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 September 30, 2010

or

¨ 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 November 15, 2010, the Registrant had 27,312,636 shares of common stock outstanding.

Sino Gas International Holdings, Inc.

Table of Contents

		Page
PART I -	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
	Notes to Financial Statements (Unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operation	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
PART II -	OTHER INFORMATION	53
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	(Removed and Reserved)	53
Item 5.	Other Information	53
Item 6.	Exhibits	53

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Sino Gas International Holdings, Inc.

Content	Page
Report of Independent Registered Public Accounting Firm	1
Consolidated Balance Sheets	2
Consolidated Statements of Income	4
Consolidated Statements of Stockholders’ Equity	5
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8

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 September 30, 2010 and December 31, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three-month and nine-month periods ended September 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
November 4, 2010	Certified Public Accountants

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of September 30, 2010 and December 31, 2009

(Stated in US Dollars)

		9/30/2010		12/31/2009
ASSETS
Current Assets	Notes
Cash & cash equivalents	2(e)	$	3,708,714	$	9,820,890
Restricted cash	3		-		126,400
Notes receivable			-		351,021
Accounts receivable	2(f),4		6,426,524		5,036,609
Inventory			1,115,042		416,931
Advance to suppliers	2(g)		5,097,456		4,814,420
Prepayment and others			724,901		446,840
Other receivables	2(f)		2,293,646		1,686,115
Total Current Assets			19,366,283		22,699,226
Non-Current Assets
Investment	2(h),5		7,177,354		7,031,333
Property, plant & equipment, net	2(j),6		49,318,297		47,772,011
Construction in progress	2(l)		18,430,433		13,357,395
Intangible assets, net	2(k),7		2,248,347		2,217,699
Total Non-current Assets			77,174,431		70,378,438
Total Assets		$	96,540,714	$	93,077,664
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Bank loans	8	$	2,985,921	$	2,925,174
Accounts payable			6,998,869		8,560,120
Other payables – current	9(a)		2,922,571		6,339,571
Accrued liabilities			92,469		453,335
Unearned revenue	2(m)		1,532,575		620,860
Total Current Liabilities			14,532,405		18,899,060
Non-current Liabilities
Long-term bank loans	8		8,957,764		6,581,641
Non-current Convertible Bonds	10		5,486,499		4,329,101
Other payables - non-current	9(b)		2,019,692		-
Total Non-current Liabilities			16,463,955		10,910,742
Total Liabilities		$	30,996,360	$	29,809,802

See Accompanying Notes to Financial Statements and Accountant’s Report

2

Sino Gas International Holdings, Inc.

Consolidated Balance Sheets

As of September 30, 2010 and December 31, 2009

(Stated in US Dollars)

		9/30/2010		12/31/2009
	Notes
STOCKHOLDERS' EQUITY
Preferred Stock B US$0.001 par value; 5,000,000 shares authorized; 4,409,097 and 4,579,839 shares issued and outstanding as of September 30, 2010 and December 31, 2009 respectively.	11	$	4,410	$	4,580
Additional paid in capital - Preferred Stock B			5,125,488		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 September 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; 27,312,636 and 26,769,313 shares issued and outstanding as of September 30, 2010 and December 31, 2009 respectively.	11		27,312		26,769
Additional paid in capital - Common Stock			23,045,495		22,513,732
Additional paid in capital - Warrants Series: A, B, J, C, D			311,110		311,110
Additional paid in capital - Warrants Series: E, G			47,946		47,946
Additional paid in capital - Warrants Series: F, R			-		107,652
Additional paid in capital - Convertible Bonds Detachable Warrants			223,367		223,367
Additional paid in capital - Beneficial Conversion Feature			8,094,814		8,094,814
Statutory reserve	2(v)		4,626,982		4,612,191
Retained earnings			14,804,529		14,143,089
Accumulated other comprehensive income	2(x)		9,100,144		7,725,883
Total Stockholders' Equity			65,544,354		63,267,862
Total Liabilities & Stockholders' Equity		$	96,540,714	$	93,077,664

See Accompanying Notes to Financial Statements and Accountant’s Report

3

Sino Gas International Holdings, Inc.

Consolidated Statements of Income

For the three-month and nine-month periods ended September 30, 2010 and 2009

(Stated in US Dollars)

		Three Months Ended						Nine Months Ended
	Note	9/30/2010			9/30/2009			9/30/2010			9/30/2009
Sales revenues	2(p)	$	8,097,341		$	6,988,621		$	20,971,220		$	19,357,933
Cost of revenues			(4,923,438	)		(4,505,070	)		(13,766,918	)		(14,074,466	)
Gross Profit			3,173,903			2,483,551			7,204,302			5,283,466
Operating Expense
Selling expense			(567,781	)		(288,766	)		(1,149,685	)		(709,256	)
General and administrative expense			(749,396	)		(656,168	)		(2,354,525	)		(1,902,328	)
Total operating expense			(1,317,177	)		(944,935	)		(3,504,210	)		(2,611,584	)
Operating Income			1,856,726			1,538,616			3,700,092			2,671,882
Other Income/(Expense)
Other income			2,099			83,000			12,394			94,206
Other expense			(4,589	)		(11,178	)		(26,087	)		(33,493	)
Interest income			3,011			941			12,050			4,019
Interest expense			(436,223	)		(96,264	)		(2,182,773	)		(180,824	)
Total other income/(expense)			(435,702	)		(23,501	)		(2,184,416	)		(116,092	)
Income before tax			1,421,024			1,515,116			1,515,676			2,555,790
Income tax	2(r),12		(395,166	)		(306,479	)		(839,007	)		(580,383	)
Gain/(loss) from discontinued operation, net of tax	17		(439	)		-			(439	)		-
Net income		$	1,025,418		$	1,208,636		$	676,230		$	1,975,407
Earnings per share	2(z),13
-      Basic		$	0.038		$	0.045		$	0.025		$	0.076
-      Diluted		$	0.035		$	0.038		$	0.025		$	0.064
Weighted Average Shares Outstanding
-      Basic			27,090,770			26,769,313			26,899,913			26,058,202
-      Diluted			36,514,909			31,444,570			26,899,913			30,733,459

See Accompanying Notes to Financial Statements and Accountant’s Report

4

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of September 30, 2010 and December 31, 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		(170,742	)		(170	)		(198,484	)		-		-		-		170,742		170		198,484
Conversion of Convertible Bonds into Common Stock		-			-			-			-		-		-		322,581		323		199,677
Shares based compensation		-			-			-			-		-		-		50,000		50		25,950
Expiration of Warrants F&R		-			-			-			-		-		-		-		-		107,652
Appropriation of Retained Earnings		-			-			-			-		-		-		-		-		-
Foreign Currency Translation Adjustment		-			-			-			-		-		-		-		-		-
Balance at September 30, 2010		4,409,097			4,410			5,125,488			95,418		95		132,662		27,312,636		27,312		23,045,495

See Accompanying Notes to Financial Statements and Accountant’s Report

5

Sino Gas International Holdings, Inc.

Consolidated Statements of Stockholders’ Equity

As of September 30, 2010 and December 31, 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		-		-		-			-		-				676,230			-		676,230
Conversion of Preferred Stock B to Common Stock		-		-		-			-		-		-		-			-		-
Conversion of Convertible Bonds into Common Stock		-		-		-			-		-		-		-			-		200,000
Shares based compensation		-		-		-			-		-		-		-			-		26,000
Expiration of Warrants F&R		-		-		(107,652	)		-		-		-					-		-
Appropriation of Retained Earnings		-		-		-			-		-		14,791		(14,791	)		-		-
Foreign Currency Translation Adjustment		-		-		-			-		-		-		-			1,374,260		1,374,260
Balance at September 30, 2010		311,110		47,946		-			223,367		8,094,814		4,626,982		14,804,529			9,100,144		65,544,354

	12/31/2009		9/30/2010		Total
Comprehensive Income
Net Income	$	4,047,584	$	676,230	$	4,723,814
Other Comprehensive Income
Foreign Currency Translation Adjustment		49,039		1,374,260		1,423,299
Total	$	4,096,623	$	2,050,490	$	6,147,113

See Accompanying Notes to Financial Statements and Accountant’s Report

6

Sino Gas International Holdings, Inc.

Consolidated Statements of Cash Flows

For the three-month and nine-month periods ended September 30, 2010 and 2009

(Stated in US Dollars)

	Three Months Ended						Nine Months Ended
	9/30/2010			9/30/2009			9/30/2010			9/30/2009
Cash Flows from Operating Activities
Net Income	$	1,025,418		$	1,208,636		$	676,230		$	1,975,407
Shares base compensation		26,000			-			26,000			-
Depreciation expense		482,168			337,328			1,204,262			756,862
Loss/(gain) from discontinued operation		439			-			439			-
Amortization expense of intangible assets		12,468			8,653			29,333			42,547
Amortization expense of convertible bonds		147,449			-			1,357,398
Withdraw/(deposit) in restricted time deposits		-			21,683			126,400			72,420
Decrease/(increase) in accounts and other receivables		(1,086,267	)		4,140,180			(1,646,425	)		5,067,040
Decrease/(increase) in inventory		(584,044	)		(83,605	)		(698,110	)		(22,220	)
Decrease/(increase) in prepaid expenses		(860,233	)		13,514			(561,098	)		(1,322,692	)
Increase/(decrease) in accounts and other payables		609,493			(251,509	)		(2,407,708	)		1,636,273
Cash Sourced/(Used) in Operating Activities		(227,111	)		5,394,880			(1,893,279	)		8,205,638
Cash Flows from Investing Activities
Disposal of discontinued operation		74			-			74			-
Increase of investment in equity		(116,998	)		(176,553	)		(146,534	)		(183,637	)
Purchase of property, plant & equipment		(921,616	)		(5,845,643	)		(2,750,548	)		(7,531,104	)
Increase of goodwill		(39,105	)		(1,769	)		(39,105	)		(4,074	)
Purchase of other intangible assets		(16,312	)		(10,113	)		(20,876	)		(147,098	)
Decrease/(increase) in construction in progress		(2,623,722	)		609,251			(5,073,038	)		(1,501,673	)
Cash Sourced/(Used) in Investing Activities		(3,717,679	)		(5,424,827	)		(8,030,027	)		(9,367,585	)
Cash Flows from Financing Activities
Increase/(decrease) of bank loans		193,840			2,308			2,436,870			5,313
Cash Sourced/(Used) in Financing Activities		193,840			2,308			2,436,870			5,313
Net increase in cash & cash equivalents for the periods		(3,750,950	)		(27,640	)		(7,486,436	)		(1,156,635	)
Effect of currency translation		1,098,954			87,368			1,374,260			43,062
Cash & cash equivalents at the beginning of periods		6,360,710			1,854,242			9,820,890			3,027,543
Cash & cash equivalents at the end of periods	$	3,708,714		$	1,913,970		$	3,708,714		$	1,913,970
Supplementary cash flows information
Interest received	$	3,011		$	1,412		$	12,050		$	4,019
Interest paid		290,107			96,264			826,708			180,824
Income tax paid		395,166			306,479			839,007			580,383

See Accompanying Notes to Financial Statements and Accountant’s Report

7

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

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

On September 7, 2006, the Company underwent a reverse-merger with Gas Investment China 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 167,750 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.

8

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Method of Accounting

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

(b) Use of estimates

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from those estimates.

(c) Economic and political risks

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

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

9

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

(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 September 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

10

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

11

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

12

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

Baishan Weiye Gas Co., Ltd.	PRC	7/13/2007	100	100	RMB 15,000,000
Xinhe Weiye Gas Co., Ltd.	PRC	7/2/2009	100	100	RMB 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.

13

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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.

14

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

(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 nine months ended September 30, 2010.

15

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

(l) Construction in Progress

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

(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.

	9/30/2010		12/31/2009
Years end RMB : US$ exchange rate		6.6981		6.8372
Average yearly RMB : US$ exchange rate		6.8164		6.8409

16

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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.

17

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

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

Subsidiary	Country of Domicile	Income Tax Rate
PRC Operating Companies (per Note 2. (d) Principals of Consolidation	PRC	25.0%
i.   GAS Investment China Co., Ltd.	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 nine months ended September 30, 2010.

18

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

(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:

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

ii. Allocations to the "Statutory reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital;

iii. Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.

(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.

19

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

On June 30, 2009, FASB issued ASC 105, 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, ASC became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the 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 categorizes the US GAAP hierarchy to two levels: one that is authoritative (in ASC) and one that is non-authoritative (not in ASC). Exceptions include all rules and interpretive releases of the SEC under the authority of federal securities laws, which are sources of authoritative US GAAP for SEC registrants, and certain grandfathered guidance having an effective date before March 15, 1992.  Statement No. 168 is the final standard that will be issued by FASB in that form.  There will no longer be, for example, accounting standards in the form of statements, staff positions, Emerging Issues Task Force (“EITF”) abstracts, or AICPA Accounting Statements of Position. The Company has adopted and implemented the new accounting policy.

20

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

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

(z) Earnings Per Share

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.

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.

21

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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.

Accounts Receivable
	9/30/2010			12/31/2009
Gross accounts receivable	$	6,491,439		$	5,087,484
Allowance for bad debt		(64,914	)		(50,875	)
Net accounts receivable	$	6,426,524		$	5,036,609

Allowance for Bad Debt
	9/30/2010		12/31/2009
Beginning balance	$	50,875	$	35,794
Addition		14,039		15,081
Reversal		-		-
Ending balance	$	64,914	$	50,875

22

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

Accounts Receivable Aging Report
	9/30/2010		12/31/2009
<30 Days	$	4,072,606	$	3,639,712
30-60 Days		105,145		276,004
60-90 Days		73,445		118,704
90-180 Days		647,911		422,179
180-360 Days		1,166,794		446,515
>360 Days		425,538		184,370
Total	$	6,491,439	$	5,087,484

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

Jiangsu Zhonghuang Real Estate Co., Ltd	$	674,009
Baishan Huixin Real Estate Co., Ltd		619,085
Hebei Zhonggang Steel, Ltd.		610,489
Baishan Xingda Real Estate Co., Ltd.		425,576
Baishan Yongsheng Real Estate Co., Ltd.		356,784
Baishan Lixia Real Estate Co., Ltd.		326,072
Jiangsu Zhongzheng Zhiye Ltd.		265,126
Shengcheng Real Estate Co., Ltd.		214,701
Jiangshu Shouyi Zhiye Co., Ltd.		196,677
Hebei Haitian Real Estate Co., Ltd.		189,683
Total	$	3,878,202

5. INVESTMENT

Ref.		9/30/2010		12/31/2009
(1)	Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.	$	5,400,731	$	5,290,855
(2)	Qujing Gas Co., Ltd.		1,746,764		1,711,227
(3)	China Construction Bank		29,859		29,251
	Total	$	7,177,354	$	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 $5,400,731 investment as of September 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 Xiangke Oil Gas as of and for the year ended December 31, 2009.

23

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

Beijing Zhongran Xiangke Oil Gas Technology Co., Ltd.
Condensed Balance Sheets			Condensed Statements of Income
	12/31/2009			12/31/2009
Assets
Current 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		11,267,927	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 $1,746,764 (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 three quarters of 2010.

(3). The investment of $29,859 (RMB 200,000) with China Construction Bank was a long-term investment fund.

6. PROPERTY, PLANT AND EQUIPMENT

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

9/30/2010	At Cost		Accumulated Depreciation		Net
Gas Pipelines	$	45,268,608	$	2,934,933	$	42,333,675
Motor Vehicles		5,901,486		1,810,887		4,090,599
Machinery & Equipment		1,522,892		336,200		1,186,692
Buildings		1,822,746		274,947		1,547,799
Leasehold Improvements		82,752		63,418		19,334
Office Equipment		253,388		113,190		140,198
Total	$	54,851,872	$	5,533,575	$	49,318,297

24

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

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

Depreciation expenses included in the consolidated statements of income for the nine months and twelve months ended September 31, 2010 and December 31, 2009 were $1,204,262 and $1,179,860 respectively.

7. INTANGIBLE ASSETS

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

9/30/2010	At Cost		Accumulated Amortization		Net
Land Use Rights	$	500,624	$	59,541	$	441,083
Franchises		410,564		380,394		30,170
Accounting Software		93,874		33,860		60,014
Goodwill		1,717,080		-		1,717,080
	$	2,722,142	$	473,795	$	2,248,347

25

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

8. LOANS

a. SHORT-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			9/30/2010		12/31/2009
Bank of Dalian - Beijing Branch	12/24/2010		5.31	%	$	2,985,921	$	2,925,174
Total					$	2,985,921	$	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’s and COO Mr. Zhou Zhicheng’s properties, which have been appraised at total fair market value of $933,254 (RMB 6,380,854).

26

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

b. LONG-TERM BANK LOANS

Name of Bank	Due Date	Interest Rate			9/30/2010		12/31/2009
China Construction Bank - Zhongguancun Branch	12/14/2011		5.94	%	$	4,478,882	$	4,387,761
China Development Bank - Beijing Branch	12/24/2012		5.40	%		2,239,441		2,193,880
China Development Bank - Beijing Branch	3/22/2013		5.40	%		2,239,441		-
Total					$	8,957,764	$	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 (the “Guarantor”). The Guarantor guaranteed to the Banks the entire principal and accrued interest. The Company pledged all of 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.

The loan from China Development Bank was securitized by the CEO Mr. Liu Yuchuan’s personal real property, which carried a $403,099 (RMB 2,700,000) loan mortgage. Because the bank required the mortgage to be settled before it collateralized on it, the Company paid the mortgage on behalf of the CEO. This receivable was interest free. Mr. Liu Yuchuan was required to make the entire principle payment in 30 months.

9. OTHER PAYABLES

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

Ref.		9/30/2010		12/31/2009
(1)	Amount due to Employees	$	562,521	$	1,219,131
(2)	Tax Payable		430,005		695,890
(3)	Payables to Subcontractors		1,930,045		2,247,036
(4)	Payable outstanding for the acquisition of Baishan Gas Co., Ltd.		-		2,177,514
	Total	$	2,922,571	$	6,339,571

27

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

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

3. All the payables to subcontractors were unbilled liabilities.

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

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

Ref.		9/30/2010		12/31/2009
(1)	Payable outstanding for the acquisition of Baishan Gas Co., Ltd.	$	2,019,692	$	-
	Total	$	2,019,692	$	-

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

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 (the “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 (the “Warrants”).

28

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

Pledge Agreement and Guaranty

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

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

The convertible bonds payable, net consisted of the followings:

		9/30/2010
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		40,230			8,841			49,071
(6)	Accretion of Interest Discount - Beneficial Conversion Feature		869,270			223,252			1,092,522
(7)	Accretion of Bond Discount - Issuance Cost		113,251			18,189			131,440
(8)	Accretion of Interest Discount - Redemption		252,572			28,966			281,538
(9)	Conversion of Convertible Bonds into Common Stock		(200,000	)		-			(200,000	)
	Convertible Bonds Payable, net	$	4,873,318		$	613,181		$	5,486,499

29

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

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

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

(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.

30

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

Included in interest expense of $2,182,773, was $362,578 convertible bonds coupon expense and $1,357,398 presenting 62.19% non-cash flow amortization expense of convertible bonds.

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 27,312,636 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 4,409,097 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 27,312,636 shares of common stock issued and outstanding at September 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.

31

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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 September 30, 2010, the Company has no shares of series A convertible preferred stock issued and outstanding, and has 4,409,097 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.

32

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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.

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.

33

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

	FinancialTransactions
	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

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

	Authorized Shares		Shares issued and outstanding
Common Stock		250,000,000		27,312,636
Convertible Preferred Stock A		10,000,000		-
Convertible Preferred Stock B		5,000,000		4,409,097
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 G Warrants	$	3.84	48 Months	9/6/2011		109,489	$	0.44
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

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

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

34

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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

35

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

Total Capitalization

The following table depicts an analysis of total capitalization for the issuance of Preferred Stock B, Preferred Stock B-1, Common Stock, and the related additional Paid in Capital at September 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		46.33	%
Minority Investor		-		-		-		-		3,428,551		3,428		747,457		12.56	%
Private Placement - Investor		4,409,097		4,410		95,418		95		11,230,423		11,230		23,850,383		41.12	%
Beneficial Conversion Feature		-		-		-		-		-		-		8,094,814		-
		4,409,097	$	4,410		95,418	$	95		27,312,636	$	27,312		36,757,516		100	%

36

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

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 nine month periods ended September 30, 2010 and 2009 respectively.

	9/30/2010		9/30/2009
Provision for income tax - PRC subsidiaries	$	839,007	$	773,580
Tax exemption - granted by PRC government		-		(193,197	)
Income tax	$	839,007	$	580,383

Income before taxes and provision for taxes consisted of the following for the nine month periods ended September 30, 2010 and 2009:

	9/30/2010			9/30/2009
Income (loss) before taxes:
US	$	(2,051,379	)	$	(184,143	)
BVI		(214,268	)		(115,890	)
PRC		3,781,323			2,855,823
Total income before tax		1,515,676			2,555,790
Provision for taxes:
US Federal		-			-
US State		-			-
PRC		839,007			580,383
Total provision for taxes	$	839,007		$	580,383
Effective tax rate		55.36	%		22.71	%

37

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

13. SEGMENT INFORMATION

The Company has contracted with customers usually in two revenue segments: the construction and installation of gas facilities and 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 are distinct from each other for the relevant cost-and-revenue to be incurred. Hence, separate calculation and subsequent payment of fees for each respective business without any interdependence are made 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 September 30, 2010

	Gas Distribution		Gas Pipeline Installation		Shell, BVIs, & Eliminations		Total
Assets
Current Assets	$	11,794,262	$	6,427,918	$	1,144,103	$	19,366,283
Non-Current Assets		27,223,468		49,950,963		-		77,174,431
Total Assets	$	39,017,730	$	56,378,881	$	1,144,103	$	96,540,714
Liabilities
Current Liabilities	$	1,783,135	$	12,656,802	$	92,468	$	14,532,405
Non-current Liabilities		2,033,072		14,430,883		-		16,463,955
Total Liabilities		3,816,207		27,087,685		92,468		30,996,360
Net Assets	$	35,201,523	$	29,291,196	$	1,051,635	$	65,544,354
Liabilities & Equities	$	39,017,730	$	56,378,881	$	1,144,103	$	96,540,714

38

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

Operation Result Segment Report

For the nine-month ended September 30, 2010

	Gas Distribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total
Sales Revenue	$	17,798,043		$	9,700,002		$	(6,526,825	)	$	20,971,220
Cost of Revenue		(16,908,410	)		(3,385,333	)		6,526,825			(13,766,918	)
Gross Profit		889,633			6,314,669			-			7,204,302
Operating Expense		(365,303	)		(2,592,941	)		(545,966	)		(3,504,210	)
Operating Income/(Loss)		524,330			3,721,728			(545,966	)		3,700,092
Other Income/(Loss)		(269,746	)		(194,990	)		(1,719,680	)		(2,184,416	)
Earnings before tax		254,584			3,526,738			(2,265,646	)		1,515,676
Income tax		(56,488	)		(782,520	)		-			(839,007	)
Gain/(loss) from discontinued operation, net of tax		-			-			(439	)		(439	)
Net Income	$	198,097		$	2,744,218		$	(2,266,085	)	$	676,230

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

39

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

Operation Result Segment Report

For the nine-month ended September 30, 2009

	Gas Distribution			Gas Pipeline Installation			Shell, BVIs, & Eliminations			Total
Sales Revenue	$	15,265,503		$	7,494,485		$	(3,402,055	)	$	19,357,933
Cost of Revenue		(14,803,848	)		(2,672,673	)		3,402,055			(14,074,466	)
Gross Profit		461,655			4,821,811			-			5,283,466
Operating Expense		(201,936	)		(2,109,141	)		(300,507	)		(2,611,584	)
Operating Income/(Loss)		259,719			2,712,670			(300,507	)		2,671,882
Other Income/(Loss)		(10,185	)		(106,381	)		474			(116,092	)
Earnings before tax		249,534			2,606,289			(300,033	)		2,555,790
Income tax		(50,712	)		(529,671	)		-			(580,383	)
Net Income	$	198,822		$	2,076,618		$	(300,033	)	$	1,975,407

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.

40

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

14. EARNINGS PER SHARE

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

		Three Months Ended				Nine Months Ended
	Ref	9/30/2010		9/30/2009		9/30/2010		9/30/2009
Net Income		$	1,025,418	$	1,208,636	$	676,230	$	1,975,407
Preferred Dividends			-		-		-		-
Constructive Preferred Dividends			-		-		-		-
Income Available to Common Stockholders for Basic EPS			1,025,418		1,208,636		676,230		1,975,407
Interest Expense for Convertible Bonds, net of tax			268,308		-		-		-
Income Available to Common Stockholders for Diluted EPS		$	1,293,727	$	1,208,636	$	676,230	$	1,975,407
Original Shares			26,769,313		25,269,313		26,769,313		25,269,313
Addition to Common Stock			321,457		1,500,000		130,600		788,889
Basic Weighted Average Shares Outstanding			27,090,770		26,769,313		26,899,913		26,058,202
Potentially Dilutive Securities:
Addition to Common Stock from Conversion of Preferred Stock B	(1)		-		4,579,839		-		4,579,839
Addition to Common Stock from Conversion of Preferred Stock B-1	(2)		-		95,418		-		95,418
Addition to Common Stock from Conversion of Convertible Bonds	(3)		9,424,139		-		-		-
Addition to Common Stock from Exercise of Warrants	(4)		-		-		-		-
Diluted Weighted Average Shares Outstanding			36,514,909		31,444,570		26,899,913		30,733,459
Earnings Per Share
-    Basic		$	0.038	$	0.045	$	0.025	$	0.076
-    Diluted		$	0.035	$	0.038	$	0.025	$	0.064
Weighted Average Shares Outstanding
-    Basic			27,090,770		26,769,313		26,899,913		26,058,202
-    Diluted			36,514,909		31,444,570		26,899,913		30,733,459

41

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

(1). The application of conversions’ of preferred stock B to common stock was anti-dilutive for the three months and nine months ended September 30, 2010.

(2). The application of conversions of preferred stock B-1 to common stock was anti-dilutive for the three months and nine months ended September 30, 2010.

(3). The average price of the Company’s common stock was $0.71 for the nine months ended September 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 three months and nine months  ended September 30, 2010 and 2009.

15. CONTINGENT LIABILITIES

a. 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.

b. On September 14, 2009, the IRS of the United States charged the Company a $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 a protest letter to the IRS on February 12, 2010. On September 28, 2010, the Company received a notice of determination letter from IRS to waive the penalty.

16. SHARE BASED COMPENSATION

For the nine months ended September 30, 2010, the Company recorded an expense of $26,000 under the general and administrative account for the issuance of 50,000 common shares at $0.52 per share on July 7, 2010. The shares were issued to investor relation firm for services rendered in connection with the investor relationship activities.

42

Sino Gas International Holdings, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2010 and December 31, 2009

And for the three-month and nine-month periods ended September 30, 2010 and 2009

17. DISCONTINUED OPERATION

The Company closed operation of its wholly-owned subsidiary Guyuan Gas Co., Ltd. in July 2010. The Company has accounted for the disposition of the assets of discontinued operation in accordance with SFAS 144 (FASB ASC360), “Accounting for the Impairment or Disposal of Long-Lived Assets”. A loss of $439 was recorded in the Company’s statement of operations for the nine months ended September 30, 2010. The following table is a summary of Guyuan Weiye Gas Co., Ltd.’s financial position and result of operations as of and for the nine months ended September 30, 2010.

Guyuan Weiye Gas Co., Ltd.
Condensed Balance Sheet			Condensed Statement of Income
Assets			Sales revenue	$	-
Current assets	$	28,814	Cost of sales		-
Non-current assets		-	Gross Profit		-
Total assets		28,814
			Operating Income		-
Liabilities
Current liabilities		-	Income tax		-
Total liabilities		-	Loss from discontinued operation, net of tax		(439	)
Net Assets	$	28,814	Net Income	$	(439	)

43

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 linked 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, which 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, had 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’s spending are infrastructure and clean energy. This stimulus aided in the continuity of increase of both connection fees and gas sales 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 third and fourthquarters of 2009. Starting in April 2010, the Chinese government issued new policies to curb the rise of housing prices in certain cities.  The new initiatives from the government have resulted in lower transaction volumes in recent months.

Even with the ups and downs 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, the 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 the Chinese economy: domestic consumption (both private and public), net exports, and domestic investment. The 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 percent in the second quarter from 6.1 percent in the first quarter, which represented a 10-year low. In the third quarter and fourth quarter, China’s economic growth accelerated to 9.1 percent and 10.7 percent, respectively. China GDP grew by 8.7 percent in 2009, exceeding the targeted 8%. The GDP growth remains strong in 2010. China's GDP grew 11.9% and 10.3% in the first and second quarters of 2010, respectively, from the same periods of 2009. China’s GDP increased by 9.6% during the third 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-sized cities to medium-sized cities. Many small-sized city markets are still untapped or undeveloped. The development of these markets is  considered major growth components of the Company.

Most medium-sized and large-sized cities have already been developed by large distributors or are still operated by state-owned companies. Acquisition opportunities exist for those still run by state-owned companies, as the central government encourages suppliers to turn them into privately-owned companies. The acquisition of these markets would have 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.

44

Material Challenges

Numerous small- to medium-sized cities left undeveloped, but competition is growing as there are many small new players in the market attracted by the profitability and growth potential of the business. In addition, we are also facing competition from stronger competitors, as large-sized city markets are becoming 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 in the benefits of natural gas. This is especially true for new markets where there is no use of natural gas. Small cities where residents depend more on coal tend to be more reluctant in the use of new energies than large cities.

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. Although we can adjust the sale price accordingly after the increase of purchase prices, passing the increase to end users, this adjustment would make natural gas more expensive as compared to other alternative energies. Thus, this increase of price may adversely affect our business development.

Risks in Short-Term and Long-Term Periods

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

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

Liquidity and Capital Resources

Natural gas distribution is a capital-intensive industry that requires large amounts of capital for the construction of pipelines and gas stations and the purchase of transportation vehicles. Without the necessary capital, the Company would be constrained by inadequate capital when developing into larger cities or engaging in merger and acquisition activities, and would require additional fundraising to finance such business activities.

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

During the three months ended September 30, 2010, net revenues were $8,097,341, representing an increase of 15.86 % from the same period of last year.  Gross profit for the three months ended September 30, 2010 was $3,173,903, representing an increase of 27.80% from the same period of last year.  Our operating income for the three months ended September 30, 2010 was $1,856,726, representing an increase of 20.68% from the same period of 2009. 

	For the 3 months ended September30,
	2010			2009			Change
	US$			US$
Net Revenues		8,097,341			6,988,621			15.86	%
Gross Profit		3,173,903			2,483,551			27.80	%
Operating Income		1,856,726			1,538,616			20.68	%
Net Income		1,025,418			1,208,636			-15.16	%
Gross Margin		39.20	%		35.54	%		10.30	%
Net Margin		12.66	%		17.29	%

45

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 September 30, 2010 were $8,097,341, compared to $6,988,621 for the same period in 2009, representing an increase of 15.86 %. The increase was due to the increase of both gas sales and connection fees. During this period, we connected 9,878 new residential households to our gas distribution network, resulting in total connection fees of $3,478,985.  Gas sales during the three months ended September 30, 2010 were $4,618,335. In comparison, we connected 7,239 new residential households to our gas distribution network for the same period in 2009, resulting in total connection fees of $3,339,462. Gas sales during the same period in 2009 were $3,646,312.

	For the 3 months ended September30,
	2010					2009					Change
(In $ million)	US$		%			US$		%			%
Net Revenues		8.10		100	%		6.99		100	%		15.86	%
Connection Fees		3.48		43	%		3.34		48	%		4.09	%
Gas Sales		4.62		57	%		3.65		52	%		26.66	%

Connection Fees

Connection fees during the three months ended September 30, 2010 were $3.48 million, representing an increase of 4.09% from the same period of 2009, accounting for 43% of the total net revenue in the three months ended September 30, 2010 as compared with approximately 48% 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 September30,
(in US$ millions)	2010					2009					Change
	US$		%			US$		%			%
Connection Fees		3.48		100	%		3.34		100	%		4.09	%
Residential Users		3.48		100	%		3.339		99.91	%
Industrial Users		0.00		0	%		0.03		0.09	%

Gas Sales

Gas sales were $4.62 million during the three months ended September 30, 2010, accounting for 57% of total net revenue for the three months ended September 30, 2010, representing an increase of 26.66% over the same period of 2009. Gas sales to residential users increased 54.23% to $2.23 million for the three months ended September 30, 2010 from $1.45 million in the same period of 2009. Gas sales to industrial and commercial users increased 8.48% to $2.39 million for the three months ended September 30, 2010 from $2.2 million in the same period of 2009.

	For the 3 months ended September30,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Gas Sales		4.62		100	%		3.65		100	%		26.66	%
Residential Users		2.23		48	%		1.45		40	%		54.23	%
Industrial and Commercial Users		2.39		52	%		2.20		60	%		8.48	%

Cost of Revenues

Cost of revenues for the three months ended September 30, 2010, which includes cost of connection and cost of gas sales, was $4.92 million, representing an increase of 9.29% from $4.51 million in the same period of 2009.

46

	For the 3 months ended September30,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Cost of Revenues		4.92		100	%		4.51		100	%		9.29	%
Connection Cost		0.76		16	%		1.04		23	%		-26.80	%
Gas Cost		4.16		84	%		3.46		77	%		20.16	%

Cost of Connection

The cost of connection decreased 26.80% to $0.76 million during the three months ended September 30, 2010 from $1.04 million for the same period in 2009. During the three months ended September 30, 2010, we incurred lower costs of raw materials, parts, and installation and maintenance fees as compared to the same period of 2009.

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

Cost of Gas Sales

The cost of gas sales increased20.16% to $4.16 million during the three months ended September 30, 2010 from $3.46 million for the same period in 2009. This increase in cost of gas sales is largely due to the increase of gas sales during 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 September 30, 2010, gross profit was $3.17 million, representing an increase of approximately 27.80% from the same period of 2009. Gross profit from connection fees was $2.72 million for the three months ended September 30, 2010, accounting for 86% of total gross profit. In comparison, gross profit from connection fees was $2.3 million for the three months ended September 30, 2009, accounting for 93% of total gross profit for the three months ended September 30, 2009. Gross profit from gas sales was $0.45 million for the three months ended September 30, 2010, accounting for 14% of total gross profit, compared to $0.18 million, accounting for 7% of total gross profit, in the same period of 2009.

	For the 3 months ended September30,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Gross Profit		3.17		100	%		2.48		100	%		27.80	%
Connection		2.72		86	%		2.30		93	%		18.11	%
Gas		0.45		14	%		0.18		7	%		148.63	%

Gross margin during the three months ended September 30, 2010 was 39.20%, compared to 35.54% during the same period in 2009.

Gross margin for connection fees for the three months ended September 30, 2010 was 78.05%, compared to 68.79% in the same period of 2009.

Gross margin for sales of natural gas was 9.93% for the three months ended September 30, 2010, compared to 5.06% during the same period of 2009.

Selling and Marketing Expenses

Our selling and marketing expenses in the three months ended September 30, 2010 were $0.57 million, approximately 7.01% of our net revenues, compared with $0.29 million or 4.13% of our net revenues in the same period of 2009.

47

General and Administrative Expenses and Other Expenses

General and administrative expenses were $0.75 million for the three months ended September 30, 2010, approximately 9.25% of our net revenues, compared with $0.66 million, or approximately 9.39% of net revenues for the same period in 2009.

Operating Income

The operating income for the three months ended September 30, 2010 was $1.86 million, representing an increase of 20.68%, compared to the operating income of $1.54 million for the same period of 2009.  This increase was driven by the increase of sales and the improvement of gross margin from both connection fee revenue and gas sales during this period.

Other Income (Expense)

Other expense was $0.44 million for the three months ended September 30, 2010, compared with other expense of $0.02 million for the same period of 2009.  The significant increase was due to the amortization costs of convertible bonds and interest expense of convertible bonds. We completed a convertible debt financing in the last quarter of 2009, which resulted in costs associated with the financing, such as interest discount-warrants, beneficial conversion feature, and debt issuance cost. Included in our interest expense of $436,233, was $120,859 of convertible bonds coupon expense and $147,449 of non-cash flow amortization expense of convertible bonds.

Income tax

Income tax was $0.40 million for the three months ended September 30, 2010, compared to $0.31 million for the same period of 2009.

Net Income

Net income for the three months ended September 30, 2010 was $1.03 million, compared with net income of $1.21 million for the same period of 2009.   Driven by the increase of sales, and improvement of gross margin from both connection fee revenue and gas sales, operating income achieved an improvement of 20.68% to $1.86 million compared to the operating income of $1.54 million for the same period of 2009.  However, the increase in operating income was offset by the additions of amortization costs of convertible bonds.  Excluding non-cash, non-operational items of amortization expense of convertible bonds in the total of $0.15 million, our adjusted net income in the third quarter of 2010 would have been $1.17 million.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

During the nine months ended September 30, 2010, our net revenues were $20,971,220, representing an increase of 8.33% from the same period of 2009, and gross profit was $7,204,302, representing an increase of 36.36% from the same period of 2009. During the nine months ended September 30, 2010, our operating income was $3,700,092, representing a significant increase of 38.48% from the same period of 2009. 

	For the9 months ended September 30,
	2010			2009			Change
	US$			US$			%
Net Revenues		20,971,220			19,357,933			8.33	%
Gross Profit		7,204,302			5,283,466			36.36	%
Operating Income		3,700,092			2,671,882			38.48	%
Net Income		676,230			1,975,407			-65.77	%
Gross Margin		34.35	%		27.29	%		25.87	%
Net Margin		3.22	%		10.20	%

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 nine months ended September 30, 2010 were $20,971,220, representing an increase of 8.33%, compared to $19,357,933 for the same period in 2009. The increase was due to the increases of both gas sales and connection fee revenue. During this period, we connected 23,572 new residential households to our gas distribution network, resulting in total connection fees of $8,307,036. Gas sales during the nine months ended September 30, 2010 were $12,664,183. In comparison, we connected 17,452 new residential households to our gas distribution network in the same period of 2009, resulting in total connection fees of $7,494,485. Gas sales during the same period in 2009 were $11,863,448.

48

	For the 9months ended September30,
	2010					2009					Change
(In $ million)	US$		%			US$		%			%
Net Revenues		20.97		100	%		19.36		100	%		8.33	%
Connection Fees		8.31		40	%		7.49		39	%		10.84	%
Gas Sales		12.66		60	%		11.86		61	%		6.75	%

Our net revenues for the nine months ended September 30, 2010 increased by 8.33%, which largely resulted from the following factors:

1. Increase of connection fees from residential customers.  We were able to connect more residential households during the nine months ended September 30, 2010 as compared to the same period of last year.

2. Increase of gas sales. Gas sales to residential users continued to grow significantly. The increase was partially offset by the decrease of sales to industrial users during this period. Lower sales from industrial users were due to the following factors: (1) The severe weather conditions in China affected the logistics of gas delivery in the first quarter of 2010, and the Chinese government prioritized the delivery gas to residential users during the severe weather during this period. (2) There were adjustments of production lines in two of our industrial users in the second quarter of 2010, and they were not back to operations until September 2010. This adjustment in operations caused the reduction of gas consumption in these two industrial users during this period.

Connection Fees

Connection fees during the nine months ended September 30, 2010 were $8.31 million, representing an increase of 10.84% over the same period of 2009, accounting for 39.61% of the total net revenue in the nine months ended September 30, 2010 compared with approximately 38.72% for the same period in 2009. Almost all connection fees in the nine months ended September 30, 2010 were from the development of new residential users.

	For the 9months ended September30,
(inUS$millions)	2010					2009					Change
	US$		%			US$		%			%
Connection Fees		8.31		100	%		7.49		100	%		10.84	%
Residential Users		8.31		99.96	%		7.41		98.83	%		12.11	%
Industrial Users		0.003		0.04	%		0.08		1.17	%		-	%

Gas Sales

Gas sales were $12.66 million during the nine months ended September 30, 2010, accounting for 60.39% of total net revenue in the nine months ended September 30, 2010, representing an increase of 6.75% over the same period of last year. During the nine months ended September 30, 2010, gas sales to residential users increased 42.57% from $4.76 million in the same period of 2009 to $6.78 million in 2010. During the nine months ended September 30, 2010, gas sales to industrial and commercial users decreased 17.21% from $7.10 million in the same period of 2009 to $5.88 million.

	For the 9months ended September30,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Gas Sales		12.66		100	%		11.86		100	%		6.75	%
Residential Users		6.78		54	%		4.76		40	%		42.57	%
Industrial and Commercial Users		5.88		46	%		7.10		60	%		-17.21	%

49

Cost of Revenues

Cost of revenues for the nine months ended September 30, 2010, which includes cost of connection and cost of gas sales, was $13.77 million, representing a slight decrease of 2.19% from $14.07 million in the same period of 2009.

	For the 9monthsendedSeptember30,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Cost of Revenues		13.77		100	%		14.07		100	%		-2.19	%
Connection Cost		1.20		14	%		2.67		19	%		-25.45	%
Gas Cost		11.77		86	%		11.40		81	%		3.27	%

Cost of Connection

The cost of connection decreased 25.45% to $1.20 million during the nine months ended September 30, 2010 from $2.67 million for the same period in 2009. During the nine months ended September 30, 2010, we incurred lower costs of raw materials, parts, and installation and maintenance fees as compared to the same period of 2009.

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

Cost of Gas Sales

The cost of gas sales increased 3.27% to $7.61 million during the nine months ended September 30, 2010 from the same period in 2009, when it was $11.4 million. This increase in cost of gas sales is largely due to the increase of gas sales during this period.

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

Gross Profit

During the nine months ended September 30, 2010, gross profit was $7.2 million, representing an increase of approximately 36.36% from the same period of 2009. Gross profit from connection fees was $6.31 million for the nine months ended September 30, 2010, accounting for 88% of total gross profit during the period. In comparison, gross profit from connection fees was $4.82 million for the nine months ended September 30, 2009, accounting for 91% of total gross profit during the period. Gross profit from gas sales for the nine months ended September 30, 2010 was $0.89 million, accounting for 12% of total gross profit during the period, compared to $0.46 million for the nine months ended September 30, 2009, accounting for 9% of total gross profit in the period of 2009.

	For the 9monthsendedSeptember30,
	2010					2009					Change
($ million)	US$		%			US$		%			%
Gross Profit		7.20		100	%		5.28		100	%		36.36	%
Connection		6.31		88	%		4.82		91	%		30.96	%
Gas		0.89		12	%		0.46		9	%		92.71	%

Gross margin during nine months ended September 30, 2010 was 34.35%, compared to 27.29% during the same period in 2009.

Gross margin for connection fees for the nine months ended September 30, 2010 was 76.02%, compared to 64.34% during the same period of 2009. The decrease in the cost of connection contributed to the improvement of gross margin.

Gross margin for sales of natural gas was 7.02% for the nine months ended September 30, 2010, compared to 3.89% during the same period of 2009. The increase was primarily due to improvement of delivery cost for the nine months ended September 30, 2010.

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Selling and Marketing Expenses

Our selling and marketing expenses in the nine months ended September 30, 2010 were $ 1.15 million, or approximately 5.48% of our net revenues, compared with $0.71 million, or approximately 3.66 % of net revenues for the same period in 2009.

General and Administrative Expenses and other expenses

General and administrative expenses were $2.35 million for the nine months ended September 30, 2010, or approximately 11.23% of our net revenues, compared with $1.90 million, or approximately 9.83% of net revenues for the same period in 2009.  The increase was primarily due to higher professional fees in the nine months ended September 30, 2010 as compared to the same period of 2009.  We incurred approximately $100,000 for engaging Ernst & Yong on SOX compliance and internal control consultation during the nine months ended September 30, 2010.

Operating Income

The operating income for the nine months ended September 30, 2010 was $3.7 million, representing an increase of 38.48%, compared to the operating income of $2.67 million in 2009. The increase was driven by the increase of sales, and improvement of gross margin from both connection fee revenue and gas sales during this period.

Other Income (Expense)

Other expense was $2.18 million for the nine months ended September 30, 2010, compared with other expense of $0.12 million for the same period of 2009.  The significant increase was due to the amortization costs of convertible bonds and interest expense of convertible bonds. We completed a convertible debt financing in the last quarter of 2009, which resulted in costs associated with the financing, such as interest discount-warrants, beneficial conversion feature, and debt issuance cost. Included in interest expense of $2.18 million for the nine months ended September 30, 2010 was $0.36 million in convertible bonds coupon expense and $1.36 million non-cash flow amortization expense of convertible bonds.

Income tax

Income tax was $0.84 million for the nine months ended September 30, 2010, compared to $0.58 million in 2009.

Net Income

Net income in the nine months ended September 30, 2010 was $0.68 million, compared with net income of $1.98 million in the same period in 2009.  Driven by the increase of sales, and improvement of gross margin from both connection fee revenue and gas sales during this period, operating income achieved improvement of 38.48% to $3.70 million compared to the operating income of $2.67 million for the same period of 2009.  However, the increase in operating income was offset by the additions of amortization costs of convertible bonds. Excluding these non-cash and non-operational items of amortization expense of convertible bonds in the total of $1.36 million, our adjusted net income in the nine months ended September 30, 2010 would have been $2.04 million.

Liquidity and Capital Resources

Cash and cash equivalents were $3.71 million as of September 30, 2010, representing a decrease of $6.11 million as compared to $9.82 million of cash and cash equivalents as of December 31, 2009.

Cash used in operating activities for the nine months ended September 30, 2010 was $1.89 million, representing a decrease of $10.10 million from $8.21 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.

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Cash used in investing activities for the nine months ended September 30, 2010 was $8.03 million, representing a decrease of $1.34 million from $9.37 million during the same period of 2009. Such decrease was mainly due to the decrease of property, plant and equipment and construction in progress.

Cash sourced in financing activities for the nine months ended September 30, 2010 was $2.44 million.  We borrowed $2.24 million from local bank in the first quarter of 2010.

Accounts Receivable

Accounts receivable as of September 30, 2010 were $6.43 million, representing an increase of $1.39 million from $5.04 million as of December 31, 2009.

Notes Receivable

There are no notes receivable as of September 30, 2010.

Inventory

Inventory of $1.12 million as of September 30, 2010 was comprised of spare parts and natural gas.

Fixed Assets

Fixed Assets as of September 30, 2010 were $54.85 million, representing an increase of $2.75 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	$	45,268,608		$	43,518,519
Motor Vehicles		5,901,486			5,775,903
Machinery & Equipment		1,522,892			1,482,599
Buildings		1,822,746			1,005,517
Leasehold Improvements		82,752			80,113
Office Equipment		253,388			238,673
Less Accumulated depreciation		(5,533,575	)		(4,329,313	)
	$	49,318,297		$	47,772,011

Bank Loans

Short-term bank loans as of September 30, 2010 were $2.99 million, with no change compared to that as of December 31, 2009.

Long-term bank loans as of September 30, 2010 were $8.96 million, representing an increase of $2.38 million compared to $6.58 million as of December 31, 2009. We borrowed an additional loan in the first quarter of 2010.

Accounts Payables

Accounts payables as of September 30, 2010 was $7.0 million, representing a decrease of $1.56 million from that as of December 31, 2009.

Other Payables

Other payables - current as of September 30, 2010 were $2.92 million, representing a decrease of $3.42 million from that as of December 31, 2009.  $2.02 million was reclassified from Other payable – current to Other payable – non-current in the second quarter of this year.

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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 September 30, 2010.

Changes in Internal Control over Financial Reporting

During the quarter ended September 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

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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: November 15, 2010	By:	/s/  Yuchuan Liu
		Yuchuan Liu
		Chairman and Chief Executive Officer
	SINO GAS INTERNATIONAL HOLDINGS, INC.
Date: November 15, 2010	By:	/s/  Yugang Zhang
		Yugang Zhang
		Chief Financial Officer

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