304		47,946		107,652		3,956,728		10,069,896			7,676,844		57,855,350

Balance, January 1, 2009		25,269,313		25,269		23,196,304		47,946		107,652		3,956,728		10,069,896			7,676,844		57,855,350
Net Income		-		-		-		-		-		-		345,637			-		345,637
Conversion of Preferred Stock B to Common Stock		-		-		-		-		-		-		-			-		-
Issuance of Common Stock		-		-		-		-		-		-		-			-		-
Appropriation of Retained Earnings		-		-		-		-		-		-		-			-		-
Foreign Currency Translation Adjustment		-		-		-		-		-		-		-			44,351		44,351
Balance, March 31, 2009		25,269,313		25,269		23,196,304		47,946		107,652		3,956,728		10,415,533			7,721,194		58,245,337

	3/31/2009		12/31/2008		Total
Comprehensive Income
Net Income	$	345,637	$	1,600,493	$	1,946,130
Other Comprehensive Income
Foreign Currency Translation Adjustment		44,351		5,408,250		5,452,601
Total	$	389,988	$	7,008,743	$	7,398,731

See Accompanying Notes to Financial Statements and Accountant’s Report

SINO GAS INTERNATIONAL HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Stated in U.S. Dollars)

	3/31/2009			3/31/2008
Cash Flows from Operating Activities
Net Income	$	345,637		$	149,327
Depreciation expense		332,656			640,248
Amortization expense		2,267			29,532
Withdraw/(deposit) in restricted time deposits		4,342			(185,141	)
Decrease/(increase) in accounts and other receivables		57,335			(5,357,649	)
Decrease/(increase) in inventory		35,721			(38,915	)
Decrease/(increase) in prepaid expenses		(862,362	)		(831,430	)
Increase/(decrease) in accounts and other payables		633,024			(287,732	)
Cash Sourced/(Used) in Operating Activities		548,620			(5,881,760	)

Cash Flows from Investing Activities
Investment in equity		(6,481	)		1,304,154
Purchase of property, plant, and equipment		(53,942	)		(2,920,649	)
Increase of goodwill		(2,108	)		-
Purchase of other intangible asset		(1,166	)		(113,620	)
Increase in construction in progress		(1,580,130	)		(1,274,121	)
Cash Sourced/(Used) in Investing Activities		(1,643,828	)		(3,004,236	)

Cash Flows from Financing Activities
Proceeds/(settlement) of bank loans		2,749			4,385,832
Cash Sourced/(Used) in Financing Activities		2,749			4,385,832

Net increase in cash & cash equivalents for the year		(1,092,459	)		(4,500,164	)
Effect of currency translation on cash and cash equivalents		44,351			1,605,787
Cash & cash equivalents at the beginning of period		3,027,543			10,915,590
Cash & cash equivalents at the end of period	$	1,979,435			8,021,212

Supplementary cash flow information
Interest received	$	1,850		$	33,166
Interest paid	$	41,452		$	60,467
Income tax paid	$	158,115		$	323,344

See Accompanying Notes to Financial Statements and Accountant’s Report

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

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 Ltd. (“GIC”), an International Business Company incorporated in the British Virgin Islands, and its wholly-owned subsidiaries, involving an exchange of shares whereby the Company issued an aggregate of 14,361,646 shares to the shareholders of GIC in exchange for all of the issued and outstanding shares of GIC. 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 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. The Company owns and operates 37 natural gas distribution systems serving approximately 100,900 residential and five commercial and industrial customers. The Company’s facilities include approximately 710 kilometers of pipeline and delivery networks (including delivery trucks) with a daily capacity of approximately 89,000 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 PRC (“PRC GAAP”) 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.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(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, which are compiled on the accrual basis of accounting.

(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.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

(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 soon after its inception and continued to acquire and own the equity interests throughout the reporting periods. The following table depicts the identities of the consolidating subsidiaries as of March 31, 2009 and December 31, 2008.

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

USD

10,000,000

Sino Gas Construction, Ltd.

The British
Virgin Islands

1/9/2007

100

USD

50,000

Sino Gas Investment Development, Ltd.

The British
Virgin Islands

1/9/2007

100

USD

50,000

Beijing Zhong Ran Wei Ye Gas Co., Ltd.

PRC

8/29/2001

100

RMB

184,916,420

Beijing Chenguang Gas, Ltd.

PRC

10/30/2002

100

RMB

20,000,000

Guannan Weiye Gas Co., Ltd.

PRC

6/19/2003

100

RMB

9,510,000

Ningjin Weiye Gas Co., Ltd

PRC

12/3/2003

100

RMB

3,000,000

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

Yutian Zhongran Weiye Gas Co., Ltd.

PRC

12/19/2003

100

RMB

3,000,000

Xingtang Weiye Gas Co., Ltd.

PRC

2/18/2004

100

RMB

3,000,000

Wuqiao Gas Co., Ltd.

PRC

6/30/2004

100

RMB

2,000,000

Jinzhou Weiye Gas Co., Ltd.

PRC

7/19/2004

100

RMB

5,000,000

Sihong Weiye Gas Co., Ltd.

PRC

12/3/2004

100

RMB

10,000,000

Sishui Weiye Gas Co., Ltd.

PRC

12/22/2004

100

RMB

3,000,000

Langfang Weiye Dangerous Goods Transportation Co., Ltd.

PRC

3/22/2005

100

RMB

1,000,000

Linzhang Weiye Gas Co., Ltd.

PRC

7/6/2005

100

RMB

1,000,000

Peixian Weiye Gas Co., Ltd.

PRC

8/22/2005

100

RMB

5,000,000

Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd.

PRC

9/30/2005

100

RMB

2,000,000

Longyao Zhongran Weiye Gas Co., Ltd.

PRC

10/13/2005

100

RMB

3,000,000

Yuxian Jinli Gas Co., Ltd.

PRC

11/8/2005

100

RMB

9,500,000

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

Hengshui Weiye Gas Co., Ltd.

PRC

12/20/2005

100

RMB

3,000,000

Shenzhou Weiye Gas Co., Ltd.

PRC

12/23/2005

100

RMB

3,000,000

Changli Weiye Gas Co., Ltd.

PRC

12/8/2006

100

RMB

3,000,000

Chenan Chenguang Gas Co., Ltd

PRC

1/23/2007

100

RMB

1,500,000

Wuhe Weiye Gas Co., Ltd.

PRC

1/30/2007

100

RMB

3,000,000

Xinji Zhongchen Gas Co., Ltd

PRC

2/7/2007

100

RMB

3,000,000

Gucheng Weiye Gas Co., Ltd.

PRC

3/21/2007

100

RMB

3,000,000

Luquan Chenguang Gas Co., Ltd.

PRC

4/27/2007

100

RMB

2,000,000

Shijiazhuang Chenguang Gas Co., Ltd.

PRC

6/14/2007

100

RMB

2,000,000

Nangong Weiye Gas Co., Ltd.

PRC

6/25/2007

100

RMB

3,000,000

Sixian Weiye Gas Co., Ltd.

PRC

9/3/2007

100

RMB

3,000,000

Baishan Weiye Gas Co., Ltd.

PRC

7/13/2007

100

RMB

15,000,000

Guyuan Gas Co., Ltd.

PRC

12/15/2008

100

RMB

1,000,000

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

(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 and Other Receivable

Accounts and other receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company 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.

Beijing Zhongran Xiangke Oil Gas Technology Co. Ltd is the Company’s 40% owned investment and is principally engaged in sale of compressed natural gas to domestic households and industrial firms around the suburbs of Beijing as well as the suburban areas of the Hebei Province and Tianjin.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

Qujing Gas Co., Ltd. is the Company’s 39% owned investment and is principally engaged in the business of gas pipeline construction in Yunnan Province.

Place of Registration	Form of Business Structure	Registered Capital	Nominal Value of Registered Capital		Principle Activities
PRC	Sino-foreign equity joint venture	RMB 20,000,000		40%	Trading of natural gas and gas pipeline construction
PRC	Equity joint venture	RMB 30,000,000		39%	Gas pipeline construction

The Company did not record any goodwill when it acquired its equity position in Xiangke and Qujing. Accordingly, in accordance with SFAS 142, the Company has not taken an amortization expense of goodwill during the time it has carried a 40% and 39% stakes in Xiangke and Qujing respectively.

(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.

During the reporting periods, there was no impairment loss.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

(j) Plant and Equipment

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

Asset Class		Estimated Use 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 amortization and accumulated 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		40 - 50 years
Franchises		30 years
Other intangibles		3 years

(l) Construction in Progress

Construction in progress represents the cost of constructing pipelines and is stated at cost. Costs comprise 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.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

(m) 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.

(n) Financial Instruments

The carrying amounts of all financial instruments approximate fair value. The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. The carrying amounts of borrowings approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.

(o) Foreign Currency Translation

The accompanying consolidated financial statements are presented in United States dollars. The functional currency of the Company is the Renminbi (RMB). The consolidated 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.

	3/31/2009		12/31/2008

Years end RMB : US$ exchange rate		6.8456		6.8542
Average yearly RMB : US$ exchange rate		6.8466		6.9623

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.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

(p) Revenue Recognition

Revenue is recognized when services are rendered to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

Net sales consist of gas and connection fee revenue. Cost of sales include gas and connection cost. Gas connection revenue 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. Sales of natural gas are recognized when goods are delivered and title has passed.

(q) Investment Income

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

(r) 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 are 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: -

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

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.	British Virgin Islands		0.00	%
ii. Sino Gas Construction, Ltd.	British Virgin Islands		0.00	%
iii. Sino Gas Investment Development, Ltd.	British Virgin Islands		0.00	%

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 three-month ended March 31, 2009 and 2008

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

(s) Advertising

The Group expensed all advertising costs as incurred

(t) 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.

(u) Retirement Benefits

Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the statements of income as incurred.

(v) 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:

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.

(w) Statement of Cash Flows

In accordance with Statement of SFAS 95, “Statement of Cash Flows”, cash flows from the Company’s operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

(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 March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 applies to all derivative instruments and related hedged items accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). Statement 162 will become effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles."

In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

Management of the Company does not anticipate that the adoption of these six standards will have a material impact on these consolidated financial statements.

(z) Earnings Per Share

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method for warrants and the as-if method for convertible securities. Dilutive potential common shares include outstanding warrants, and convertible preferred stock.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

3. RESTRICTED CASH

Restricted Cash represents compensating balances held at banks to partially secure banking facilities in the form of loans and notes payable. The imposed restrictions dictate that funds cannot be withdrawn when there are outstanding loans and notes payable, and the funds are only allowed to be used to settle bank indebtedness. The funds deposited as compensating balances are interest bearing. The amount of cash restricted varies based on the Bank’s credit policy at the time that the Company requests for increase or extension of credit facilities.

4. ACCOUNTS RECEIVABLE

For natural gas sales, it is due when the gas is sold. Normally, most of them are settled by prepayments from the customers.

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.

Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on customer facts and economic conditions. Outstanding account balances are reviewed individually for collectibles. Account balances are charged off against the allowance after all means of collection have been exhausted and collection is improbable. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection. The Company does not have any off-balance-sheet credit exposure to its customers.

The credit and billing policy is that residential customers are billed and collected immediately, whereas industrial customers are billed and paid according to the contract terms from 10 days to one month. For the construction business, customers are billed and pay based on the percentage of completion method of the construction project.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

Accounts Receivable
	3/31/2009			12/31/2008
Gross accounts receivable	$	5,973,836		$	6,049,415
Allowance for bad debt		(37,598	)		(35,794	)
Net accounts receivable	$	5,936,238		$	6,013,621

Allowance for Bad Debt
	3/31/2009		12/31/2008
Beginning balance		35,794	$	36,760
Addition		1,804		-
Reverse		-		(966	)
Ending balance		37,598	$	35,794

Accounts Receivable Aging Report
	3/31/2009		12/31/2008
30 Days	$	2,046,928	$	4,896,066
30-60 Days		443,425		258,107
60-90 Days		1,044,211		292,988
90-180 Days		2,306,418		311,954
180-360 Days		-		205,745
>360 Days		95,255		48,760
Total	$	5,936,238	$	6,013,621

The following are the ten most significant accounts receivable at March 31, 2009:

Hebei Zhonggang Steel, Ltd.	$	754,555
Lianyun Port Development		382,814
Guannan Fangwu Construction Co., Ltd.		369,644
Xuzhou Shenyuan Real Estate Co., Ltd.		349,157
Sihong Jinwan Development Co., Ltd.		338,036
Beijing Yincheng Construction Co., Ltd.		288,603
Peixuan Jiannan Development Company		284,199
Tonghua Tongsheng Real Estate Co., Ltd.		272,465
Suqian City Ming Wei Co., Ltd.		259,014
Jiangsu Hongzhe Lake Farm		241,103
Total	$	3,539,590

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

INVESTMENT

	3/31/2009		12/31/2008
Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.	$	4,823,665	$	4,817,613
Qujing Gas Co., Ltd.		341,825		341,397
Total	$	5,165,490	$	5,159,009

PROPERTY, PLANT, AND EQUIPMENT, NET

Property, Plant, and Equipment consisted of the followings at March 31, 2009 and December 31, 2008:

At Cost	3/31/2009			12/31/2008
Gas Pipelines	$	27,602,154		$	27,859,313
Motor Vehicles		5,607,544			5,600,508
Machinery & Equipment		858,912			857,834
Buildings		1,862,509			1,568,380
Leasehold Improvements		80,522			80,101
Office Equipment		224,872			216,435
		36,236,513			36,182,572

Less: Accumulated depreciation		(3,482,109	)		(3,149,453	)
	$	32,754,404		$	33,033,118

Accumulated Depreciation	3/31/2009		12/31/2008
Gas Pipelines	$	1,714,145	$	1,532,478
Motor Vehicles		1,208,148		1,109,489
Machinery & Equipment		207,266		198,072
Buildings		227,306		193,126
Leasehold Improvements		51,676		48,325
Office Equipment		73,568		67,963
Total	$	3,482,109	$	3,149,453

Depreciation expenses included in the consolidated statements of income for the three months and twelve months ended March 31, 2009 and December 31, 2008 were $332,657 and $1,459,682, respectively.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

INTANGIBLE ASSETS

Intangible assets consisted of the following at March 31, 2009 and December 31, 2008:

At Cost	3/31/2009			12/31/2008
Land use rights	$	511,550		$	510,907
Franchises		401,718			401,214
Goodwill		1,680,083			1,677,975
Others		15,331			15,312
		2,608,683			2,605,408

Less: Accumulated Amortization		(414,423	)		(412,156	)
	$	2,194,260		$	2,193,252

Accumulated Amortization	3/31/2009		12/31/2008
Land use rights	$	32,979	$	32,938
Franchises		370,067		369,603
Goodwill		-		-
Others		11,377		9,615
Total	$	414,423	$	412,156

The Company operates as a local natural gas distributor in a city or county, known as an operation location, under an exclusive franchise agreement between the Company and the local government or entities in charge of gas utility. Franchises are the rights to develop sites in Anping and Jinzhou in China. They are stated at cost less accumulated amortization.

Goodwill is related to the acquisitions of Beijing Chenguang Gas and Guannan Gas. Management annually reviews 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.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

SHORT-TERM BANK LOAN

Name of Bank	Due Date	Interest Rate			3/31/2009		12/31/2008
Bank of Dalian	12/18/2009		6.69	%	$	2,191,189	$	2,188,439
Total					$	2,191,189	$	2,188,439

Interest expenses for the short-term bank loans were $41,452 and $187,999 for the three-month and twelve-month periods ended March 31, 2009 and December 31, 2008.

OTHER PAYABLES

Other payables consisted of the following at March 31, 2009 and December 31, 2008:

	3/31/2009		12/31/2008
Employees’ welfare payables	$	340,414	$	137,264
Amount due to employees		316,017		366,732
Tax payable		221,242		267,790
Other Payable		5,033,814		5,403,085

Total	$	5,911,487	$	6,174,871

All the amounts due to employees are unsecured, interest free, and have no fixed repayment terms.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

10.

CAPITAL STOCK

The authorized capital stock consists of (i) 250,000,000 shares of common stock, par value $0.001 per share, of which 25,269,313 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 4,579,839 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.

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 25,269,313 shares of common stock issued and outstanding at December 31, 2008. 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.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

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 March 31, 2009 and December 31, 2008, the Company has no shares of series A convertible preferred stock issued and outstanding, and has 4,579,839 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

On May 15, 2007, Vision Opportunity Master Fund, Ltd. exercised 1,094,891 shares of Series J Warrants at $2.74 per share. The Company received $3,000,000 cash gross proceeds. In consideration of exercise of Series J Warrants, 1,094,891 new Series E Warrants and 109,489 Series G Warrants were issued to Vision and placement agent Kuhns’ Brother respectively. Pursuant to the financial advisory agreement between the Company and the placement agent Kuhns’ Brother, the Company totally reimbursed $412,241 of the gross proceeds to Kuhns’ Brother, including $146,374 disbursements of Kuhns’ Brother’s legal counsel. The Company received $2,587,759 net proceeds.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

On September 7, 2007, the Company entered into a securities purchase agreement with a series of private placement investors leading by Vision Opportunity Master Fund, Ltd. for a sale of 8,340,762 shares of the Company’s common stock. The Company generated an aggregate of $18,766,700 gross proceeds. Simultaneously, the Company entered into a Warrant Purchase Agreement, Amendment and Waiver (“WPA”) with the holders of its outstanding Warrants and Series B Preferred Stock, who acquired those securities by private placement in September and October of 2006. Pursuant to the WPA, all of the Series A and Series B Warrants issued in 2006 were purchased back by the Company for $3,500,000; the exercise price of Series C Warrants was changed to $3.375; all of the Series D Warrants was purchased for a purchase price of issuing additional 770,897 shares of Series B preferred Stock; all of the outstanding Series J and Series E Warrants were cancelled; additional 271,074 Series F Warrants and 271,074 Series R Warrants were issued respectively. Among the $18,766,700 cash gross proceeds, $3,500,000 was used to purchase back the Series A and Series B Warrants issued in 2006 from private placement investors; $1,473,833 was reimbursed to the placement agent Roth Capital, including the out-of-pocket expenses and $232,028 legal counsel expense. The Company received $13,792,866 net proceeds.

Financial Transactions
	5/15/2007			9/7/2007
Gross proceeds	$	3,000,000		$	18,766,700
Commission to Placement Agent		(265,867	)		(1,241,805	)
Legal counsel expense		(146,374	)		(232,028	)
Used to purchase Warrants A & B		-			(3,500,000	)
Net proceeds	$	2,587,759		$	13,792,867

The following table depicts the issued and outstanding shares of Common Stock, Preferred Stock, and Warrants at March 31, 2009.

	Authorized Shares		Shares issued and outstanding
Common Stock		250,000,000		25,269,313
Convertible Preferred Stock A		10,000,000		-
Convertible Preferred Stock B		5,000,000		4,579,839
Convertible Preferred Stock B-1		3,000,000		95,418

	Strike Price		Contractual Life	Expiration Date	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 F Warrants		4.84	36 Months	9/6/2010		271,074		0.20
Series G Warrants		3.84	48 Months	9/6/2011		109,489		0.44
Series R Warrants		4.84	36 Months	9/6/2010		271,074		0.20
Outstanding Option		3.00	48 Months	11/1/2010		100,000		0.92

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

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

	Warrants A			Warrants C			Warrants F			Warrants G			Warrants R			Outstanding Option
Weighted-average fair value of warrants		0.70			0.81			0.20			0.44			0.20			0.92
Strike price	$	3.84		$	3.38		$	4.84		$	3.84		$	4.84		$	3.00
Risk-free interest rate		4.18	%		4.18	%		4.18	%		4.18	%		4.18	%		4.18	%
Expected volatility		40.00	%		40.00	%		40.00	%		40.00	%		40.00	%		40.00	%
Years to maturity		5.00			5.00			3.00			4.00			3.00			4.00

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

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 March 31, 2009:

	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		-		-		-		-		12,653,662		12,654		4,064,862		51	%
Minority Investor		-		-		-		-		3,428,551		3,428		747,457		9	%
Private Placement- Investor		4,579,839		4,580		95,418		95		9,187,100		9,187		24,307,327		40	%
Beneficial- Conversion Feature		-		-		-		-		-		-		7,002,292		-
		4,579,839		4,580		95,418		95		25,269,313		25,269		36,121,938		100	%

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

11.

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 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: gas pipeline construction (installation of gas facilities) and sales of piped gas. These principal operating activities are the basis on which the Company reports its primary segment information.

Balance Sheet Segment Report

As of March 31, 2009

	Gas Distribution		Gas pipeline Installation		Others		Total
Assets
Current Assets	$	11,653,889	$	3,862,349	$	356,305	$	15,872,542
Non-Current Assets		14,803,951		44,045,806		-		58,849,757
Total Assets		26,457,840		47,908,155		356,305		74,722,299

Liabilities
Current Liabilities		1,395,129		14,929,802		152,032		16,476,962
Total Liabilities		1,395,129		14,929,802		152,032		16,476,962

Net Assets	$	25,062,711	$	32,978,353	$	204,273	$	58,245,337

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

Income Statement Segment Report

For the three months ended March 31, 2009

	Gas Distribution			Gas pipeline Installation			Others			Total

Sales Revenue	$	3,813,956		$	1,223,736		$	-		$	5,037,692
Cost of Revenue		(3,643,225	)		(129,987	)		-			(3,773,212	)
Gross Profit		170,731			1,093,749			-			1,264,480

Operating Expense		(87,394	)		(559,866	)		(68,259	)		(715,519	)

Other Income / Expense		(6,177	)		(39,571	)		578			(45,170	)
Earnings before tax		77,161			494,311			(67,681	)		503,791

Income tax		(21,354	)		(136,800	)		-			(158,155	)

Net Income	$	55,807		$	357,511		$	(67,681	)	$	345,637

Balance Sheet Segment Report

As of December 31, 2008

	Gas Distribution		Gas pipeline Installation		Others		Total
Assets
Current Assets	$	11,815,718	$	3,915,982	$	423,986	$	16,155,686
Non-Current Assets		14,474,690		43,066,163		-		57,540,853
Total Assets		26,290,407		46,982,145		423,986		73,696,538

Liabilities
Current Liabilities		1,353,788		14,487,400		-		15,841,188
Total Liabilities		1,353,788		14,487,400		-		15,841,188

Net Assets	$	24,936,619	$	32,494,745	$	423,986	$	57,855,350

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

Income Statement Segment Report

For the three months ended March 31, 2008

	Gas Distribution			Gas pipeline Installation			Others			Total

Sales Revenue	$	2,987,419		$	1,354,697		$	-		$	4,342,116
Cost of Revenue		(2,545,638	)		(429,834	)		-			(2,975,472	)
Gross Profit		441,781			924,863			-			1,366,644

Operating Expense		(232,194	)		(493,412	)		(289,548	)		(1,015,154	)

Other Income / Expense		(18,061	)		(38,380	)		28,295			(28,146	)
Earnings before tax		191,526			393,071			(261,253	)		323,344

Income tax		(55,685	)		(118,332	)		-			(174,017	)

Net Income	$	135,841		$	274,739		$	(261,253	)	$	149,327

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 piped 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.

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

12.

EARNINGS PER SHARE

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

	3/31/2009
Net Income	$	345,637
Preferred Dividends		-
Constructive Preferred Dividends		-
Income Available to Common Stockholders	$	345,637

Original Shares		25,269,313
Addition to Common Stock		-
Basic Weighted Average Shares Outstanding		25,269,313

Addition to Common Stock from Conversion of Preferred Stock B		4,579,839
Addition to Common Stock from Conversion of Preferred Stock B-1		95,418
Addition to Common Stock from Exercise of Warrants		-
Diluted Weighted Average Shares Outstanding		29,944,570

Earnings Per Share
Basic	$	0.014
Diluted	$	0.012

Weighted Average Shares Outstanding
Basic		25,269,313
Diluted		29,944,570

SINO GAS INTERNATIONAL HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2009 AND DECEMBER 31, 2008

(Stated in U.S. Dollars)

13.

LIQUIDATED DAMAGE

The Company entered into a registration rights agreement related to a private placement financing transaction with accredited investors on September 13, 2007. Pursuant to the agreement, the Company had to (1) file the registration statement within 45 days of the execution, and (2) declare the effectiveness within 150 days of filing the registration statement. However, the Company did not meet the aforementioned requirements under the registration rights agreement, and was subjected to liquidated damages. The Company has paid $481,805 in liquidated damages to investors in 2008, which was reported as other expense in the statements of income.

14.

CONTINGENT LIABILITIES

Pursuant to the warrants purchase agreement related to 2006 private placement financing transactions, the Company was required to reach $7.9 million and $11 million net income target for the fiscal years ended 2007 and 2008 respectively. However, the Company did not meet the stipulated 2007 and 2008 net income target and therefore incurred certain contingent liabilities. The Company is liable to issue 1.2 million and 1.5 million shares make good common stock to the accredited investors in 2009 in compensation of not attaining the 2007 and 2008 net income target respectively.

Item 2. Management’s Discussion and Analysis

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth elsewhere in this Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.

Economic & Industrial Trend

We generate revenue from two sources: connection fees for constructing connections to our natural gas distribution network and 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, starting 2007, the Chinese government implemented a series of policies and regulations to curb inflation and the property market. These policies, together with the worldwide financial crisis in 2008, has resulted a slowdown of the real estate market in China and our business, in turn, was affected in 2008. Recently, the Chinese government has changed its policies and prioritized boosting of the economy. The Chinese government has 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 has also decided to inject stimulus package to boost the overall economy, including allocation of funds for mass housing projects. We have seen signs of recovery of the real estate market in China in recent months.

Even with the current slowdown of the Chinese real estate market, we believe that the future growth trend of the real estate market will not change because of the continuous urbanization in China. Therefore, in the next several months, we expect to see the return of growth of household connections, especially in small-to-medium sized cities where the real estate market is at an early developing stage.

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 we anticipate that such sales would maintain stable growth in the future, due to the increasing pool of our residential customers. Gas sales to industrial users are subject to the performance of the end industrial users. Gas sales to our industrial users have increased 41.6% during 2008 as existing users have expanded their production capacity. For our biggest industrial user, Hebei Zhong Gang Co. Ltd, our average daily gas sales were 24,000 cubic meters in 2008. As we expand into more cities, we expect to add one to two industrial users in the coming year if capital is available.

Material Opportunities

The gas distribution market is quite fragmented in the small (population less than 100,000) to medium (population between 100,000 to 300,000) sized cities. We have been in active talks with potential project targets. The size of the projects varies from small cities, like the ones we have, to medium-sized cities. For small city markets, many of them are still untapped or undeveloped. The development of these markets is generally considered our major growth components. The current worldwide financial crisis has created pricing opportunities for us to acquire projects since we could acquire projects at attractive prices.

Most medium-sized or large cities have already been developed by large gas distributors or are still operated by state-owned companies. Acquisition opportunities exist in state-owned companies, as the central government encourages suppliers to turn them into privately-owned companies. The expansion into these markets would have material impact on the Company, increasing the Company’s assets and revenues significantly. The Company would require additional fundraising for such acquisitions.

Material Challenges

There are a vast number of small-to-medium sized cities left undeveloped by our industry, but the competition is intense, as there are many small new players in the market attracted by the profitability and growth potentials of the natural gas business. Meanwhile, from time to time, 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 have 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 (largest in China), in the past decade.

Still, potential residential users in small and medium-sized cities need to be educated about the benefits of using natural gas. Time is required for residents to realize the benefits of natural gas. This is especially true for new markets, where there is no use of natural gas. Small cities tend to be more reluctant for use of new energy resources, such as natural gas, than large cities, and residents depend more on coal.

China’s energy market is highly regulated by the government with regard to the purchase and sale price of natural gas. When an adjustment to the purchase price by the government occurs, gas distributors will correspondingly increase the sale price, subject to a public hearing and government approval. The increase of natural gas price in China is lagging behind that in the international markets, which has soared in the past year. The Chinese government has seldom adjusted natural gas price, but we cannot rule out the possibilities of the increase of natural gas prices in the future. We can adjust the sale price accordingly after the increase of purchase price. However, passing the increase to end users would make natural gas more expensive, as compared to other alternative energies. Thus this increase of price will deter our business development.

Risks in Short-Term and Long-Term Periods

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 demands for new homes would decrease, resulting in fewer natural gas connections, and thus negatively impacting our business.

To reduce the Company’s heavy dependence on connection fees, the Company is exploring opportunities to diversify our business by expanding into related areas, such as pipeline and gas station businesses. However, we do not expect to expand into these areas in large scale in the near future.

Liquidity and Capital Resources

Natural gas distribution is a capital-intensive industry that requires large amounts of capital for the construction of pipelines and gas stations, and the purchase of transportation vehicles. The Company would be constrained by inadequate capital when developing into larger cities or engaging in merger and acquisition activities. With such situations, the Company would require additional fundraising to finance such business activities.

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

During the three months ended March 31, 2009, net revenues were $5,037,692, representing an increase of 16.02 % from the same period of last year. Gross profit for the three months ended March 31, 2009 was $1,264,480, representing a decrease of 7.48% from the same period of last year. Our operating income for the three months ended March 31, 2009 was $548,961, representing an increase of 56.18% from the same period of 2008.

	For the 3 months ended March 31,
	2009			2008			Change
	US$			US$%
Net Revenues		5,037,692			4,342,116			16.02	%
Gross Profit		1,264,480			1,366,645			-7.48	%
Operating Income		548,961			351,490			56.18	%
Net Income		345,637			149,327			131.46	%
Gross Margin		25.10	%		31.47	%		- 20.24	%
Net Margin		6.86	%		3.44	%

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 three months ended March 31, 2009 were $5,037,692, compared to $4,342,116 for the same period in 2008, representing an increase of 16.02%. The increase was mainly due to the increase of gas sales, which was able to offset the decrease in connection fees. During this period, we connected 2,878 new residential households to our gas distribution network, resulting in total connection fees of $1,223,736. Gas sales during the same period were 11.52 million cubic meters, or $3,813,956. In comparison, we connected 4,590 new residential households to our gas distribution network for the same period in 2008, resulting in total connection fees of $1,354,697. Gas sales during the period were 9.45 million cubic meters, or $2,987,419.

	For the 3 months ended December 31,
	2009					2008					Change
(In $ million)	US$		%			US$		%			%
Net Revenues		5.04		100	%		4.34		100	%		16.02	%
Connection Fees		1.22		24	%		1.35		31	%		-9.67	%
Gas Sales		3.81		76	%		2.99		69	%		27.67	%

The increase in our net revenues for the three months ended March 31, 2009 were due to the following factors:

1) Increase of gas sales. With more customers added to our existing gas network distribution system, our gas sales increased accordingly.

2) Decrease of connection fees from residential customers. (Connection fees offer a higher gross margin than gas sales.) The slowdown of the real estate market and the unfavorable capital markets conditions continued to affect our business operations, especially our connection fees. The slowdown of the real estate market has caused real estate developers to grant fewer new contracts to us to perform new gas connection services. In addition, real estate developers have also postponed the execution of certain existing contracts for connection services. The unfavorable capital markets conditions have caused us to scale back our business operations. In the first quarter of 2009, the lack of capital has greatly reduced the amount of connection fees from new projects.

3) Higher average connection fees per unit. In the first quarter of 2009, we developed certain residential projects with higher connection fees per unit, compared with the same period of 2008. The higher connection fees per unit helped to offset the lower number of residential units developed in the first quarter of 2009.

Connection Fees

Connection fees during the three months ended March 31, 2009 were $1.22 million, representing a decrease of 9.67% over the same period of 2008, accounting for 24.29% of the total net revenue as compared with approximately 31.20% of the total net revenue for the same period in 2008. The source of connection fees was mainly from the development of new residential users. Connection fees from residential users during the three months ended March 31, 2009 were $1.14 million, representing a decrease of 16.12% from the same period of 2008.

	For the 3 months ended March 31,
(in US$ millions)	2009					2008					Change
	US$		%			US$		%			%
Connection Fees		1.22		100	%		1.35		100	%		-9.67	%
Residential Users		1.14		92.86	%		1.35		100	%		-16.12	%
Industrial Users		0.09		7.14	%		0.00		0	%

The table below is a breakdown of our top five customers by connection fees:

Customers	Connection Fees: ($ million)
Hebei Xiangyin Real Estate Development Co., Ltd.		0.045
Shenzhou City’s Middle School		0.044
Nangong Middle School		0.044
Xuzhou Ganglong Real Estate Development Co., Ltd.		0.035
Henan Dihua Real Estate Co., Ltd.		0.023

Due to seasonality, the first quarter of each year usually generates less revenue for the Company with regards to connection fees. Generally, there are no construction projects because of cold weather in Northern China and the Chinese New Year holiday. Generally, new construction projects begin in the end of the quarter.

Gas Sales

In terms of volume, we sold 11.52 million cubic meters of natural gas during the three months ended March 31, 2009, compared with 9.45 million cubic meters for the same period of 2008. In terms of monetary value, gas sales were $3.81 million during the three months ended March 31, 2009, accounting for 75.71% of total net revenue for the three months ended March 31, 2009, representing an increase of 27.67% over the same period of 2008. Gas sales to residential users increased 63.3% to $1.04 million for the three months ended March 31, 2009 from $0.64 million in the same period of 2008. Gas sales to industrial users increased 43.25% to $1.27 million for the three months ended March 31, 2009 from $0.88 million in the same period of 2008. Gas sales to commercial users increased 2.77% to $1.51 million for the three months ended March 31, 2009 from $1.47 million in the same period of 2008.

	For the 3 months ended March 31,
	2009					2008					Change
($ million)	US$		%			US$		%			%
Gas Sales		3.81		100	%		2.99		100	%		27.67	%
Residential Users		1.04		27	%		0.64		21	%		63.3	%
Industrial Users		1.27		33	%		0.88		30	%		43.25	%
Commercial Users		1.51		40	%		1.47		49	%		2.77	%

Such increases were primarily due to the fact that our invested projects maintained steady development, and more users were added to our gas distribution network.

The table below is a breakdown of our major industrial customers for gas use in the first quarter of 2009.

Industrial Customers	Gas Usage (million cubic meters)		Gas Usage ($ million)
Hebei Zhonggang Steel Co., Ltd.		1.98		0.71
Oil Pipeline of The First Machine Factory of Huabei Petrol Bureau		0.32		0.11
Buohai Oil equipment manufacturer of PetroChina Group		0.25		0.09
Elite (Langfang) Textile Corporation		0.08		0.03
Hebei Jihengyuan Group Ltd.		0.05		0.02

Gas sales of $0.71 million were contributed by Hebei Zhonggang Steel Co., Ltd., which started to use gas at the beginning of 2006. The gas consumption of Hebei Zhonggang was 1.98 million cubic meters during the three months ended March 31, 2009, representing a slight increase, compared with 1.94 million cubic meters for the same period of 2008.

As mentioned above, due to our business’ seasonality, gas sales accounted for a relatively higher percentage of our total net revenues. As our residential customer base grows, gas sales to residential users would increase gradually.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2009, which includes cost of connection and cost of gas sales, was $3.77 million, representing an increase of 26.81% from $2.98 million in the same period of 2008.

	For the 3 months ended March 31,
	2009					2008					Change
($ million)	US$		%			US$		%			%
Cost of Revenues		3.77		100	%		2.98		100	%		26.81	%
Connection Cost		0.13		3	%		0.43		14	%		-69.76	%
Gas Cost		3.64		97	%		2.55		86	%		43.12	%

Cost of Connection

Our cost of connection during the three months ended March 31, 2009 was $0.13 million, or 3% of our total cost of revenues. By comparison, the cost of connection during the same period of 2008 was $0.43 million, or 14% of our total cost of revenues.

Cost of connection decreased by approximately 69.76% from the same period in 2008, mainly due to the decrease of connection service activities for the three months ended March 31, 2009 as compared to the same period of 2008.

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

Considering the city's overall planning and our long-term interests, the capacity of the gas pipeline network we designed to distribute gas for a city usually greatly exceeded the number of households we served at the beginning of our service, which makes the cost of connection, specifically the depreciation of pipelines and maintenance cost relatively high if the number of residential users connected is low. However, with the connection of more households to the gas pipeline, the average cost to each household will be gradually reduced.

Cost of Gas Sales

The cost of gas sales increased 43.12% to $3.64 million during the three months ended March 31, 2009 from $2.55 million for the same period in 2008. This increase, which surpassed the 27.67% increase in sales of natural gas during the same period, is largely due to the increase of rental expenses on gas delivery equipments and higher fuel costs.

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

Langfang Development Zone Wei Ye Hazardous Goods Transportation Co. Ltd, one of our subsidiaries, is responsible for our gas transportation, and transportation cost per cubic meter is RMB 0.55 ($0.080) per cubic meter.

Gross Profit

During the three months ended Mar 31, 2009, gross profit was $1.26 million, representing a decrease of approximately 7.48% from the same period of 2008. Gross profit from connection fees was $1.09 million for the three months ended March 31, 2009, accounting for 87% of total gross profit. In comparison, gross profit from connection fees was $0.92 million for the three months ended March 31, 2008, accounting for 68% of total gross profit. Gross profit from gas sales was $0.17 million for the three months ended March 31, 2009, accounting for 13% of total gross profit, compared to $0.44 million, accounting for 32% of total gross profit in the same period of 2008.

	For the 3 months ended March 31,
	2009					2008					Change
($ million)	US$		%			US$		%			%
Gross Profit		1.26		100	%		1.37		100	%		-7.48	%
Connection		1.09		87	%		0.92		68	%		18.26	%
Gas		0.17		13	%		0.44		32	%		-61.36	%

Gross margin during the three months ended March 31, 2009 was 25.10%, compared to 31.47% during the same period in 2008.

Gross margin for connection fees for the three months ended Mar 31, 2009, was 89.38%, compared to 68.27% in the same period of 2008. The increase of connection gross margin is mainly due to higher average connection fees per unit. In the first quarter of 2009, we developed certain residential projects with higher connection fees per unit.

Gross margin for sales of natural gas was 4.48% for the three months ended March 31, 2009, compared to 14.79% during the same period of 2008. The decrease was due to an increase of rental expenses on gas delivery trucks and higher costs of fuel.

Selling and Marketing Expenses

Our selling and marketing expenses in the three months ended March 31, 2009 were $0.20 million, approximately 4.03% of our net revenues, compared with $0.18 million or 4.18 % of our net revenues in the same period of 2008.

General and Administrative Expenses and Other Expenses

General and administrative expenses were $0.51 million for the three months ended March 31, 2009, which was 38.55% lower than $0.83 million for the same period of 2008. Other expense was $0.05 million for the three months ended March 31, 2009, compared with 0.03 million for the same period of 2008.

Operating Income

The operating income for the three months ended March 31, 2009 was $0.55 million, representing an increase of 57.14%, compared to the operating income of $0.35 million for the same period of 2008.

Income tax

Income tax was $0.16 million for the three months ended Mar 31, 2009, compared to $0.17 million for the same period of 2008.

Net Income

Net income for the three months ended March 31, 2009 was $0.35 million, representing an increase of 133% from $0.15 million for the same period of 2008. The increase is mainly due to the decrease of SG&A expenses.

Cash and cash equivalents

Cash and cash equivalents were $2.21 million as of March 31, 2009, a decrease of $1.05 million as compared to $3.26 million of cash and cash equivalents as of December 31, 2008. In the first quarter of 2009, the major source of cash was the Company’s operating activities.

Accounts Receivable

Accounts receivable during the three months as of March 31, 2009 were $5.94 million, a slight decrease of $0.07 million from $6.01 million as of December 31, 2008.

Our accounts receivable is expected to gradually decrease during the first six months of 2009 due to our businesses’ seasonality. Connection fees are generally higher in the third and fourth quarters of every year than in the first two quarters. Accounts receivable are collected in the beginning of the following year.

Notes Receivable

Notes receivable of $0.05 million as of March 31, 2009 was the Note issued by Hebei Zhonggang for its use of gas.

Inventory

Inventory of $0.31 million as of March 31, 2009 was comprised of spare parts and natural gas.

Fixed Assets

Fixed Assets as of March 31, 2009 were $36.24 million, representing a slight increase of $0.06 million from $36.18 million as of December 31, 2008. The table below is a breakdown of our fixed assets at cost:

	2008			2007
At Cost
Gas Pipelines	$	27,602,154		$	27,859,313
Motor Vehicles		5,607,544			5,600,508
Machinery & Equipment		858,912			857,834
Buildings		1,862,509			1,568,380
Leasehold Improvements		80,522			80,101
Office Equipment		224,872			216,435
Less Accumulated depreciation		(3,482,109	)		(3,149,453	)
	$	32,754,404		$	33,033,118

Bank Loans

Bank loans as of March 31, 2009 were $2.19 million, representing no change, as compared to that as of December 31, 2008.

Accounts Payables

Accounts payables as of March 31, 2009 was $6.44 million, representing an increase of $0.09 million from that as of December 31, 2008.

Other Payables

Other payables as of March 31, 2009 were $5.91 million, representing a decrease of $0.26 million from that as of December 31, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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. 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 March 31, 2009. Based on that evaluation, our management concluded that, as of March 31, 2009, our Company’s disclosure controls and procedures was not effective due to the material weaknesses described below.

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.

During the fiscal year ended December 31, 2008, our management conducted its evaluation of the effectiveness of our Company’s internal control over financial reporting, using the criteria in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that, as of December 31, 2008, our Company’s internal control over financial reporting was not effective due to the material weaknesses described below.

(1) The Company has not yet established a comprehensive Code of Conduct and Ethics (the “Code”) which is applicable to all Company directors, officers and employees.

(2) Our Internal Audit Department has not taken an active role in the conduct of its activities due to insufficient resources. The annual plan, budget, and specific procedures to perform the internal audit function have not been fully developed, and the anti-fraud audit plan has not been developed either.

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

Management’s Plan for Remediation of Material Weaknesses

In light of the conclusion that our Company’s internal control over financial reporting was not effective, our management has worked, and will continue to work, to address these weaknesses in our internal control over financial reporting. Implementations of certain remedial measures include the following:

(1) We are going to continue modify the Code, and arrange respective on-going training to all the employees in the near future. Training which includes the content of the Code will be provided to new employees at the time of hiring. All the employees will be required to sign an affidavit acknowledging that the employee has read and will intend to comply with the Code;

(2) The management is committed to develop a comprehensive and risk-based internal audit function within the Company. With the limited human capital supplies in the market, we will engage a third party professional to assist the management in establishing the internal control system. At the same time, we have enhanced our efforts of recruitment and interviews are undergoing. We expect that an internal audit department will be set up in the near future. With the assistance from the third party professional, the roles and responsibilities of the internal audit department will be formulated and a comprehensive risk-based internal audit plan will be developed and approved by the Audit Committee within a month after the set up.

(3) We will continue to modify Related Party Transaction Policy and our goal is to formulate a comprehensive policy in the near future.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2009, 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.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Not required.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are hereby filed as part of this Quarterly Report on Form 10-Q.

Exhibit Number:		Description
31.1		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in Beijing.

	SINO GAS INTERNATIONAL HOLDINGS, INC.

Date: May 20, 2009	By:	/s/ Yuchuan Liu
		Yuchuan Liu
		Chairman and Chief Executive Officer

	SINO GAS INTERNATIONAL HOLDINGS, INC.

Date: May 20, 2009	By:	/s/ Yugang Zhang
		Yugang Zhang
		Chief Financial Officer