The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Overview

We were incorporated in the state of Delaware on March 31, 1999, as Bullet Environmental Systems, Inc. On May 25, 2000, we changed our name to Liquidpure Corp. and on February 14, 2002, we changed our name to Coventure International Inc.

On December 6, 2005, we issued an aggregate of 4 million shares to all of the registered shareholders of Xi'an Xilan Natural Gas Co., Ltd., and entered into exclusive arrangements with Xi'an Xilan Natural Gas Co., Ltd. and these shareholders that give us the ability to substantially influence Xi'an Xilan Natural Gas' daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. On December 19, 2005, we changed our name to China Natural Gas, Inc.

On February 21, 2006, we formed Xilan Natural Gas Equipment Ltd., ("Xilan Equipment") as a wholly owned foreign enterprise (WOFE). We then, through Xilan Equipment, entered into exclusive arrangements with Xi'an Xilan Natural Gas Co., Ltd. and these shareholders that give us the ability to substantially influence Xi'an Xilan Natural Gas' daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. We memorialized these arrangements on August 17, 2007. As a result, the Company consolidates the financial results of Xi'an Xilan Natural Gas as variable interest entity pursuant to FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities."

We transport, distribute and sell natural gas to commercial, industrial and residential customers in the Xi'an area, including Lantian County and the districts of Lintong and Baqiao, in the Shaanxi Province of The Peoples' Republic of China ("China" or the "PRC") through a network of high pressure pipelines. We also distribute and sell CNG as vehicular fuel through a network of approximately 120 km of CNG filling stations in Shaanxi and Henan Provinces.
- During the year of 2007, the pipeline's average daily throughput capacity is 20,565 cubic meters, comparing to approximately 18,048 cubic meters in the year of 2006. As of December 31, 2007, we own and operate 16 CNG fueling stations in Shaanxi Province and 8 CNG fueling stations in Henan Province. During the year of 2007, we had sold compressed natural gas of 84,744,620 cubic meters through our fueling stations, comparing to 39,279,689 cubic meters in the year of 2006.

We operate three primary business lines:

· Distribution and sale of compressed natural gas (CNG) through Company-owned CNG filling stations for hybrid (natural gas/gasoline) powered vehicles (24 stations as of December 31, 2007);

· Distribution and sale of piped natural gas to residential, commercial and industrial customers through Company-owned pipelines. The Company distributes and sells natural gas to approximately 84,500 homes and businesses; and

· Conversion of gasoline-fueled vehicles to hybrid (natural gas/gasoline) powered vehicles at our Auto Conversion Division.

We buy all of the natural gas that we sell and distribute to our customers. We do not mine or produce any of our own natural gas and have no plans to do so during the next 12 months. The natural gas that we buy is available in two forms: (i) piped natural gas; and (ii) CNG.

On October 24, 2006, Xi'an Xilan Natural Gas formed a wholly-owned subsidiary, Shaanxi Jingbian Liquified Natural Gas Co., Ltd., for the purpose of constructing a liquefied natural gas facility to be located in Jingbian, Shaanxi Province. We plan to invest approximately $40 million to construct this facility, and we have secured such funding for this project through security purchase agreement with Abax Lotus Ltd. The LNG plant is under construction and is expected to start operation in 2009. Once completed, the plant has LNG processing capacity of 500,000 cubic meters per day, or approximately 150 million cubic meters on an annual basis.

Critical Accounting Policies

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounts and Other Receivables. Accounts and other receivables are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company allowance for uncollectible accounts is not significant.

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. The Company's management determined that all receivables are good and there is no need for a bad debt reserve as of December 31, 2007.

As needed for normal business purpose, the Company advances predetermined amounts based upon internal Company policy to certain employees and internal units to ensure certain transactions to be performed in timely manner. The Company has full oversight and control over the advanced accounts. Therefore, the allowance for the uncollectible accounts is nil.

Inventory. Inventory is stated at the lower of cost, as determined on a first-in, first-out basis, or market. Management compares the cost of inventories with the market value, and allowance is made for writing down the inventories to their market value, if lower. Inventory consists of material used in the installation of pipelines and material used in repairing and modifying of vehicles. Inventory also consists of natural gas and gasoline.

Revenue Recognition. The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. Revenue is recognized when services are rendered to customers, when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. Revenue from gas sales is recognized when gas is pumped through pipelines to the end users. Revenue from installation of pipelines is recorded when the contract is completed and accepted by the customers. The installation contracts are usually completed within one to two months time.

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

CONSOLIDATED RESULTS OF OPERATIONS

Comparing Fiscal Years Ended December 31, 2007 and 2006:

The following table presents certain consolidated statement of operations
information. Financial information is presented for the 12-month period ending
December 31, 2007 and December 31, 2006.

                             2007           2006
Revenues                 $ 35,392,053   $ 18,828,790
Cost of Revenues         $ 18,025,075   $  9,718,000
Operating Expenses       $  6,288,929   $  2,596,199
Income from Operations   $ 11,078,049   $  6,514,591
Net Income               $  9,116,070   $  5,451,095

Revenue. We generated approximately 80.7% of our revenues in 2007 from the sale of natural gas and approximately 17.4% of our revenues from installation fees charged to connect end-user customers to our natural gas distribution system. Sales of natural gas at the Company-owned filling stations accounted for approximately 76.5% of our total revenues in 2007, or approximately $27,060,537 which was the largest contribution of our three business lines. Sales of natural gas to end-user customers connected to our pipeline distribution system accounted for approximately 21.4% of our total revenues in 2007, or approximately $7,576,286 including both natural gas sales and installation fees. Sales of natural gas to third party-owned filling stations accounted for approximately 0.2% of our total revenues in 2007, or approximately $79,200.The Company expects natural gas revenues to increase on both an actual basis and as a percentage of revenue. In 2008, the Company expects to add up to 15,600 pipeline customers and construct an additional 18 filling stations, which the Company estimates will increase sales of natural gas by 69 million cubic meters.

We had total revenues of $35,392,053 for the twelve months ended December 31, 2007, an increase of $16,563,263 or approximately 87.97%, compared to $18,828,790 for the twelve months ended on December 31, 2006. The increase in revenues was due primarily to the addition of 13 new company-owned filling stations during 2007 as well as an increase in the number of residential, commercial and industrial pipeline customers from approximately 75,000 in 2006 to approximately 84,500 in 2007.

New pipeline customers pay approximately 60% of the installation costs to connect to our pipeline system up front and the balance is payable as part of their monthly natural gas bill. During 2007, our installation revenues increased approximately 39.06% over the previous year and our sales of natural gas increased approximately 106.21% over the previous year. Four customers accounted for approximately 13.6%, 11.8%, 8.8% and 8.4% of the Company's installation revenue for the year ended December 31, 2007.

During the year of 2007, we had sold compressed natural gas of 84,744,620 cubic meters, compared to 39,279,689 cubic meters in the same period of 2006, through Company-owned fueling stations. In terms of average station sales value and volume, in the year of 2007, we had sold approximately $1,500,000 and 4,760,000 cubic meters of compressed natural gas per station, compared to approximately $1,500,000 and 4,900,000 cubic meters in the same period of 2006. The reason for the higher unit selling price in 2007 than in 2006 is mainly due to the appreciation of Renminbi ("RMB") compared to US dollar in the period of 2007. The unit selling price in RMB was decreased slightly in 2007. The decrease in average unit selling price in 2007 resulted from the Company's increased sales volume in 2007 to bus companies and prepaid VIP members at a lower discounted price than the regular retail price charged to taxi drivers. As for our natural gas pipeline business, in the year of 2007, we had sold 7,403,314 cubic meters, compared to 6,497,186 cubic meters in the same period of 2006 through our pipeline network.

Cost of Sales. Our cost of sales consists of both the cost of gas sales and the cost of installation. Cost of gas sales consists primarily of the cost that we pay for natural gas purchased from our supplier, together with transportation costs and depreciation of equipment. Cost of connection includes certain installation costs related to connecting customers to our pipeline system that are generally expensed when incurred.

Cost of sales in 2007 was $18,025,075, an increase of $8,307,075 or approximately 85.48% from 2006. Cost of gas sales increased by approximately 93.64% to $14,838,997 in 2007, as compared with $7,663,060 in 2006. The increase in our cost of sales was primarily related to a material increase in the amount of gas sold and the price that we paid to our suppliers in 2007. The opening cost per station during the twelve months ended December 31, 2007 is approximately $900,000, compared to approximately $800,000 in the year of 2006. In 2007, the transportation cost per million cubic meters is approximately $5,800. In addition, our installation costs increased in 2007 by approximately 55.04% to $3,186,078, as compared with $2,054,940 in 2006 as a result of the addition of new pipeline customers. The price that we paid for gas in 2007 remained relatively constant compared to 2006. We had sold natural gas of 92,147,935 cubic meters in 2007, compared to 45,776,875 cubic meters in 2006.

We purchase all of our natural gas for resale from three vendors, PetroChina Changqing Oilfield Company, Shaanxi Natural Gas Co Ltd, and Jingcheng city Mingshi Coal Bed Methane Exploitage Ltd. As the government owns all land in China, the government controls and owns all the natural resources coming from the ground, thus the government controls the price and flow of the natural gas. Due to the soaring crude oil price and ever increasing demand for energy consumption, the National Development and Reform Commission, which regulates the energy price in China, adjusted the upstream natural gas price for industrial users and vehicular CNG distributors upward by ¥0.4/CM, or 35% in November, 2007. The retail price for vehicular CNG was adjusted upward at a ratio of 0.75:1 to the retail price of #90 gasoline at November, 2007. Many large cities see dramatic increase in retail vehicular CNG price, for example 66% in Shanghai and 21% (taxi) and 38% (bus) in Tianjin. However, natural gas price for residential customers is not adjusted to keep the rate at an affordable level. As China shifts from a centrally planned economy to a market economy, we believe that it is in the government's best interest to keep prices stable, and maintain a stable flow of supply. The government has also undertaken programs to promote the economy growth of the region in which we are located. Therefore, we expect supply and price to continue to be stable in the future.

Gross profit. The Company earned a gross profit of $17,366,978 for the twelve months ended December 31, 2007, an increase of $8,256,188 or approximately 90.62%, compared to $9,110,790 for the twelve months ended December 31, 2006. The increase in gross profit is due to a material increase in gas sales and installation revenues in 2007, partially offset by an increase in cost of sales.

Gross margin. Gross margin, as a percentage of revenues, increased to approximately 49.07% for the twelve months ended December 31, 2007, from approximately 48% for the twelve months ended December 31, 2006. The increase in gross margin is primarily attributable to the significant increase in revenues generated from our Company-owned filling stations.

Operating expenses. The Company incurred operating expenses of $6,288,929 for the twelve months ended December 31, 2007, an increase of $3,692,730 or approximately 142.24%, compared to $2,596,199 for the twelve months ended December 31, 2006. Our operating expenses increased primarily as a result of expenses related to the construction, acquisition, and operation of 13 new filling stations in 2007, as well as continuing expenses related to the identification of possible locations for additional filling stations and the governmental licensing and approval process, as well as the evaluation of existing natural gas filling stations as potential acquisition targets. In addition, sales and marketing costs increased in 2007 as we increased our efforts to obtain new residential and commercial customers and attract customers to our filling stations. General and administrative expenses increased from $1,287,735 in 2006 to $2,837,768 in 2007 due to an increase in personnel as a result of our growth.

For the year ended December 31, 2007, two suppliers accounted for 29.66% and 11.36% of the total equipment we purchased for construction activities. We believe that as a result of our relationships within the construction industry and the construction equipment vendor community, and the availability of other vendors to supply the construction equipment and materials, the loss of any one of these two vendors would not have a material adverse effect on our operations.

Net Income. Net income increased to $9,116,070 for the twelve months ended December 31, 2007, an increase of $3,664,975, from $5,451,095 for the twelve months ended December 31, 2006. Increase in net income is attributed to our material increase in revenues, partially offset by a higher increase in cost of sales and operating expenses in 2007. The company expects revenue from our CNG filling stations to increase on both an actual basis and as a percentage of revenue. In 2008, the Company expects to add up to 15,600 pipeline customers and construct or acquire an additional 18 filling stations, which the Company estimates will increase sales of natural gas by 69 million cubic meters. In addition, the Company began selling gasoline in late 2007 and expects gasoline sales will be a minor portion of our entire business.

Income tax was $1,913,923 for the twelve months ended December 31, 2007, as compared to $1,025,584 for the twelve months ended December 31, 2006. The increase in income tax was attributed to the growth of installation fees and the sale of natural gas.

Liquidity and Capital Resources

As of December 31, 2007 the Company had $13,291,729 of cash and cash equivalents on hand compared to $5,294,213 of cash and cash equivalents as of December 31, 2006.

The primary sources of cash in 2007 were income from operations and financing activities. The Company had net cash flows provided by operations of $10,476,441 for the twelve months ended December 31, 2007 as compared to net cash provided by operations of $4,385,524 in the corresponding period last year. The increase in net cash flows from operations in 2007 as compared to 2006 was mainly due to the increase in net income and a decrease in accounts receivable and advances during the twelve months ended December 31, 2007 offset by a decrease in other payables and tax payable.

On August 2, 2007, we completed a private placement offering, which generated net proceeds of $13,823,467, which were used for the construction of natural gas filling stations, the purchase of raw materials and working capital.

Cash outflows for investing activities increased from $9,738,469 in 2006 to $16,885,340 in 2007 as a result of advance payments made to equipment suppliers for investments necessary to construct and acquire filling stations and for construction materials used to build the pipelines to individual households.

The Company expects to construct an additional 18 CNG filing stations in 2008. The Company expects the funds for these investing activities will come from the Company's operating cash flow.

Based on past performance and current expectations, we believe our cash and cash equivalents, cash generated from operations, as well as future possible cash investments, will satisfy our working capital needs, capital expenditures (other than the LNG Project) and other liquidity requirements associated with our operations for at least the next 12 months.

The majority of the Company's revenues and expenses were denominated primarily in Renminbi ("RMB"), the currency of the People's Republic of China. There is no assurance that exchange rates between the RMB and the U.S. Dollar will remain stable. The Company does not engage in currency hedging. Inflation has not had a material impact on the Company's business.

Off-Balance Sheet Arrangements and Contractual Obligations

We entered in to a 15 day foreign currency forward contract in late December 2007; please refer to financial statement footnote under "Derivative Accounting" for more details. We also entered into series of long term lease agreements with outside parties to lease land use right to the self-built natural gas filling stations located in the PRC, and please refer to footnote "Commitments and Contingencies" to the financial statements for details. We have purchase agreements with several natural gas suppliers and please see footnote "Current Vulnerability Due to Certain Concentrations" for more explanations. We do not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.

Foreign Currency Transactions and Comprehensive Income (Loss)

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. Our transactions occur in Chinese Renminbi. The unit of Renminbi is in Yuan.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The objective of SFAS No. 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material effect on the Company's future reported financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities". This Statement permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its financial position and results of operations.

In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities" ("FSP EITF 07-3"), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. Management is currently evaluating the effect of this pronouncement on financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations." SFAS No. 141 (Revised 2007) changes how a reporting enterprise accounts for the acquisition of a business. SFAS No. 141 (Revised 2007) requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events. SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective application is prohibited. The Company is currently evaluating the impact that adopting SFAS No. 141R will have on its financial statements.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements", which is an amendment of Accounting Research Bulletin ("ARB") No. 51. This statement clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This statement changes the way the consolidated income statement is presented, thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest. This statement is effective for the fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Based on current conditions, the Company does not expect the adoption of SFAS 160 to have a significant impact on its results of operations or financial position.