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 June 30, 2010

¨	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	90-0438712
(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 ¨	Accelerated filer ¨
Non-accelerated filer ¨ (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 ¨ No x

As of August 13 , 2010, the Registrant had 26,847,473 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)	11

Item 2.	Management's Discussion and Analysis or Plan of Operation	46

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55

Item 4.	Controls and Procedures	55

PART II -	OTHER INFORMATION	55

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 3.	Defaults Upon Senior Securities	55

Item 4.	(Removed and Reserved)	55

Item 5.	Other Information	55

Item 6.	Exhibits	55

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Sino Gas International Holdings, Inc.

Reviewed Consolidated Financial Statements

June 30, 2010 and December 31, 2009

(Stated in US Dollars)

Sino Gas International Holdings, Inc.

Content		Page

Report of Independent Registered Public Accounting Firm		4

Consolidated Balance Sheets		5 - 6

Consolidated Statements of Income		7

Consolidated Statements of Stockholders’ Equity		8 - 9

Consolidated Statements of Cash Flows		10

Notes to Consolidated Financial Statements		11 - 45

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 June 30, 2010 and December 31, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three-month and six-month periods ended June 30, 2010 and 2009. 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.

San Mateo, California	Samuel H. Wong & Co., LLP
August 2, 2010	Certified Public Accountants

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of June 30, 2010 and December 31, 2009

(Stated in US Dollars)

	Notes	6/30/2010		12/31/2009
ASSETS
Current Assets
Cash & cash equivalents	2 (e)	$	6,360,710	$	9,820,890
Restricted cash	3		-		126,400
Notes receivable			-		351,021
Accounts receivable	2 (f) , 4		5,885,235		5,036,609
Inventory			530,998		416,931
Advance to suppliers	2 (g)		4,324,555		4,814,420
Prepayment and others			637,569		446,840
Other receivables	2 (f)		1,748,668		1,686,115
Total Current Assets			19,487,735		22,699,226

Non-Current Assets
Investment	2 (h) , 5		7,060,869		7,031,333
Property, plant & equipment, net	2( j), 6		48,878,849		47,772,011
Construction in progress	2 (l)		15,806,711		13,357,395
Intangible assets, net	2 (k), 7		2,205,398		2,217,699
Total Non-current Assets			73,951,827		70,378,438
Total Assets		$	93,439,562	$	93,077,664

LIABILITIES & STOCKHOLDERS' EQUITY

LIABILITIES
Current Liabilities
Bank loans	8	$	2,937,461	$	2,925,174
Accounts payable			7,319,879		8,560,120
Other payables - current	9 (a)		2,600,306		6,339,571
Accrued liabilities			283,087		453,335
Unearned revenue	2 (m)		759,156		620,860
Total Current Liabilities			13,899,890		18,899,060

Non-current Liabilities
Long-term bank loans	8		8,812,384		6,581,641
Non-current Convertible Bonds	10		5,539,050		4,329,101
Other payables - non-current	9 (b)		1,994,256		-
Total Non-current Liabilities			16,345,690		10,910,742
Total Liabilities		$	30,245,580	$	29,809,802

See Accompanying Notes to Financial Statements and Accountant’s Report

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of June 30, 2010 and December 31, 2009

(Stated in US Dollars)

	Notes	6/30/2010		12/31/ 2009

STOCKHOLDERS' EQUITY

Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,501,679 and 4,579,839 shares issued and outstanding as of June 30, 2010 and December 31, 2009 respectively.	11	$	4,502	$	4,580

Additional paid in capital - Preferred Stock B			5,323,972		5,323,972

Preferred Stock B-1 US$0.001 par value; 3,000,000 shares authorized; 95,418 shares issued and outstanding as of June 30, 2010 and December 31, 2009.	11		95		95

Additional paid in capital - Preferred Stock B-1			132,662		132,662

Common Stock US$0.001 par value; 250,000,000 shares authorized; 26,847,473 and 26,769,313 shares issued and outstanding as of June 30, 2010 and December 31, 2009 respectively.	11		26,847		26,769

Additional paid in capital - Common Stock			22,513,732		22,513,732

Additional paid in capital - Warrants Series: A, B, J, C, D			311,110		311,110
Additional paid in capital - Warrants Series: E, G			47,946		47,946
Additional paid in capital - Warrants Series: F, R			107,652		107,652
Additional paid in capital - Convertible Bonds Detachable Warrants			223,367		223,367
Additional paid in capital - Beneficial Conversion Feature			8,094,814		8,094,814

Statutory reserve	2 (v)		4,626,942		4,612,191
Retained earnings			13,779,151		14,143,089
Accumulated other comprehensive income	2 (x)		8,001,190		7,725,883
Total Stockholders' Equity			63,193,982		63,267,862

Total Liabilities & Stockholders' Equity		$	93,439,562	$	93,077,664

See Accompanying Notes to Financial Statements and Accountant’s Report

Sino Gas International Holdings, Inc.

Consolidated Statements of Income

For the three-month and six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

		Three Months Ended						Six Months Ended
	Note	6/30/2010			6/30/2009			6/30/2010			6/30/2009
Sales revenues	2(p)	$	5,916,218		$	7,331,620		$	12,873,879		$	12,369,312
Cost of revenues			(4,010,333	)		(5,796,185	)		(8,843,480	)		(9,569,397	)
Gross Profit			1,905,885			1,535,435			4,030,399			2,799,915

Operating Expense
Selling expense			(310,661	)		(217,418	)		(581,904	)		(420,490	)
General and administrative expense			(698,598	)		(733,712	)		(1,605,129	)		(1,246,159	)
Total operating expense			(1,009,259	)		(951,130	)		(2,187,033	)		(1,666,649	)

Operating Income			896,626			584,305			1,843,366			1,133,266

Other Income/(Expense)
Other income			4,914			11,045			10,296			11,206
Other expense			(20,197	)		(16,585	)		(21,497	)		(22,314	)
Interest income			4,270			1,227			9,039			3,077
Interest expense			(821,709	)		(43,108	)		(1,746,550	)		(84,560	)
Total other income/(expense)			(832,722	)		(47,422	)		(1,748,712	)		(92,591	)

Income before tax			63,904			536,883			94,654			1,040,675

Income tax	2(r),12		(204,506	)		(115,749	)		(443,842	)		(273,904	)

Net income		$	(140,602	)	$	421,134		$	(349,188	)	$	766,771

Earnings per share	2(z),13
- Basic		$	(0.005	)	$	0.02		$	(0.013	)	$	0.03
- Diluted		$	(0.005	)	$	0.01		$	(0.013	)	$	0.02

Weighted Average Shares Outstanding
- Basic			26,839,657			26,135,980			26,804,485			25,702,646
- Diluted			26,839,657			30,811,237			26,804,485			30,377,903

See Accompanying Notes to Financial Statements and Accountant’s Report

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

	Preferred Stock B								Preferred Stock B-1						Common Stock
	Shares Outstanding			Amount			Additional Paid In Capital-Preferred Stock B		Shares Outstanding		Amount		Additional Paid In Capital-Preferred Stock B-1		Shares Outstanding		Amount		Additional Paid In Capital-Common Stock

Balance at January 1, 2009		4,579,839			4,580			5,323,972		95,418		95		132,662		25,269,313		25,269		23,196,304
Net Income		-			-			-		-		-		-		-		-		-
Issuance of 2007 Make Good Common Stock		-			-			-		-		-		-		1,500,000		1,500		(1,500	)
Re-allocation of Beneficial Conversion Feature		-			-			-		-		-		-		-		-		(681,072	)
Issuance of Convertible Bonds		-			-			-		-		-		-		-		-		-
Appropriate of Retained Earnings		-			-			-		-		-		-		-		-		-
Foreign Currency Translation Adjustment		-			-			-		-		-		-		-		-		-
Balance at December 31, 2009		4,579,839			4,580			5,323,972		95,418		95		132,662		26,769,313		26,769		22,513,732

Balance at January 1, 2010		4,579,839			4,580			5,323,972		95,418		95		132,662		26,769,313		26,769		22,513,732
Net Income		-			-			-		-		-		-		-		-		-
Conversion of Preferred Stock B to Common Stock		(78,160	)		(78	)		-		-		-		-		78,160		78		-
Appropriation of Retained Earnings		-			-			-		-		-		-		-		-		-
Foreign Currency Translation Adjustment		-			-			-		-		-		-		-		-		-
Balance at June 30, 2010		4,501,679			4,502			5,323,972		95,418		95		132,662		26,847,473		26,847		22,513,732

See Accompanying Notes to Financial Statements and Accountant’s Report

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

	Common Stock
	Additional Paid in Capital-Warrants Series: A,B,J,C,D		Additional Paid in Capital-Warrants Series: E,G		Additional Paid in Capital-Warrants Series: F,R		Additional Paid in Capital-Convertible Bonds Detachable Warrants		Additional Paid in Capital-Beneficial Conversion Feature		Statutory Reserve		Retained Earnings			Accumulated Other Comprehensive Income		Total

Balance at January 1, 2009		311,110		47,946		107,652		-		7,002,292		3,956,728		10,069,896			7,676,844		57,855,350
Net Income		-		-		-		-		-		-		4,047,584			-		4,047,584
Issuance of 2007 Make Good Common Stock		-		-		-		-		-		-		-			-		-
Re-allocation of Beneficial Conversion Feature		-		-		-		-		-		-		681,072			-		-
Issuance of Convertible Bonds		-		-		-		223,367		1,092,522		-		-			-		1,315,889
Appropriate of Retained Earnings		-		-		-		-		-		655,463		(655,463	)		-		-
Foreign Currency Translation Adjustment		-		-		-		-		-		-		-			49,039		49,039
Balance at December 31, 2009		311,110		47,946		107,652		223,367		8,094,814		4,612,191		14,143,089			7,725,883		63,267,862

Balance at January 1, 2010		311,110		47,946		107,652		223,367		8,094,814		4,612,191		14,143,089			7,725,883		63,267,862
Net Income		-		-		-		-		-		-		(349,188	)		-		(349,188	)
Conversion of Preferred Stock B to Common Stock		-		-		-		-		-		-		-			-		-
Appropriation of Retained Earnings		-		-		-		-		-		14,751		(14,751	)		-		-
Foreign Currency Translation Adjustment		-		-		-		-		-		-		-			275,307		275,307
Balance at June 30, 2010		311,110		47,946		107,652		223,367		8,094,814		4,626,942		13,779,150			8,001,190		63,193,981

Comprehensive Income	12/31/2009		6/30/2010			Total
Net Income	$	4,047,584	$	(349,188	)	$	3,698,396
Other Comprehensive Income
Foreign Currency Translation Adjustment		49,039		275,307			324,346
Total	$	4,096,623	$	(73,881	)	$	4,022,742

See Accompanying Notes to Financial Statements and Accountant’s Report

Sino Gas International Holdings, Inc.

Consolidated Statements of Cash Flows

For the three-month and six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

	Three Months Ended						Six Months Ended
	6/30/2010			6/30/2009			6/30/2010			6/30/2009
Cash Flows from Operating Activities
Net Income	$	(140,602	)	$	421,134		$	(349,188	)	$	766,771
Depreciation expense		383,177			209,766			722,094			419,533
Amortization expense of intangible assets		9,439			31,627			16,865			33,894
Amortization expense of convertible bonds		529,593			-			1,209,949			-
Withdraw/(deposit) in restricted time deposits		95,425			46,396			126,400			50,738
Decrease/(increase) in accounts and other receivables		791,824			746,636			(560,158	)		926,859
Decrease/(increase) in inventory		45,110			25,664			(114,067	)		61,385
Decrease/(increase) in prepaid expenses		(443,484	)		(473,843	)		299,136			(1,336,205	)
Increase/(decrease) in accounts and other payables		(12,197	)		1,254,759			(3,017,201	)		1,887,783
Cash Sourced/(Used) in Operating Activities		1,285,285			2,262,138			(1,666,170	)		2,810,758

Cash Flows from Investing Activities
Decrease/(increase) of investment in equity		(28,404	)		(604	)		(29,536	)		(7,085	)
Disposal/(purchase) of property, plant & equipment		(238,624	)		(1,631,519	)		(1,828,932	)		(1,685,461	)
Increase of goodwill		-			(196	)		-			(2,304	)
Purchase of other intangible assets		(4,406	)		(135,818	)		(4,564	)		(136,984	)
Increase in construction in progress		(2,434,392	)		(530,794	)		(2,449,315	)		(2,110,924	)
Cash Sourced/(Used) in Investing Activities		(2,705,826	)		(2,298,930	)		(4,312,347	)		(3,942,758	)

Cash Flows from Financing Activities
Increase/(decrease) of bank loans		47,738			256			2,243,030			3,005
Cash Sourced/(Used) in Financing Activities		47,738			256			2,243,030			3,005

Net increase in cash & cash equivalents for the periods		(1,399,805	)		(36,536	)		(3,735,487	)		(1,128,995	)

Effect of currency translation		254,902			(88,657	)		275,307			(44,306	)

Cash & cash equivalents at the beginning of periods		7,505,613			1,979,435			9,820,890			3,027,543

Cash & cash equivalents at the end of periods	$	6,360,710		$	1,854,242		$	6,360,710		$	1,854,242

Supplementary cash flows information
Interest received	$	4,269		$	757		$	9,039		$	2,607
Interest paid		290,787			43,108			536,601			84,560
Income tax paid		204,507			346,934			443,842			505,089

See Accompanying Notes to Financial Statements and Accountant’s Report

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US 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 natural gas distribution systems in 35 small and medium size cities serving approximately 158,500 residential and seven industrial customers. The Company’s facilities include approximately 1040 kilometers of pipeline and delivery networks (including delivery trucks) with a daily capacity of approximately 110,000 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 June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US 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.

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 June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US 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 June 30, 2010.

Name of Company	Place of Incorporation	Date of Incorporation	Beneficiary Interest %	Equity Interest %	Registered Capital
GAS Investment China Co., Ltd.	The British Virgin Islands	6/19/2003	100	100	USD 10,000,000

Sino Gas Construction, Ltd.	The British Virgin Islands	1/9/2007	100	100	USD 50,000

Sino Gas Investment Development, Ltd.	The British Virgin Islands	1/9/2007	100	100	USD 50,000

Beijing Zhong Ran Wei Ye Gas Co., Ltd.	PRC	8/29/2001	100	100	RMB 206,000,000

Beijing Chenguang Gas, Ltd.	PRC	10/30/2002	100	100	RMB 35,239,600

Guannan Weiye Gas Co., Ltd.	PRC	6/19/2003	100	100	RMB 9,510,000

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

Ningjin Weiye Gas Co., Ltd	PRC	12/3/2003	100	95	RMB 3,000,000

Yutian Zhongran Weiye Gas Co., Ltd.	PRC	12/19/2003	100	90	RMB 3,000,000

Xingtang Weiye Gas Co., Ltd.	PRC	2/18/2004	100	95	RMB 3,000,000

Wuqiao Gas Co., Ltd.	PRC	6/30/2004	100	95	RMB 2,000,000

Jinzhou Weiye Gas Co., Ltd.	PRC	7/19/2004	100	95	RMB 5,000,000

Sihong Weiye Gas Co., Ltd.	PRC	12/3/2004	100	95	RMB 10,000,000

Sishui Weiye Gas Co., Ltd.	PRC	12/22/2004	100	95	RMB 3,000,000

Langfang Weiye Dangerous Goods Transportation Co., Ltd.	PRC	3/22/2005	100	95	RMB 1,000,000

Linzhang Weiye Gas Co., Ltd.	PRC	7/6/2005	100	85	RMB 1,000,000

Peixian Weiye Gas Co., Ltd.	PRC	8/22/2005	100	90	RMB 5,000,000

Zhangjiakou City Xiahuayuan Jinli Gas Co., Ltd.	PRC	9/30/2005	100	100	RMB 2,000,000

Longyao Zhongran Weiye Gas Co., Ltd.	PRC	10/13/2005	100	95	RMB 3,000,000

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

Yuxian Jinli Gas Co., Ltd.	PRC	11/8/2005	100	100	RMB 9,500,000

Hengshui Weiye Gas Co., Ltd.	PRC	12/20/2005	100	100	RMB 3,000,000

Shenzhou Weiye Gas Co., Ltd.	PRC	12/23/2005	100	95	RMB 3,000,000

Changli Weiye Gas Co., Ltd.	PRC	12/8/2006	100	100	RMB 3,000,000

Chenan Chenguang Gas Co., Ltd	PRC	1/23/2007	100	100	RMB 1,500,000

Wuhe Weiye Gas Co., Ltd.	PRC	1/30/2007	100	100	RMB 3,000,000

Xinji Zhongchen Gas Co., Ltd	PRC	2/7/2007	100	100	RMB 3,000,000

Gucheng Weiye Gas Co., Ltd.	PRC	3/21/2007	100	100	RMB 3,000,000

Luquan Chenguang Gas Co., Ltd.	PRC	4/27/2007	100	100	RMB 2,000,000

Shijiazhuang Chenguang Gas Co., Ltd.	PRC	6/14/2007	100	100	RMB 2,000,000

Nangong Weiye Gas Co., Ltd.	PRC	6/25/2007	100	100	RMB 3,000,000

Sixian Weiye Gas Co., Ltd.	PRC	9/3/2007	100	100	RMB 3,000,000

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

Baishan Weiye Gas Co., Ltd.	PRC	7/13/2007	100	100	RMB 15,000,000

Guyuan Gas Co., Ltd.	PRC	12/15/2008	100	100	RMB 1,000,000
Xinhe Weiye Gas Co., Ltd.	PRC	7/2/2009	100	100	RMB 1,000,000
Hebei Weiye Gas Co., Ltd.	PRC	12/18/2009	100	100	RMB 75,439,270
Gaocheng Weiye Gas Co., Ltd.	PRC	1/27/2010	100	100	RMB 200,000

(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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd. (“Xiangke Oil Gas”) 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.

Qujing Gas Co., Ltd. (“Qujing Gas”) 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
P.R.C	Sino-foreign equity joint venture	RMB 20,000,000	40%	Distribution of natural gas and gas pipeline construction
P.R.C	Equity joint venture	RMB 30,000,000	39%	Distribution of natural gas and gas pipeline construction

The Company did not record any goodwill when it acquired its equity position in Xiangke Oil Gas and Qujing Gas. Accordingly, in accordance with SFAS 142, the Company has not taken an amortization expense of goodwill during the time it has carried 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 June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

(j) Property, Plant and Equipment

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

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

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

(k) Intangible Assets

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

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

For goodwill, impairment tests are performed annually and more frequently whenever events or changes in circumstances indicate goodwill carrying values exceed estimated reporting unit fair values. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Based on the impairment tests performed, there was no impairment of goodwill for the three months ended June 30, 2010.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

(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.

(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.

	6/30/2010		12/31/200 9
Years end RMB : US$ exchange rate		6.8086		6.8372
Average yearly RMB : US$ exchange rate		6.8347		6.8409

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

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.

(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 Company’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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

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: -

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 six months ended June 30, 2010.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

(s) Advertising

The Company 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 June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US 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 June 2009, FASB issued FASB Statement No. 166, Accounting for Transfers for Financial Assets (FASB ASC 860 Transfers and Servicing ) and FASB Statement No. 167 (FASB ASC 810 Consolidation ), a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation ) .

Statement 166 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FASB ASC 860 Transfers and Servicing ) , and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. Statement No. 166 (FASB ASC 860 Transfers and Servicing ) must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the effective date. The Company is still evaluating the impact of the above pronouncement.

Statement 167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities (FASB ASC 810 Consolidation ) , and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. Statement No. 167 (FASB ASC 810 Consolidation ) shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is still evaluating the impact of the above pronouncement.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

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

The Company is currently evaluating the potential impact, if any, of the adoption of the above recent accounting pronouncements on its consolidated results of operations and financial condition.

(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 June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

3. RESTRICTED CASH

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

4. ACCOUNTS RECEIVABLE

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

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

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.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

Accounts Receivable

	6/30/2010			12/31/2009
Gross accounts receivable	$	5,944,682		$	5,087,484
Allowance for bad debt		(59,447	)		(50,875	)
Net accounts receivable	$	5,885,235		$	5,036,609

Allowance for Bad Debt

	6/30/2010		12/31/2009
Beginning balance	$	50,875	$	35,794
Addition		8,572		15,081
Reversal		-		-
Ending balance	$	59,447	$	50,875

Accounts Receivable Aging Report

	6/30/2010		12/31/2009
<30 Days	$	3,467,058	$	3,639,712
30-60 Days		92,561		276,004
60-90 Days		166,206		118,704
90-180 Days		342,837		422,179
180-360 Days		1,478,480		446,515
>360 Days		338,093		133,496
Total	$	5,885,235	$	5,036,609

The following are the ten most significant accounts receivable at June 30, 2010:

Hebei Zhonggang Steel, Ltd.	$	880,544
Baishan Huixin Real Estate Co., Ltd		610,844
Baishan Xingda Real Estate Co., Ltd.		419,911
Baishan Yongsheng Real Estate Co., Ltd.		352,034
Baishan Lixia Real Estate Co., Ltd.		321,731
Jiangsu Zhongzheng Zhiye Ltd.		266,138
Shengcheng Real Estate Co., Ltd.		211,843
Jiangshu Shouyi Zhiye Co., Ltd.		194,059
Hebei Haitian Real Estate Co., Ltd.		187,158
Suqian Yuncheng Zhiye Ltd		131,727
Total	$	3,575,989

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

5. INVESTMENT

Ref.		6/30/2010		12/31/2009
(1)	Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.	$	5,313,079	$	5,290,855
(2)	Qujing Gas Co., Ltd.		1,718,415		1,711,227
(3)	China Construction Bank		29,375		29,251
	Total	$	7,060,869	$	7,031,333

(1).

The Company invested $1,642,152 (RMB 13,465,648) on Xiangke Oil Gas in the acquisition of 40% equity position. The $5,313,079 investment as of June 30, 2010 consisted of principal and accumulated post-acquisition investment income attributed to Xiangke Oil Gas’ prior years operation results.

The following tabulation presented the condensed balance sheets and statements of income of X iangke Oil Gas as of and for the year ended December 31, 2009.

Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.

Condensed Balance Sheets			Condensed Statements of Income
	12/31/2009			12/31/2 009
Assets
Cu rrent Assets	$	6,135,845	Revenue	$	7,379,777
Non-Current Assets		19,672,751	Cost of revenue		(3,819,923	)
Total Assets		25,808,596	Gross profit		3,559,854

Liabilities			Operating expenses		(1,951,894	)
Current Liabilities		11,267,927	Other expenses		(47,251	)
Total Liabilities		11,267,92 7	Earnings before tax		1,560,709
Net Assets		14,540,669	Income tax		(248,259	)
Total Liabilities & Net Assets	$	25,808,596	Net income	$	1,312,450

(2).

Along with two local partners in Qujing city, the second largest city in Yunnan province of P.R.C, the Company established Qujing Gas Co., Ltd. with registered capital of $4,387,761 (RMB 30,000,000). The Company’s investment of $1,718,415 (RMB 11,700,000) presented 39% equity ownership of Qujing Gas. Since Qujing Gas has not finished the required registration procedures with local government, there was no business activity during the first two quarters of 2010.

(3).

The investment of $29,375 (RMB 200,000) with China Construction Bank was a long-term investment fund.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

6. PROPERTY, PLANT AND EQUIPMENT

Property, Plant, and Equipment consisted of the followings at June 30, 2010 and December 31, 2009:

6/30/2010	At Cost		Accumulated Depreciation		Net
Gas Pipelines	$	45,303,790	$	2,653,585	$	42,650,205
Motor Vehicles		5,798,783		1,686,397		4,112,386
Machinery & Equipment		1,490,233		314,321		1,175,912
Buildings		1,009,742		228,924		780,818
Leasehold Improvements		82,752		63,418		19,334
Office Equipment		244,956		104,762		140,194
Total	$	53,930,256	$	5,051,407	$	48,878,849

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

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

Depreciation expenses included in the consolidated statements of income for the six months and twelve months ended June 31, 2010 and December 31, 2009 were $722,094 and $1,179,860 respectively.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

7. INTANGIBLE ASSETS

Intangible assets consisted of the following at June 30, 2010 and December 31, 2009:

6/30/2010	At Cost		Accumulated Amortization		Net
Land Use Rights	$	545,134	$	61,849	$	483,285
Franchises		403,901		373,914		29,987
Accounting Software		39,715		25,564		14,151
Goodwill		1,677,975		-		1,677,975
	$	2,666,725	$	461,327	$	2,205,398

12/31/200 9	At Cost		Accumulated Amortization		Net
Land Use rights	$	543,117	$	52,318	$	490,799
Franchises		402,211		371,740		30,471
Accounting Software		38,858		20,404		18,454
Goodwill		1,677,975		-		1,677,975
	$	2,662,160	$	444,462	$	2,217,699

The Company operated 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 were the rights to develop sites in Anping and Jinzhou in China. They were stated at cost less accumulated amortization.

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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

8. LOANS

a. SHORT-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			6/30/ 20 10		12/31/2009
Bank of Dalian - Beijing Branch	12/24/2010		5.31	%	$	2,937,461	$	2,925,174
Total					$	2,937,461	$	2,925,174

The loans provided by Bank of Dalian were secured by Beijing Chenguang Gas, Ltd.’s registered capital of $2,925,174 (RMB 20,000,000), CEO Mr. Liu Yuchuan and COO Mr. Zhou Zhicheng’s properties, which have been appraised at total fair market value of $933,254 (RMB 6,380,854).

b. LONG-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			6/30/2010		12/31/2009
China Construction Bank - Zhongguancun Branch	12/14/2011		5.94	%	$	4,406,192	$	4,387,761
China Development Bank - Beijing Branch	12/24/2012		5.40	%		2,203,096		2,193,880
China Development Bank - Beijing Branch	3/22/2013		5.40	%		2,203,096		-
Total					$	8,812,384	$	6,581,641

The Company obtained the loans from Construction Bank of China and China Development Bank via a collateralized agent Zhongyuan Guoxin Credit Guarantee Co., Ltd (“Guarantor”). Guarantor guaranteed to the Banks the entire principal and accrued interest. The Company pledged all Beijing Zhongran Weiye Gas’ subsidiaries to the guarantor and was required to pay 2% of the outstanding loans as financial service to the guarantor per annum. Because the Company lacked the favorable credit history to directly establish credit facility with the banks, the pursuance of a credit collateralization from guarantor was a financing solution of choice.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

9. OTHER PAYABLES

(a). Current other payables consisted of the following at June 30, 2010 and December 31, 2009:-

Ref.		6/30/2010		12/31/2009
(1)	Amount due to Employees	$	530,987	$	1,219,131
(2)	Tax Payable		145,567		695,890
(3)	Payables to Subcontractors		1,923,752		2,247,036
(4)	Payable outstanding for the acquisition of Baishan Gas Co., Ltd.		-		2,177,514
	Total	$	2,600,306	$	6,339,571

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

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

All the payables to subcontractors were unbilled liabilities.

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

(b). Non-current other payables at June 30, 2010 and December 31, 2009:-

Ref.		6/30/2010		12/31/2009
(1)	Payable outstanding for the acquisition of Baishan Gas Co., Ltd.	$	1,994,257	$	-
	Total	$	1,994,257	$	-

After assessment of the installment, the Company does not believe the obligation to be satisfied within one year from June 30, 2010. Therefore, the Company reclassifies this payable to long-term liability.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

10. CONVERTIBLE BONDS AND BOND WARRANTS

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

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

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

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

Pledge Agreement and Guaranty

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

Event of Default

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

Redemption

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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

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

The convertible bonds payable, net consisted of the followings:

		6/30/2010
Ref.		5.3M Bonds			692K Bonds			Total
(1)	Convertible Bonds Payable - principal	$	5,349,982		$	692,984		$	6,042,966
(2)	Less: Interest Discount - Warrants		(178,950	)		(44,417	)		(223,367	)
(3)	Less: Interest Discount - Beneficial Conversion Feature		(869,270	)		(223,252	)		(1,092,522	)
(4)	Less: Bond Discount - Issuance Cost		(503,766	)		(91,382	)		(595,148	)
(5)	Accretion of Interest Discount - Warrants		27,519			5,816			33,335
(6)	Accretion of Interest Discount - Beneficial Conversion Feature		869,270			223,252			1,092,522
(7)	Accretion of Bond Discount - Issuance Cost		77,470			11,966			89,436
(8)	Accretion of Interest Discount - Redemption		172,773			19,055			191,828
	Convertible Bonds Payable, net		4,945,028			594,022			5,539,050

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

(1).

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

(2).

The proceeds were allocated between the convertible bonds and warrants based on their relative fair value. For more information pertaining the calculation of fair value of convertible bonds detachable warrants, see Note 11 Capital Stock.

(3).

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

(4).

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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

(5).

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

(6).

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

(7).

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

(8).

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

Included in interest expense of $1,746,550, was $241,719 convertible bonds coupon expense and $1,209,949 presenting 69.28% non-cash flow amortization expense of convertible bonds.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

11.	CAPITAL STOCK

The authorized capital stock consists of (i) 250,000,000 shares of common stock, par value $0.001 per share, of which 26,847,473 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 4,501,679 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 26,847,473 shares of common stock issued and outstanding at June 30, 2010. All shares of common stock have one vote per share on all matters including election of directors, without provision for cumulative voting. The common stock is not redeemable and has no conversion or preemptive rights. The common stock currently outstanding is validly issued, fully paid and non-assessable. In the event of liquidation of the company, the holders of common stock will share equally in any balance of the company's assets available for distribution to them after satisfaction of creditors and preferred shareholders, if any. The holders of common stock are entitled to equal dividends and distributions per share with respect to the common stock when, as and if, declared by the board of directors from funds legally available.

Preferred Stock

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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US 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 June 30, 2010, the Company has no shares of series A convertible preferred stock issued and outstanding, and has 4,501,679 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 September 7, 2006, the Company entered into a stock purchase transaction with Vision Opportunity Master Fund, Ltd., SEI Private Trust Co., and Coronado Capital Partners LP by issuing 2,509,782 shares of series B convertible preferred stock for an aggregate of $6,876,800 in gross cash proceeds. Pursuant to the Purchase Agreement, 2,509,782 Series A Warrants, 1,254,891 Series B Warrants, 2,284,651 Series J Warrants, 2,284,651 Series C Warrants and 1,142,326 Series D Warrants were issued to the private placement investors. Simultaneously, 635,822 shares of series B convertible preferred stock and 241,708 Series A Warrants were issued to the placement agent Kuhns’ Brother. Among the gross proceeds of $6,876,800, $675,000 was used to purchased the Shell, Dolce Ventures, Inc. (Legal acquirer, accounting acquiree), $673,786 was reimbursed to the placement agent Kuhns’ Brother, and $426,978 was paid for legal counsel and other related expenses. The Company received $5,101,036 net proceeds.

On October 20, 2006, the Company entered into another stock purchase transaction with Vision Opportunity Master Fund, Ltd., Nite Capital LP, and Ijaz Malik by issuing 877,664 shares of series B convertible preferred stock for an aggregate of $2,404,800 in gross cash proceeds. Pursuant to the Purchase Agreement, 877,664 Series A Warrants, 438,833 Series B Warrants, 798,938 Series J Warrants, 798,938 Series C Warrants and 399,469 Series D Warrants were issued to the private placement investors. Simultaneously, $235,000 of gross proceeds were reimbursed to the private placement agent and $10,000 of gross proceeds were paid to transfer agent respectively. The Company received $2,159,800 net proceeds.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

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.

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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

The following table depicts the issued and outstanding shares of Common Stock, Preferred Stock, and Warrants at June 30, 2010.

	Authorized Shares		Shares issued and outstanding
Common Stock		250,000,000		26,847,473
Convertible Preferred Stock A		10,000,000		-
Convertible Preferred Stock B		5,000,000		4,501,679
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
IR CCG Elite’s Option	$	3.00	48 Months	11/1/2010		100,000	$	0.92
5.3 M Convertible Bonds Detachable Warrants	$	0.744	36 Months	11/30/2012		3,451,601	$	0.05
692K Convertible Bonds Detachable Warrants	$	0.744	36 Months	12/23/2012		447,086	$	0.11

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			CCG Elite’s Option			5.3M CB Warrants			692 K CB Warrants
Weighted-average fair value of warrants	$	0.70		$	0.81		$	0.20		$	0.44		$	0.20		$	0.92		$	0.05		$	0.11
Strike price	$	3.84		$	3.38		$	4.84		$	3.84		$	4.84		$	3.00		$	0.744		$	0.744
Risk-free interest rate		4.18	%		4.18	%		4.18	%		4.18	%		4.18	%		4.18	%		1.12	%		1.51	%
Expected volatility		40.00	%		40.00	%		40.00	%		40.00	%		40.00	%		40.00	%		12.84	%		12.84	%
Years to maturity		5.00			5.00			3.00			4.00			3.00			4.00			3.00			3.00

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

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US 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 June 30, 2010:

	Preferred Stock B				Preferred Stock B-1				Common Stock
Name of Shareholders	Number of Shares outstanding		Capital		Number of Shares outstanding		Capital		Number of Shares outstanding		Capital		Additional Paid in Capital		% of Equity Holdings
Manager / Insider		-	$	-		-	$	-		12,653,662	$	12,654		4,064,862		47	%
Minority Investor		-		-		-		-		3,428,551		3,428		747,457		13	%
Private Placement - Investor		4,501,679		4,502		95,418		95		10,765,260		10,765		23,848,122		40	%
Beneficial Conversion Feature		-		-		-		-		-		-		8,094,814		-
		4,501,679	$	4,502		95,418	$	95		26,847,473	$	26,847		36,755,255		100	%

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

12.

INCOME TAX

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

The following table details the difference between the actual tax provisions and the amounts of tax exemption obtained from PRC government for the six-month and twelve-month periods ended June 30, 2010 and December 31, 2009 respectively.

	6/30 /2010		12/31/2009
Provision for Income Tax - PRC Subsidiaries	$	443,842	$	1,324,184
Tax Exemption - Granted by PRC Government		-		(229,527	)
Income Tax	$	443,842	$	1,094,657

Income before taxes and provision for taxes consisted of the following for the six-month periods ended June 30, 2010 and 2009:-

	6/30/2010			6/30/2009
Income (loss) before taxes:
US	$	(1,712,477	)	$	(154,215	)
BVI		(135,341	)		(69,057	)
PRC		1,942,472			1,263,947
Total income before tax	$	94,654		$	1,040,675

Provision for taxes:
US Federal	$	-		$	-
US State		-			-
PRC		443,842			273,904
Total provision for taxes	$	443,842		$	273,904
Effective tax rate		468.91	%		26.32	%

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

13. 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.

Financial Position Segment Report

As of June 30, 2010

	Gas Distribution		Gas Pipeline Installation		Shell, BVIs, & Eliminations		Total
Assets
Current Assets	$	12,266,490	$	5,634,218	$	1,587,028	$	19,487,735
Non-Current Assets		23,276,213		50,675,613		-		73,951,827
Total Assets		35,542,703		56,309,831		1,587,028		93,439,562

Liabilities
Current Liabilities		1,470,312		12,269,424		160,154		13,899,890
Non-current Liabilities		1,749,178		14,596,512		-		16,345,690
Total Liabilities		3,219,490		26,865,936		160,154		30,245,580

Net Assets		32,323,213		29,443,895		1,426,874		63,193,982

Liabilities & Equities	$	35,542,703	$	56,309,831	$	1,587,028	$	93,439,562

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

Operation Result Segment Report

For the six-month ended June 30, 2010

	Gas Distribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total

Sales Revenue	$	12,124,888		$	5,569,178		$	(4,820,187	)	$	12,873,879
Cost of Revenue		(11,693,588	)		(1,970,079	)		4,820,187			(8,843,480	)
Gross Profit		431,300			3,599,099			-			4,030,399

Operating Expense		(191,614	)		(1,598,973	)		(396,446	)		(2,187,033	)
Operating Income/(Loss)		239,686			2,000,126			(396,446	)		1,843,366

Other Income/(Loss)		(187,132	)		(110,208	)		(1,451,372	)		(1,748,712	)
Earnings before tax		52,554			1,889,918			(1,847,818	)		94,654

Income tax		(12,008	)		(431,834	)		-			(443,842	)

Net Income	$	40,546		$	1,458,084		$	(1,847,818	)	$	(349,188	)

Financial Position Segment Report

As of December 31, 2009

	Gas Distribution		Gas Pipeline Installation		Shell, BVIs, & Eliminations		Total
Assets
Current Assets	$	12,361,628	$	8,090,196	$	2,247,402	$	22,699,226
Non-Current Assets		27,839,832		42,538,606		-		70,378,438
Total Assets		40,201,460		50,628,802		2,247,402		93,077,664

Liabilities
Current Liabilities		1,695,239		16,762,395		441,426		18,899,060
Non-current Liabilities		1,002,095		9,908,647		-		10,910,742
Total Liabilities		2,697,334		26,671,042		441,426		29,809,802

Net Assets		37,504,126		23,957,760		1,805,976		63,267,862

Liabilities & Equities	$	40,201,460	$	50,628,802	$	2,247,402	$	93,077,664

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

Operation Result Segment Report

For the six months ended June 30, 2009

	Gas Distribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total

Sales Revenue	$	10,441,304		$	4,152,176		$	(2,224,168	)	$	12,369,312
Cost of Revenue		(10,164,044	)		(1,629,521	)		2,224,168			(9,569,397	)
Gross Profit		277,260			2,522,655			-			2,799,915

Operating Expense		(142,883	)		(1,300,024	)		(223,742	)		(1,666,649	)
Operating Income/(Loss)		134,377			1,222,631			(223,742	)		1,133,266

Other Income/(Loss)		(9,215	)		(83,846	)		470			(92,591	)
Earnings before tax		125,162			1,138,785			(223,272	)		1,040,675

Income tax		(27,123	)		(246,781	)		-			(273,904	)

Net Income	$	98,039		$	892,004		$	(223,272	)	$	766,771

The Company's operations are located in the PRC. All revenue is from customers in the PRC. All of the Company’s assets are located in the PRC. Sales of natural gas and gas pipeline construction are carried out in the PRC. Accordingly, no analysis of the Company's sales and assets by geographical market is presented.

No other measures of segment profit or loss and assets have been provided or reviewed by the company's chief operating decision maker.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

14. EARNINGS PER SHARE

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

	Ref	6/30/2010			6/30/2009
Net Income		$	(349,188	)	$	766,771
Preferred Dividends			-			-
Constructive Preferred Dividends			-			-
Income Available to Common Stockholders for Basic EPS		$	(349,188	)	$	766,771

Interest Expense for Convertible Bonds, net of tax			-			-
Income Available to Common Stockholders for Diluted EPS		$	(349,188	)	$	766,771

Original Shares			26,769,313			25,269,313
Addition to Common Stock			35,172			433,333
Basic Weighted Average Shares Outstanding			26,804,485			25,702,646

Potentially Dilutive Securities:
Addition to Common Stock from Conversion of Preferred Stock B	(1)		-			4,579,839
Addition to Common Stock from Conversion of Preferred Stock B-1	(2)		-			95,418
Addition to Common Stock from Conversion of Convertible Bonds	(3)		-			-
Addition to Common Stock from Exercise of Warrants	(4)		-			-
Diluted Weighted Average Shares Outstanding			26,804,485			30,377,903

Earnings Per Share
Basic		$	(0.013	)	$	0.03
Diluted		$	(0.013	)	$	0.02

Weighted Average Shares Outstanding
Basic			26,804,485			25,702,646
Diluted			26,804,485			30,377,903

(1).

The application of conversions’ of preferred stock B to common stock was anti-dilutive for the six-month periods ended June 30, 2010.

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of June 30, 2010 and December 31, 2009

And for the six-month ended June 30, 2010 and 2009

(Stated in US Dollars)

(2).

The application of conversions of preferred stock B-1 to common stock was anti-dilutive for the six-month periods ended June 30, 2010.

(3).

The average price of the Company’s common stock was $0.83 for the six-month periods ended June 30, 2010, which was higher than the conversion price $0.62 of the convertible bonds; however the conversion of the convertible bonds to common stock would have been anti-dilutive; therefore, they have been excluded from diluted earnings per share.

(4).

The exercise of warrants to common stock was anti-dilutive for the six-month periods ended June 30, 2010 and 2009.

15. 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.

On May 26, 2009, the private placement investors led by Vision Opportunity Master Fund, Ltd. waived the 2007 net income target application. The Company was exempt from the issuance of 1.2 million shares of contingent common stock. Simultaneously, 1.5 million shares make good stock held in an escrow account were issued to the private placement investor on May 8, 2009 as compensation for not attaining the 2008 net income target. A cost of $1,500, based on US$0.001 par value, was debited to additional paid in capital account.

On September 14, 2009, the IRS of United States charged the Company $270,000 penalty for the failure to file timely Form 5471 on December 31, 2007 tax return. However, the Company did not believe it should be subject to this liability because of the fact that the Company was only a holding company. It did not have any tax liability for the year 2007. The Company appealed the penalty by filing protest letter to IRS office on February 12, 2010. As of August 2, 2010, the Company has not received any reply from IRS.

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

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, in 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, has been affected in 2008. Starting from 2008, in response to a slowdown in its economy in that year, the Chinese government implemented a wide range of initiatives that prioritized the boosting of the overall economy 。 The key components of the central government spending are infrastructure and clean energy. Those help the continuity of increase of both Connection fee and Gas sale in our business. We saw signs of recovery of the real estate market in China at the beginning of 2009, and experienced the increased activities in the 3 rd quarter of 4 th quarter of 2009. Starting in April 2010, the Chinese government issued new policies to curb the precipitous rise of housing prices in some cities and satisfy people's basic needs for housing. The new initiatives from government have resulted in lower transaction volume in recent months.

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

There are three pillars in Chinese economy: domestic consumption (both private and public), net exports, and domestic investment. Chinese Government’s RMB 4 trillion stimulus package has made great impacts on China's domestic production and investments in the past year. In 2009, GDP growth rebounded to 7.9 per cent in the second quarter from 6.1 percent in the first, which represented a 10-year low. In the third quarter and fourth quarter, China’s economic growth accelerated to 9.1 per cent and 10.7 per cent respectively. China GDP grows by 8.7 percent in 2009, exceeding the target 8%. The GDP growth remains strong in 2010. China's GDP grew 11.9% in the first quarter of 2010 from a year earlier. It grew 10.3% during the second quarter of 2010.

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

Material Opportunities

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

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

Material Challenges

There are vast number of small-to-medium sized cities left undeveloped, but the competition is growing, as there are many small new players in the market attracted by the profitability and growth potential of the 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 are facing 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.

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

China’s energy market is highly regulated by the government, with regard to purchase price and sale price of natural gas. Whenever there is an adjustment to purchase price by the government, gas distributors would increase the sale price correspondingly, subject to a public hearing and government approval. The increase of natural gas prices in China is lagging behind that in the international markets. The Chinese government has seldom adjusted natural gas and we cannot rule out the possibilities of an increase of natural gas prices by the government in the future. Even though we can adjust the sale price accordingly after the increase of purchase price, passing the increase to end users. However, it 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 the 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 dependence on connection fees, the Company is looking at opportunities to diversify its business by expanding into related areas, such as pipeline and gas station business. However, we do not expect to develop into those areas in large scale any time soon and it may take some time for those businesses to become our major business.

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 June 30, 2010 Compared to Three Months Ended June 30, 2009

During the three months ended June 30, 2010, net revenues were $5,916,218, representing a decrease of 19.31 % from the same period of last year. Gross profit for the three months ended June 30, 2010 was $1,905,885, representing an increase of 24.13% from the same period of last year. Our operating income for the three months ended June 30, 2010 was $896,626, representing an increase of 53.45% from the same period of 2009.

	For the 3 months ended June 30,
	2010			2009			Change
	US$			US$
Net Revenues		5,916,218			7,331,620			-19.31	%
Gross Profit		1,905,885			1,535,435			24.13	%
Operating Income		896,626			584,305			53.45	%
Net Income		-140,602			421,134			-133.39	%
Gross Margin		32.21	%		20.94	%		53.82	%
Net Margin		-2.38	%		5.74	%

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 June 30, 2010 were $5,916,218, compared to $7,331,620 for the same period in 2009, representing a decrease of 19.31%. The decrease was due to the decrease of both gas sales and connection fees. During this period, we connected 6,490 new residential households to our gas distribution network, resulting in total connection fees of $2,082,636. Gas sales during the same period were $3,833,582. In comparison, we connected 7,218 new residential households to our gas distribution network for the same period in 2009, resulting in total connection fees of $2,928,440. Gas sales during the same period in 2009 were $4,403,180.

	For the 3 months ended June 30,
	2010					2009					Change
(In $ million)	US$		%			US$		%			%
Net Revenues		5.92		100	%		7.33		100	%		-19.31	%
Connection Fees		2.08		35	%		2.93		40	%		-28.88	%
Gas Sales		3.83		65	%		4.40		60	%		-12.94	%

The decreases in our net revenues for the three months ended June 30 were due to the following factors:

1) Decrease of gas sales. Gas sales to residential users continued to grow. However, that increase could not offset the decrease of sales to industrial users. There were adjustments of production lines in two of our industrials users, which caused the reduction of gas consumption in those two industrial users.

2) Decrease of connection fees from residential customers.

Lower average connection fees per unit in this quarter compared with the same period of last year. In the second quarter of year 2009, we developed certain residential projects with higher connection fees per unit.

We connected 10% less residential households during the second quarter of 2010 compared to the same period of last year.

Connection Fees

Connection fees during the three months ended June 30, 2010 were $2.08 million, representing a decrease of 28.88% from the same period of 2009, accounting for 35% of the total net revenue as compared with approximately 40% of the total net revenue for the same period in 2009. The source of connection fees was mainly from the development of new residential users.

	For the 3 months ended June 30,
(in US$ m illions)	2010					2009					Change
	US$		%			US$		%			%
Connection Fees		2.08		100	%		2.93		100	%		-28.88	%
Residential Users		2.08		100	%		2.93		100	%
Industrial Users		0.00		0	%		0.00		0	%

Gas Sales

Gas sales were $3.83 million during the three months ended June 30, 2010, accounting for 65% of total net revenue for the three months ended June 30, 2010, representing a decrease of 12.94% over the same period of 2009. Gas sales to residential users increased 5.75% to $2.40 million for the three months ended June 30, 2010 from $2.26 million in the same period of 2009. Gas sales to industrial and commercial users decreased 32.7% to $1.44 million for the three months ended June 30, 2010 from $2.14 million in the same period of 2009.

	For the 3 months ended June 30,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Gas Sales		3.83		100	%		4.40		100	%		-12.94	%
Residential Users		2.39		62	%		2.26		51	%		5.75	%
Industrial and Commercial Users		1.44		38	%		2.14		49	%		-32.7	%

Cost of Revenues

Cost of revenues for the three months ended June 30, 2010, which includes cost of connection and cost of gas sales, was $4.01 million, representing a decrease of 30.81% from $5.8 million in the same period of 2009.

	For the 3 months ended June 30,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Cost of Revenues		4.01		100	%		5.80		100	%		-30.81	%
Connection Cost		0.46		11	%		1.50		26	%		-69.41	%
Gas Cost		3.55		89	%		4.30		74	%		-17.34	%

Cost of Connection

The cost of connection decreased 69.41% to $0.46 million during the three months ended June 30, 2010 from $1.50 million for the same period in 2009. This decrease outpaced the 28.88% decrease in connection fees revenue during the same period of 2009. During the second quarter of last year 2009, higher cost of raw materials, parts, installation and maintenance fees, and adjustment in the second quarter of cost of connection from the first quarter of 2009, contributed the higher-than-average cost in connection fee services.

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

Cost of Gas Sales

The cost of gas sales decreased 17.34% to $3.55 million during the three months ended June 30, 2010 from $4.30 million for the same period in 2009. This decrease, which surpassed the 12.94% decrease in sales of natural gas during the same period, is largely due to the improvement of delivery cost in this quarter.

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

Gross Profit

During the three months ended June 30, 2010, gross profit was $1.91 million, representing an increase of approximately 24.13% from the same period of 2009. Gross profit from connection fees was $1.62 million for the three months ended June 30, 2010, accounting for 85% of total gross profit. In comparison, gross profit from connection fees was $1.43 million for the three months ended June 30, 2009, accounting for 93% of total gross profit. Gross profit from gas sales was $0.28 million for the three months ended June 30, 2010, accounting for 15% of total gross profit, compared to $0.11 million, accounting for 7% of total gross profit in the same period of 2009.

	For the 3 months ended June 30,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Gross Profit		1.91		100	%		1.54		100	%		24.13	%
Connection		1.62		85	%		1.43		93	%		13.65	%
Gas		0.28		15	%		0.11		7	%		164.62	%

Gross margin during the three months ended June 30, 2010 was 32.21%, compared to 20.94% during the same period in 2009.

Gross margin for connection fees for the three months ended June 30, 2010, was 77.98%, compared to 48.79% in the same period of 2009.

Gross margin for sales of natural gas was 7.35% for the three months ended June 30, 2010, compared to 2.42% during the same period of 2009.

Selling and Marketing Expenses

Our selling and marketing expenses in the three months ended June 30, 2010 were $0.31 million, approximately 5.25% of our net revenues, compared with $0.22 million or 2.97% of our net revenues in the same period of 2009.

General and Administrative Expenses and Other Expenses

General and administrative expenses were $0.70 million for the three months ended June 30, 2010, approximately 11.81% of our net revenues, compared with $0.73 million, or approximately 10.0% of net revenues for the same period in 2009.

Operating Income

The operating income for the three months ended June 30, 2010 was $0.90 million, representing an increase of 53.45%, compared to the operating income of $0.58 million for the same period of 2009. This is largely driven by the improvement of gross margin from both connection fee revenue and gas sales.

Other Income (Expense)

Other expense was $0.83 million for the three months ended June 30, 2010, compared with Other Expense of $0.05 million for the same period of 2009. The significant increase was due to the amortization costs of convertible bonds and interest expense of convertible bonds. We closed a convertible debt financing in the last quarter of 2009, which resulted in costs associated with the financing, such as interest discount-warrants, beneficial conversion feature, debt issuance cost, etc. Included in interest expense of $822 thousand, was $121 thousand convertible bonds coupon expense and $530 thousand non-cash flow amortization expense of convertible bonds.

Income tax

Income tax was $0.20 million for the three months ended June 30, 2010, compared to $0.12 million for the same period of 2009.

Net Income

Net loss for the three months ended June 30, 2010 was $0.14 million, compared with net income of $0.42 million for the same period of 2009. Largely driven by the improvement of gross margin from both connection fee revenue and gas sales, operating income achieved considerable improvement of 53.45% to $0.90 million compared to the operating income of $0.58 million for the same period of 2009. However, that significant improvement of operating income was negated by the additions of amortization costs of convertible bonds. Excluding these non-cash non-operational items of amortization expense of convertible bonds in the total of $0.53 million, our adjusted net income in the second quarter of 2010 would have been $0.39 million.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

During the six months ended June 30, 2010, our net revenues were $12,873,879, representing an increase of 4.08% from the same period of last year, and gross profit was $4,030,399, representing an increase of 43.95% from the same period of last year. During the six months ended June 30, 2010, our operating income was $1,843,366, representing a significant increase of 62.66% from the same period of 2009.

	For the 6 months ended June 30,
	2010			2009			Change
	US$			US$			%
Net Revenues		12,873,879			12,369,312			4.08	%
Gross Profit		4,030,399			2,799,915			43.95	%
Operating Income		1,843,366			1,133,266			62.66	%
Net Income		-349,188			766,771			-145.54	%
Gross Margin		31.31	%		22.64	%		38.31	%
Net Margin		-2.71	%		6.20	%

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 six months ended June 30, 2010 were $12,873,879, representing an increase of 4.08%, compared to $12,369,312 for the same period in 2009. The increase was due to the increases of connection fee revenue. During this period, we connected 13,694 new residential households to our gas distribution network, resulting in total connection fees of $4,828,051. Gas sales during the same period were $8,045,828. In comparison, we connected 10,096 new residential households to our gas distribution network in the same period of 2009, resulting in total connection fees of $4,152,176. Gas sales during the period were $8,217,136.

	For the 6 months ended June 30,
	2010					2009					Change
(In $ million)	US$		%			US$		%			%
Net Revenues		12.87		100	%		12.37		100	%		4.08	%
Connection Fees		4.83		38	%		4.15		34	%		16.28	%
Gas Sales		8.05		62	%		8.22		66	%		-2.08	%

Our net revenues for the six months ended June 30, 2010 increased by 4.08%, largely resulted from the following factors:

1.	Increase of connection fees from residential customers. We were able to connect more residential households during the first half of 2010, compared to the same period of last year.

Slight decrease of gas sales. Gas sales to residential users continue to grow. However, that increase couldn’t fully offset the decrease of sales to industrial users. Lower sales from industrial users due to the following factors: (1) The severe weather conditions in China affected the logistics of gas delivery in the first quarter this year. Chinese government prioritized the delivery gas to residential users during the severe weather during this period. (2)There were adjustments of production lines in two of our industrials users, which caused the reduction of gas consumption in these two industrial users.

Connection Fees

Connection fees during the six months ended June 30, 2010 were $4.83 million, representing an increase of 16.28% over the same period of 2009, accounting for 38% of the total net revenue compared with approximately 34% for the same period in 2009. With regard to the source of connection fees, almost all connection fees came from the development of new residential users.

	For the 6 months ended June 30,
(in US$ millions)	20 10					2009					Change
	US$		%			US$		%			%
Connection Fees		4.83		100	%		4.15		100	%		16.28	%
Residential Users		4.83		99.94	%		4.07		98	%		18.62	%
Industrial Users		0.003		0.06	%		0.08		2	%		-96.53	%

Gas Sales

Gas sales were $8.05 million during the six months ended June 30, 2010, accounting for 63% of total net revenue in 2010, representing a slight decrease of 2.08% over the same period of last year. During the six months ended June 30, 2010, gas sales to residential users increased 37.46% from $3.31 million in the same period of 2009 to $4.54 million in 2010. During the six months ended June 30, 2010, gas sales to industrial and commercial users decreased 28.72%, from $4.91 million in the same period of 2009 to $3.50 million in 2010.

	For the 6 months ended June 30,
	20 10					2009					Change
($ million)	US$		%			US$		%			%
Gas Sales		8.05		100	%		8.22		100	%		-2.08	%
Residential Users		4.54		56	%		3.31		40	%		37.46	%
Industrial and Commercial Users		3.51		44	%		4.91		60	%		-28.72	%

Cost of Revenues

Cost of revenues for the six months ended June 30, 2010, which includes cost of connection and cost of gas sales, was $8.84 million, a decrease of 7.59%, from $9.57 million in the same period of 2009.

	For the 6 months ended June 30,
	20 10					200 9					Change
($ million)	US$		%			US$		%			%
Cost of Revenues		8.84		100	%		9.57		100	%		-7.59	%
Connection Cost		1.23		14	%		1.63		17	%		-24.59	%
Gas Cost		7.61		86	%		7.94		83	%		-4.10	%

Cost of Connection

The cost of connection decreased 24.59% to $1.23 million during the six months ended June 30, 2010 from $1.63 million for the same period in 2009. During the first half of last year 2009, we incurred higher cost of raw materials, parts, and installation and maintenance fees.

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

Cost of Gas Sales

The cost of gas sales decreased 4.10% to $7.61 million during the six months ended June 30, 2010 from the same period in 2009, when it was $7.94 million. We achieved improvement of delivery cost in the first half of 2010.

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

Gross Profit

During the six months ended June 30, 2010, gross profit was $4.03 million, an increase of approximately 43.95% from the same period of 2009. Gross profit from connection fees was $3.60 million for the six months of 2010, accounting for 89% of total gross profit. In comparison, gross profit from connection fees was $2.52 million for the six months of 2009, accounting for 90% of total gross profit. Gross profit from gas sales was $0.43 million, accounting for 11% of total gross profit, compared to $0.28 million, 10% of total gross profit in the same period of 2009.

	For the 6 months ended June 30,
	2010					2009					Ch ange
($ million)	US$		%			US$		%			%
Gross Profit		4.03		100	%		2.80		100	%		43.95	%
Connection		3.60		89	%		2.52		90	%		42.68	%
Gas		0.43		11	%		0.28		10	%		55.51	%

Gross margin during six months ended June 30, 2010 was 31.31%, compared to 22.64% during the same period in 2009.

Gross margin for connection fees for the six months ended June 30, 2010 was 74.55%, compared to 60.76% during the same period of 2009. The decrease of cost of connection helped the improvement of gross margin.

Gross margin for sales of natural gas was 5.36% for the six months ended June 30, 2010, compared to 3.37% during the same period of 2009. The increase was due to improvement of delivery cost for the six months ended June 30, 2010 .

Selling and Marketing Expenses

Our selling and marketing expenses in the six months ended June 30, 2010 were $ 0. 58 million , or approximately 4.52% of our net revenues, compared with $ 0 . 42 million, or approxim ately 3 . 4 % of net revenues for the same period in 2009.

General and Administrative Expenses and other expenses

General and administrative expenses were $1.61 million for the six months ended June 30, 2010, or approximately 12.47% of our net revenues, compared with $1.25 million, or approximately 10.07% of net revenues for the same period in 2009. Professional fees are higher than the same period of 2009, we incurs approximately $100 thousand for engaging Ernst & Yong on SOX compliance and internal control in the first half of 2010.

Operating Income

The operating income for the six months ended June 30, 2010 was $1.84 million, representing an increase of 62.66%, compared to the operating income of $1.13 million in 2009. This is driven by the increase of connection fees, which have a higher gross margin, and improvement of gross margin from both connection fee revenue and gas sales.

Other Income (Expense)

Other Expense was $1.75 million for the six months ended June 30, 2010, compared with Other Expense of $0.09 million for the same period of 2009. The significant increase was due to the amortization costs of convertible bonds and interest expense of convertible bonds. We closed a convertible debt financing in the last quarter of 2009, which resulted in costs associated with the financing, such as interest discount-warrants, beneficial conversion feature, debt issuance cost, etc. Included in interest expense of $1.75 million for the six months ended June 30, 2010, was $0.24 million convertible bonds coupon expense and $1.21 million non-cash flow amortization expense of convertible bonds.

Income tax

Income tax was $0.44 million for the six months ended June 30, 2010, compared to $0.27 million in 2009.

Net Income

Net loss in the six months ended June 30, 2010 was $0.35 million, compared with net income of $0.77 million in the same period in 2009. Driven by the increase of connection fees, which have a higher gross margin, and improvement of gross margin from both connection fee revenue and gas sales, operating income achieved significant improvement of 62.66% to $1.84 million compared to the operating income of $1.13 million for the same period of 2009. However, that significant improvement of operating income was negated by the additions of amortization costs of convertible bonds. Excluding these non-cash and non-operational items of amortization expense of convertible bonds in the total of $1.21 million, our adjusted net income in the six months ended June 30, 2010 would have been $0.86 million.

Liquidity and Capital Resources

Cash and cash equivalents were $6.36 million as of June 30, 2010, a decrease of $3.46 million as compared to $9.82 million of cash and cash equivalents as of Dec. 31, 2009.

Cash used in operating activities for the six months ended June 30, 2010 was $1.67 million, a decrease of $4.48 million from $2.81 million sourced during the same period of 2009. Such decrease was mainly due to the decrease of net income, adjusted for non-cash expense items and changes in working capital.

Cash used in investing activities for the six months ended June 30, 2010 was $4.31 million, an increase of $0.37 million from $3.94 million during the same period of 2009. Such increase was mainly due to the increase of property, plant & equipment, and construction in progress.

Cash sourced in financing activities for the six months ended June 30, 2010 was $2.24 million. We borrowed $2.24 million from local bank in the first quarter of 2010.

Accounts Receivable

Accounts receivable as of June 30, 2010 were $5.89 million, an increase of $0.85 million from $5.04 million as of December 31, 2009.

Notes Receivable

There is no Notes receivable as of June 30, 2009.

Inventory

Inventory of $0.53 million as of June 30, 2010 was comprised of spare parts and natural gas.

Fixed Assets

Fixed Assets as of June 30, 2010 were $53.93 million, representing an increase of $1.83 million from $52.10 million as of December 31, 2009. The table below is a breakdown of our fixed assets at cost:

	2010			2009
At Cost
Gas Pipelines	$	45,303,790		$	43,518,519
Motor Vehicles		5,798,783			5,775,903
Machinery & Equipment		1,490,233			1,482,599
Buildings		1,009,742			1,005,517
Leasehold Improvements		82,752			80,113
Office Equipment		244,956			238,673
Less Accumulated depreciation		(5,051,407	)		(4,329,313	)
	$	48,878,849		$	47,772,011

Bank Loans

Short-term Bank loans as of June 30, 2010 were $2.94 million, no change compared to that as of December 31, 2009.

Long-term Bank loans as of June 30, 2010 were $8.81 million, an increase of $2.23 million compared to $6.58 million as of December 31, 2009. We borrowed additional loan of $2.23 million in the first quarter of 2010.

Accounts Payables

Accounts payables as of June 30, 2010 was $7.32 million, a decrease of $1.24 million from that as of December 31, 2009.

Other Payables

Other payables - current as of June 30, 2010 were $2.60 million, a decrease of $3.74 million from that as of December 31, 2009. $1.99 Million was reclassified from Other Payable – current to Other Payable – non-current in the second quarter of this year.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a – 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act”)) are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2010.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2010, there was no change in our internal controls over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

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. (Removed and Reserved)

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
23.1		Consent of Samuel H. Wong & Co., LLP

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: August 16, 2010	By:	/s/ Yuchuan Liu
		Yuchuan Liu
		Chairman and Chief Executive Officer

	SINO GAS INTERNATIONAL HOLDINGS, INC.

Date: August 16, 2010	By:	/s/ Yugang Zhang
		Yugang Zhang
		Chief Financial Officer