UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549



|FORM
      10-KSB
|-----------------

| X |       Annual report under Section 13 or
15(d) of the Securities Exchange Act of 1934 for the fiscal year ended November 30, 2006

|     |       Transition
report under Section 13 or 15(d) of the Securities

Exchange Act of 1934 for the transition
period from ____ to ______.



|Commission file number:
      000-52409
|---------------------------------------

CHINA ENERGY
CORPORATION



|(Name of small business
      issuer in its charter)
|----------------------------------------------------

|Nevada                                                               | 98-0522950                                  
|-------------------------------------------------------------------- | --------------------------------------------
|(State or other
      jurisdiction of incorporation or               | (IRS Employer Identification
      No.)     
|organization)                                                        |                                             
|                                                                    
|6130 Elton Avenue, Las Vegas,
      NV                               | 89107                                       
|(Address of principal
      executive offices)                       | (Zip Code)                                  
|                                                                    
|Issuer's telephone
    Number                                        | 702-216-6000                                
|Securities registered
      under Section 12(b) of the Exchange Act: |                                             
|                                                                    
|Common Stock, $0.001 par value
Common                                | N/A                                         
|(Title of
      class)                                               | (Name of exchange on which
      registered)

Check whether the issuer is not required
to file reports pursuant to Section 13 or 15 (d) of the Exchange
Act.    |    |

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

Yes | X
|         No 
|     |

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this
form, and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this form
10-KSB.    |    |

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act. Yes  |    | No   | X |

State issuer's revenue for its most recent
fiscal year: $ 13,685,370 for the fiscal year ended November 30, 2006

The aggregate market value of common
shares of voting and non-voting common shares held by non-affiliates, was not
determinable as the Company's stock was not traded.



|- 1
-
|-----

---

State the number of shares outstanding of
each of the issuer's classes of common equity, as of the latest practicable
date: The registrant had 45,000,000 shares of common stock outstanding as of
March 14, 2007.

DOCUMENTS INCORPORATED BY REFERENCE:
None

Transitional Small Business Disclosure
Format (Check one):       Yes|  |;      No|X|

- 2 -

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|         | TABLE OF
      CONTENTS                                                  |   
|-------- | ------------------------------------------------------------------------ | --
|         | PART I                                                                   |   
|Item 1   | Description of
      Business                                            | 5 
|Item 2   | Description of Property                                                  | 33
|Item 3   | Legal
      Proceedings                                                  | 36
|Item 4   | Submission of Matters to a Vote of Security
      Holders                | 36
|PART II 
|Item 5   | Market for Common Equity and Related
      Stockholder Matters           | 36
|Item 6   | Management's Discussion
      and Analysis or Plan of Operation          | 39
|Item 7   | Financial Statements                                                     | 54
|Item 8   | Change In and
      disagreements With Accountants on Accounting and     | 72
|         | Financial Disclosure                                                     |   
|Item 8A  | Controls and
      Procedures                                            | 72
|Item 8B  | Other Information                                                        | 73
|PART III
|Item 9   | Directors, Executive Officers, Promoters and
      Control Persons;      | 73
|         | Compliance with Section
      16(a) of the Exchange Act                  |   
|Item 10  | Executive Compensation                                                   | 75
|Item 11  | Security Ownership of
      Certain Beneficial Owners and Management and | 76
|         | Related Stockholder Matters                                              |   
|Item 12  | Certain Relationships and
      Related Transactions                     | 77
|Item 13  | Exhibits                                                                 | 79
|Item 14  | Principal Accountant Fees
      and Services                             | 80
|         | Signatures                                                               | 81

- 3 -

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|PART
      I
|------------

This report contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 (the "Exchange Act"). We have based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends affecting the financial condition of our business. These
forward-looking statements are subject to a number of risks, uncertainties and
assumptions, including, among other things:

|- | general economic and business
      conditions, both nationally and in our markets,                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------
| 
|- | our expectations and estimates
      concerning future financial performance, financing plans and the impact of
      competition,
| 
|- | our ability to implement our
      growth strategy,                                                                               
| 
|- | anticipated trends in our
      business,                                                                                         
| 
|- | advances in technologies,
      and                                                                                               
| 
|- | other risk factors set forth
      herein.                                                                                        
| 

In addition, in this report, we use words
such as "anticipates," "believes," "plans," "expects," "future," "intends," and
similar expressions to identify forward-looking statements.

China Energy Corporation ("CEC" or the
"Company") undertakes no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this prospectus. In light of these risks
and uncertainties, the forward-looking events and circumstances discussed in
this prospectus may not occur and actual results could differ materially from
those anticipated or implied in the forward-looking statements.

- 4 -

---



|ITEM
      1                 
       BUSINESS
|---------------------------------------------

We, China Energy Corporation
("CEC"),
produce coal through our subsidiary Inner Mongolia Tehong Coal Group Co, Ltd.
("Coal Group") and supply heating and electricity requirements throughout the
XueJiaWan district through our subsidiary Inner Mongolia Zhunger Heat Power Co.,
Ltd. ("Heat Power"). We acquired our subsidiaries on November 30, 2004.

Inner Mongolia Tehong Coal Group
Co., Ltd. ("Coal Group")

Coal Group produces coal from the LaiYeGou
coal mine located in Erdos City, Inner Mongolia, People's Republic of China. Its
trade consists of production and processing of raw coal for domestic heating,
electrical generation and coking purposes for subsequent steel production. The
principal sources of revenue are generated from local heating power
industry.

Coal Group produces approximately 500,000
tons of coal per year based on current levels of input and has the capacity of
producing approximately up to 1,200,000 tons subject to enhancement of
productions lines in the next 2 years. Coal Group is in the process of
increasing its capacity.

The raw coal produced is non caking coal
and has a high ash melting point with high thermal value used almost exclusively
as fuel for steam-electric power generation. It has low sulphur and low chemical
emission which satisfies government environmental protection standards with
heating capability of 6,800 -7,000 Kilocalories ("Kcal").

The following consists of tonnage of coal
produced and purchased from external sources in the past 4 years:

Year
    Produced
    External Sources2003
    235,322
    20,9362004
    506,913
    34,2952005
    612,739 *
    100,3582006
    549,970
    3,572


* 2005 production exceeded capacity of
500,000 tons produced per year as mentioned above as a result of increasing the
levels of input and production capacity from 56 hour to 70 hour average work
week.

- 5 -

---

Inner Mongolia Zhunger Heat Power
Co., Ltd. ("Heat Power")

Heat Power currently supplies heating
requirements throughout 120 hectares of the XueJiaWan district in XueJiaWan
Town, Zhunger County with its newly constructed thermoelectric plant
("XueJiaWan Expansion") and 2 heating plants previously used exclusively for
heating supply operations. These plants are operated by Heat Power employees.
The Autonomous Region Planning & Reform Committee appointed Heat Power in
2003 to establish a thermoelectric plant providing heating and electricity
capable of expanding coverage in the area serving a larger population
base.

Heat Power supplies heating to users
directly and supplies electricity through a government controlled intermediary,
Inner Mongolia Electric Power Group Co., Ltd. ("Electric Power Group"). Heat Power
will, therefore, be operating two processes, one for heating and one for
co-generation of electricity supply.

Heat Power is not a regulated utility
company and therefore such regulations are only applicable to the entity
providing service to the end users. Electric Power Group is subject to these
applicable rules and regulations consisting of compliance to safety and
environmental standards and pricing structures set by the Inner Mongolia
Government.

Heat Power does not supply steam or hot
water. Only heating is supplied to private dwellings, factories as well as
municipal facilities.

Heat Power obtains its supply of powdered
coal required to generate heat and electricity production from Zhunger County
Guanbanwusu Coalmine ("Guanbanwusu"), an unrelated,
unassociated 3rdparty. It also obtains its supply through various other coal
mines in the area.



|History and result of
      operations
|--------------------------------------

CEC was incorporated in the state of
Nevada on October 11, 2002 for the purpose of producing coal to meet the
increasing demand in power and heating industries and also to expand
thermoelectric plants and networks in rural developments. CEC was a shell
company until it entered into the Share Exchange Agreement to acquire its
subsidiaries, Coal Group and Heat Power, on November 30, 2004. Please refer to
Exhibit 10.1.

Although CEC is the legal survivor of this
acquisition and is the registrant with the Securities and Exchange Commission,
under accounting principles generally accepted in the United States, the
transaction was accounted for as a reverse merger, whereby Coal Group is
considered the ¡¡ãacquirer¡¡À of CEC for financial reporting purposes as its
shareholders control a majority of the post transaction combined company. Among
other matters, this requires CEC to present in all financial statements and
other public information filings, prior historical and other information of Coal
Group, and requires a retroactive restatement of Coal Group historical
shareholder investment for the equivalent number of shares of common stock
received in the merger. Accordingly, our financial statements present the
results of operations of Coal Group for the year ended November 30, 2004 and
reflect the acquisition of November 30, 2004 under the purchase method of
accounting. Subsequent to November 30, 2004, the operations of the Company
reflect the combined operations of CEC and Coal Group.

Since the inception of Coal Group in 2000,
its trade consists of production and processing of raw coal for both domestic
heating and electrical generation purposes and acting as a brokerage in
facilitating coal trade buyers and sellers. Our brokerage activities to date
have been limited as our focus is on direct supply of raw coal.

Through Heat Power, we operate a
thermoelectric plant and 2 heating plants located in the XueJiaWan district in
which we have a monopoly granted to us by the Inner Mongolia
government.

For the years ended November 30, 2006 and
2005, we generated net income of $ 3,008,805 and $ 3,382,777
respectively.

Not including funds required for expansion
of our facilities, we estimate our cash requirements for the next 12 months Coal
Group will require approximately $ 4,580,000 and Heat Power will require
approximately $ 3,670,000, a total of $ 8,250,000 in order to cover our working
capital needs as follows:

- 6 -

---

|                               | Coal Group        | Heat Power       
|------------------------------ | ----------------- | -----------------
|Materials                      | 2,650,000         | 3,000,000        
|Labor/Overhead                 | 430,000           | 600,000          
|Selling/Administrative expense | 1,500,000         | 70,000           
|Total                          | $
      4,580,000 | $
      3,670,000

We currently are able to sustain our
working capital needs through profits we generate and bank and shareholder
loans.

Our principal business office is located
at No.57, Xinhua East Street, Hohhot City, Inner Mongolia. Our administrative
branch office for North American investor relations and U.S. regulatory
reporting is located at 6130 Elton Ave., Las Vegas, Nevada 89107.



|We are in the process of constructing
      our website.Principal
      Products, Services and Their
Markets
|------------------------------------------------------------------------------------------------------------



|Coal
  Group
|------------



|Acquisition of LaiYeGou Mine and
      Mining Right
|---------------------------------------------------

In June 1999 the LaiYeGou mine was
acquired and the purchase contract is attached in Exhibit 10.17. Property
acquisition in China is through 50 or 70 year lease and this is the only type of
ownership permitted in China. We have leased the land surrounding the mine and
the mine itself for a period of 50 years. Since acquisition of LaiYeGou in 1999,
Coal Group's activities has been coal production for the purpose of supplying
raw materials to heating and power industries, retail customers and coking
factories for steel production.

All land in the China belongs to the PRC.
To extract resources from land, Coal Group is required to obtain a mining right.
The jurisdiction responsible for issuing such rights is the Provincial Bureau of
National Land and Resource, a division of the PRC Government. In December 2005,
Coal Group's mining right was assessed to be approximately $ 3,656,731 for a
period of 14 years commencing November 2005. This mining right is regarded as an
Intangible Asset to be amortized over a period of 14 years.



|The payment schedule is as
      follows:
|-----------------------------------------

|- | Instalment | #1: | $ | 1,105,821 due on or before December 1,
      2006
|- | ---------- | --- | - | -------------------------------------------------
|- | Instalment | #2: | $ | 510,182                                          
|- | Instalment | #3: | $ | 510,182                                          
|- | Instalment | #4: | $ | 510,182                                          
|- | Instalment | #5: | $ | 510,182                                          
|- | Instalment | #6: | $ | 510,182                                          

Coal Group has the option of forfeiting
the mining rights without being obligated to make all future payments however
would be required cease of all mining activities. Coal Group has no intention of
ceasing its mining activities and will make future payments as scheduled.

The LaiYeGou coal mine is an underground
operation where current production is 500,000 metric tons per year. Occupying an
area of 230.3 hectares (approximately 569 acres) at Dongsheng Coalfield near
Dongsheng City, LaiYe Gou has established proven and probable reserves of 25.7
million tons. Based on 51% estimated mining recovery rate, we will produce 13.1
million tons of salable products with our present mining equipment. The product
mined, is high quality, non-caking, coal that has low sulphur, low phosphorus
and low ash contents which does not fuse together or cake when heated but burns
freely and is used mainly for heating and electric power generation.

- 7 -

---

With such minimal harmful chemical
contents, it meets the stringent environmental standards set by the Central
Government of China. It is ideal for general heating applications as well as for
power generation, with a heat rating of 6,800 - 7,000 kcal.

The following definitions apply to our
mining operations as per Industry Guide 7 of the Securities Act Industry
Guides.

Definitions.

|(1) | Reserve. That part of a mineral
      deposit which could be economically and legally extracted or produced at
      the time of the reserve determination.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|   

Note: Reserves are customarily stated in
terms of "ore" when dealing with metalliferous minerals; when other materials
such as coal, oil, shale, tar, sands, limestone, etc. are involved, an
appropriate term such as "recoverable coal" may be substituted.

|(2) | Proven (Measured) Reserves.Reserves for which (a) quantity is
      computed from dimensions revealed in outcrops, trenches, workings or drill
      holes; grade and/or quality are computed from the results of detailed
      sampling and (b) the sites for inspection, sampling and measurement are
      spaced so closely and the geologic character is so well defined that size,
      shape, depth and mineral content of reserves are well-established.              
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) | Probable (Indicated) Reserves.Reserves for which quantity and grade
      and/or quality are computed from information similar to that used for
      proven (measure) reserves, but the sites for inspection, sampling, and
      measurement are farther apart or are otherwise less adequately spaced. The
      degree of assurance, although lower than that for proven (measured)
      reserves, is high enough to assume continuity between points of
      observation.
|   

Proven and Probable Reserve
Survey

Our survey of reserves is performed by No.
153 Exploration Team of Inner Mongolia Coalfield Geological Bureau, surveying
the district of Hongjingta area consisting of 7,800 hectares (approximately
19,266 acres), total survey area. LaiYeGou is included in Hongjingta and is
230.3 hectares (approximately 569 acres) or 3% of the total survey area. The
survey consists of 3,454 samples including 184 outcrops (A body of rock exposed
at the surface of the Earth), 140 trenches and 32 drilling samples. The distance
between each sample is 4,428 hectares (approximately 10,937 acres).

Accuracy and
Risks

The accuracy and risks associated with
Proven Reserves are less than of Probable Reserves due to the assumption of
continuity of coal layers between sample points. The following consists of the
classifications of the types of coal layers which are determined to be
continuous:

(Gangue Coal: Commercially valueless
rock material containing minimal amounts of coal)

Non Reserve Coal:

Non reserve coal also consists of coal
bearing body in trenches, outcrops, drilling and other underground workings that
have been sampled which require further exploration work.

Continuous Reserve Coal:

- 8 -

---

These types of reserve and non reserve
coal sampled are extrapolated to be continuous between sampling points of which
may not be consistent.

Proven and Probable
Reserves

The reserves in the LaiYeGou Coal Mine are
as follows as of March 2005 in thousand ton units:

|                               |        | Coal seam       | Thermal              | **evelin%**        
|------------------------------ | ------ | --------------- | -------------------- | -------------------
|                               |        |                 | value (BTU)Qnet,d ** | St,d **            
|Proven reserves                | 21,160 | 6-2             | 11002.42 - 12846.9   | 0.16 - 0.22        
|                               |        |                 | 11535.55(2)          | 0.19(4)            
|Probable reserves              | 4,930  | 4-1             | 11436.66 - 11720.43  | 0.28 - 0.33        
|                               |        |                 | 11578.55(2)          | 0.31(2)            
|                               |        | 4-2
      upper | 12184.78 - 12455.65  | 0.22(2)            
|                               |        |                 | 12322.26(2)          | 11458.16 - 12644.82
|                               |        | 4-2             | 11458.16 - 12644.82  | 11987(2)           
|                               |        |                 | 11987(2)             |                    
|Total reserve****              | 26,090 |                 |                      |                    
|                              
|                              
|Insitu proven reserve consumed | 6,590  |                 |                      |                    
|Probable
      reserves***     | 4,939  |                 |                      |                    
|Reserve currently developing * | 14,570 |                 |                      |                    
|Total                          | 26,090 |                 |                      |                    

*These reserves will be developed during
our expansion of LaiYeGou.

** The top figures represent maximum and
minimum amount, and the bottom figure represents the average.

*** Probable reserves are assigned to
existing facilities whereby existing infrastructure and equipment allows these
reserves to be mined at current production levels.

**** Reserves are insitu (in the
ground)

The projected mine life of the Proven
& Probable reserves at present production rates are as follows in thousand
ton units:

Reserve
    Amount
    Mine  life(year)
    Recovery rate(%)
    Remarks


- 9 -

---

Proven reserves
    14,570
    7
    37%Probable
      reserve
    4,930
    
    
    Cannot be mined
      underpresent production methodTotal reserve
    19,500
    7


The projected mine life after the
expansion is estimated to be as follows in thousand ton units:

Reserve
    Amount
    Life(year)
    Recovery rate (%)Proven reserves
    14,570
    10.4
    75Probable
      reserve
    4,930
    2.5
    85Total
      reserve
    19,500
    12.9


With the exception of reserves currently
developing, all other reserves have been assigned to existing facilities and
determined for sorting or for packaging of mixed coal. Coal is steam and non
metallurgical and owned by Coal Group through right of land and use by 50 year
lease granted by the Government. This is the only type of ownership permitted in
the PRC.



| | Coal
      Specifications
| | -------------------------

The BTU per pound is 12,322.98. (Short forBritishthermalunit. One Btu is equal to the amount of heat required to raise the
temperature of one pound of liquid water by 1 degree Fahrenheit at its maximum
density, which occurs at a temperature of 39.1 degrees Fahrenheit. One Btu is
equal to approximately 251.9 calories or 1055 joules.)

Coal produced from LaiYeGou does not
undergo any washing or any other preparation prior to sale to customers as its
raw form is satisfactory in meeting the needs and requirements of its customers.
As a result, LaiYeGou does not have wash plant facilities nor it is necessary to
account for dilution of its products. The saleable product for estimated coal
reserves is 75% (recovery rate).

The sulphur content is 0.5 pounds per
million BTU and deemed to be compliant coal as non compliance coal emits greater
than 3.0 pounds of sulphur dioxide per million BTU when burned.



| | Coal
  Seams
| | ------------



| | The coal seams of economic interest are
      as follows:
| | ---------------------------------------------------------

Thickness of Gangue containedNo. of coal
    Thickness of coal seam(m)
    (m)
    Pitch of coal seam (m)
    Status of
    Stability of coal seamseam
    minimum -maximum
    minimum -maximum
    minimum -maximum
    coal seamaverage
    average
    average2.39 -2.84
    0.06 -0.19
    
    Most
      can be4¡a1
    2.61(2)
    0.12
    
    mined
    Comparatively stable11.25 -17.641.20 -2.10
    
    
    Most can be4¡a2
    1.65(2)
    
    13.89
    mined
    Comparatively stableupper
    
    
    1.49 -4.241.25 -1.49
    
    3.83
    Most
      can be4¡a2
    1.37(2)
    
    55.40 -76.93
    mined
    Comparatively stable6.78 -8.08
    
    67.01
    All can be6¡a2
    7.45(5)
    
    
    mined
    Stable


- 10 -

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Coal reserves in each coal seam are as
follows:                                                                         
Tonnage:10thousand
tons

|                      | No. of    | Elevation of |            | Consumed         | Remained resource      | Type of resource
|--------------------- | --------- | ------------ | ---------- | ---------------- | ---------------------- | ----------------
|Type
      of mineral | coal seam | soleplate    | This audit | Resource reserve | reserve                | reserve         
|Coal                  | 4-1       | 1285-1305    | 30         |                  | 30                     | Probable reserve
|4-2upper              | 1270-1285 | 247          |            | 247              | Probable
      reserve
|                      |           |              |            |                  |                       
|4-2                   | 1265-1280 | 216          |            | 216              | Probable
      reserve
|6-2                   | 1192-1205 | 2116         | 659        | 1457             | Proven reserve        
|Total                 | 1192-1305 | 2609         | 659        | 1950             |                       

General characteristic of quality in coal
seam are as follows:

|item                     |                   | industrial analysis(%) |                     | evelin%           | Thermal value(BTU) | ****model
      of****
|------------------------ | ----------------- | ---------------------- | ------------------- | ----------------- | ------------------ | ----------------------
|****No. of coal seam**** |                   | Mad                    | Ad                  | Vdaf              | ***St,d***         | Qnet,d                
|4-1                      |                   | 8.88 - 9.90            | 11.92 - 13.54       | 36.87 - 38.41     | 0.28 - 0.33        | 11436.66 - 11720.43   
|Raw coal                 |                   |                        |                     |                   |                    | 2                     
|                         | 9.39(2)           | 12.73(2)               | 37.64(2)            | 0.31(2)           | 11578.55(2)        |                       
|                         | 6.72 -
      6.74 |                        | 36.32 -
      36.64 |                   |                    |                       
|floatation               |                   | 4.52(2)                |                     | 0.32              | 12606.13           | 2                     
|                         | 6.73(2)           |                        | 36.48(2)            |                   |                    |                       
|4-2upper                 |                   | 8.48 - 9.80            | 6.56 - 8.50         | 36.92 - 37.68     |                    | 12184.78 - 12455.65   
|Raw coal                 |                   |                        |                     | 0.22(2)           |                    | 2                     
|                         | 9.14(2)           | 7.53(2)                | 37.30(2)            |                   | 12322.26(2)        |                       
|                         | 5.67(2)           | 4.77 -
      5.36      | 35.79 -
      36.19 |                   |                    |                       
|floatation               |                   |                        |                     | 0.21              | 12528.74           | 2                     
|                         |                   | 5.06(2)                | 35.99(2)            |                   |                    |                       
|4-2                      |                   | 8.30 - 8.62            | 7.78 - 12.94        | 36.69 - 37.05     | 0.16 - 0.33        | 11458.16 - 12644.82   
|Raw coal                 |                   |                        |                     |                   |                    | 2                     
|                         | 8.46(2)           | 10.36(2)               | 36.87(2)            | 0.25(2)           | 11987(2)           |                       
|                         | 5.52 -
      5.86 | 4.17 -
      4.30      | 34.68 -
      35.05 |                   |                    |                       
|floatation               |                   |                        |                     | 0.11              | 12915.69           | 2                     
|                         | 5.56(2)           | 4.24(2)                | 34.87(2)            |                   |                    |                       
|6-2                      |                   | 7.34 - 8.36            | 4.78 - 15.28        | 33.80 - 36.47     | 0.16 - 0.22        | 11002.42 - 12846.9    
|Raw coal                 |                   |                        |                     |                   |                    | 2                     
|                         | 7.90(4)           | 7.79(4)                | 34.65(4)            | 0.19(4)           | 11535.55(2)        |                       
|                         | 5.38 -
      6.62 | 3.78 -
      4.62      | 33.18 -
      34.23 | 0.11 -
      0.22 |                    |                       
|floatation               |                   |                        |                     |                   | 12915.69           | 2                     
|                         | 5.85(4)           | 4.11(4)                | 33.54(4)            | 0.15(3)           |                    |                       

The following is a stratagraphic column
illustrating partings within the coal seams:

- 11 -

---

---



|Mining
    Method
|-----------------

We currently use the "Room & Pillar"
production method of mining whereby rooms are cut into the coal bed leaving a
series of pillars, or columns of coal, to help support the mine roof and control
the flow of air. Rooms are 20-30 feet wide and the pillars up to 100 feet wide.
As mining advances, a grid-like pattern of rooms and pillars is formed. When
mining advances to the end of a panel or the property line, retreat mining
begins. In retreat mining, the workers mine as much coal as possible from the
remaining pillars until the roof falls in. When retreat mining is completed, the
mined area is abandoned. Conventional mining method is used where the coal seam
is cut, drilled, blasted and then loaded into trucks.

After reconstruction of Laiyegou coal
mine, the "Long Wall" production of mining will be used whereby large
rectangular blocks of coal are defined during the development stage of the mine
and are then extracted in a single continuous operation. Each defined block of
coal, know as a panel, is created by driving a set of headings from main or
trunk roadways in the mine, some distance into the panel.

The panel or block of coal up to 1,000
feet wide and two or three miles long is completely extracted. The working area
is protected by movable hydraulic powered roof supports called shields. The
longwall employs a shearer, with two rotating cutting drums, which is dragged
mechanically back and forth across the coal face. The coal which is cut falls
onto a heavy chain conveyor which delivers it to a belt conveyor system for
removal out of the mine. The longwall shields advance with the machine as mining
proceeds and provide not only high levels of production but also increased miner
safety.

Longwall mining systems employ sensors to
detect how much coal remains in the seam being mined as well as robotic controls
to enhance efficiency. Microprocessors record seam data as a longwall miner
makes it initial pass, subsequent passes then follow the previous route
resulting in high efficiencies.

With the use of a longwall system, the
amount of coal which is recovered in a given area increases from 50% to as much
as 80%. The carefully planned longwall process has a positive influence on
minimizing the effects of subsidence. Gradual or occasionally abrupt collapse of
rock layers sometimes occurs between an underground mine and the surface. With
the longwall operation such ground movements are completed in a shorter period
of time and the settling process occurs in a more uniform and predictable manner
helping to minimize surface impacts. Longwall production has increased the
largest amount of tonnage among underground mining methods.



|Mining Equipment and
      Employees
|------------------------------------

The following are the equipment used under
the "Room and Pillar" mining method:

Equipment
    Function
    Number
    Capacity
    RemarkElectric driller
    Use
      electric drill drills the
    6
    127KW/hr
    Ownedshot
      holeVentilator
    Keeping well
      ventilated
    3
    5.5KW/hr
    OwnedVentilator
    Keeping well ventilated
    1
    2.2KW/hr
    OwnedLoader
    Loading coal into
      truck
    4
    1.5 tons
    Leased bycontractorTruck
    Transportation for coal
    30
    6
      tons
    Leased bycontractor


There are approximately 70 staff working
in the mine under the supervision of one contractor, Wu Lingwen. We have an
agreement with Wu Lingwen for a period of 2 years and 2 months commencing March
1, 2006. Wu Lingwen under the agreement shall be responsible for all areas of
production and processing. Please refer to Exhibit 10.22 (a) (b).



|Screening, Crushing and Loading
      Facilities
|------------------------------------------------

Our screening facilities consist of a
filter which divides three types of coal according to customer specifications.
We use manual screening method to filter the coal consisting of two screens of
different filters and steel frame to support the facility.

- 13 -

---

We currently do not have crushing
facilities as the use of "Room and Pillar" mining method does not require coal
to be crushed or altered from its existing form.

We also do not have washing facilities and
therefore do not incur losses of product from this process.

Our loading facilities consist of
equipment leased by contractor. We require the use of 4 Loaders with the
capacity of 1.5 tons each.



|Transportation
      Infrastructure
|-----------------------------------

Currently our customers provide their own
transportation of goods from production to their desired location. There are
however transportation challenges customers face where routes are inefficient
however where the contract is granted through Government appointment,
transportation is guaranteed from LaiYeGou coal mine to the final destination.
Where contracts are privately arranged, transportation is arranged through hire
of 3rdparty transporters by customers. In some instances, coal is purchased by
3rdparties close in proximity to train stations where transportation to customer's
destinations is more efficiently arranged. However, transportation to
destinations is limited to where routes are in place. Coal Group does not own
any transportation equipment for the purpose of delivering its goods.



|Resources and
      Utilities
|-----------------------------

The source of water for the mine is from
an on site water well. This well is currently our only source of water and has a
capacity of 3 tons. We are currently in negotiation and under application for
water supply with Zhunger Keyuan Water Supply Co., Ltd, a public utility company
owned by the Government. Pipelines are currently being built and with the
expected completion date of June 2007. We have signed a promissory letter with
Zhunger Keyuan Water Supply Co. Please refer to Exhibit 10.23.

The source of power is provided by the
Agricultural Power Supply Bureau, a public utility company owned by the
Government. The current supply obtained is sufficient in meeting our needs
however after the expansion is completed, we will require additional power
supply. We have secured the supply of power with the Erdos Power Industry
Bureau. Please refer to Exhibit 10.24.



|Other Exploration
      Projects
|--------------------------------

Coal Group is currently expending its
exploration efforts in a nearby mine in Dalu to test whether acquisition of this
mine is commercially viable and a worthy investment. Coal Group has not obtained
any mining rights and such rights can only be granted to registered owners of
the mine. As of November 30, 2006, Coal Group has expended $ 770,639 in
exploration costs. These costs are not recoverable. To date Coal Group has not
made any decisions to purchase this mine and is currently evaluating whether
such an investment should be made at this time. Exploration efforts are
contracted to No. 4 Geology Team Co., Ltd.



|Coal Group
  Markets
|--------------------

The main product of Coal Group is "Raw
coal" or "Mixed coal" consisting of large, middle and powdered coal; accounting
for more than 90% of our sales. Coal Group does not specifically sell large mass
coal, median mass coal and powder coal unless it is requested by the
customer.



|Large Mass
    Coal
|-------------------

Production of this mass coal fulfills the
needs of its retail customers in Hohhot and in BaoTou, the second largest city
in Inner Mongolia with a population of 1.96 million. Retail customers purchase
large mass coal for individual or commercial resale. Most coal mines in the area
do not engage in individual sale and have minimum purchase requirements and
therefore deter the type of customers Coal Group attracts to its customer
base.



|Middle Mass
      Coal
|----------------------

- 14 -

---

Coal Group supplies approximately 50,000
tons to Inner Mongolia LiTai Coking Co. Ltd., located in Erdos City, WuRiTuGaoLe
Town, Zhunger County, for coking purposes in connection with the production of
steel. The contract signed with LiTai is attached in Exhibit 10.4 and
10.5.

Our current agreement with LiTai is
effective March 18, 2006 whereby 70,000 tons of coal with a minimum heating
capacity of 5,800 Kcal is to be supplied for a period of one year for
consideration of approximately $ 1,207,500. LiTai shall be responsible for the
transportation of the coal from LaiYeGou. We have a 20% investment in LiTai.
Please refer to Exhibit 10.19(a) and 10.19(b) .

The price of middle mass coal in generally
is lower than of large mass or powdered coal and therefore it is not as
frequently produced resulting in lower levels of supply. Current levels of
production are maintained to meet requirements pursuant to the terms of the
contract with LiTai.

On November 22, 2006, LiTai received
notification from the Zhunger County Environmental Protection Bureau (the
"Protection Bureau") to shut down its operations effective December 31, 2006 as a result of
their findings of contamination of the water supply in the region. LiTai was
fined approximately $ 12,500 and ordered to rectify the breach of environmental
standards. LiTai will only be able to commence operations upon the inspection
and approval from the Protection Bureau.

In January 2007, LiTai was notified by the
Protection Bureau that its operations may be sustained so as long as efforts
were underway to rectify the breach. The breach was regarded in a more lenient
manner as the supply of raw materials from coking factories in the area
currently meets the demand. The shutting down of LiTai would have had a
detrimental effect on various industries dependent on the raw material produced
from the coking factories in the region.

LiTai fully intends to rectify the breach
while sustaining its operations.



| | Powdered
    Coal
| | -----------------

Powdered coal is generally for the use of
power stations for electricity and heat generation purposes. Coal Group supplies
Zhejiang Fuxing Electric and Fuel Co., Ltd., which services the ZhejiangFuXing
& JiangSu region with its electricity and heating generation needs. The
contract is for supply of 200,000 tons of coal with no set fixed price per ton.
The contract is attached in Exhibit 10.28. Our previous contract is attached in
Exhibit 10.6.



| | Mixed
  Coal
| | ------------

The composition of mixed coal is
classified into three specifications according to mass size. Coal is screened
according to client's request. Large mass coal is mainly for civil use, middle
mass coal is mostly used in coking industry and powered coal is mainly used in
electricity generating.



| | The size specifications and price per
      ton is as follows:
| | --------------------------------------------------------------

Type of coal
    Specification in CM
    Percentage coverage
    Unit price per tonLarge
      mass coal
    >20
    30
    $
      26.83Middle mass
    coal
    1-20
    40
    $ 24.39Powered coal
    <1
    30
    $
      20.73


These specifications are similar for
coal purchased from other companies.

**Pricing**

- 15 -

---

The following are annual production per
ton and weighted average prices received in the past three years:

Year
    Annual
      Production
    Weighted
      Average Price2003
    235,321
    $ 10.462004
    506,913
    $ 10.462005
    612,739
    $ 23.872006
    549,970
    $ 23.98




|Contracts to be
      Awarded
|-----------------------------

Coal Group is targeting other power and
electricity stations and in turn, increasing its production capabilities. Each
year, the China Coal Industry Association convenes a supply and sale meeting
whereby contracts to supply coal to power stations are awarded to suppliers
based on levels of production.

As of the previous meeting held in 2006,
Coal Group was classified as one of the top 20 coal producers and, as a result,
will be awarded contracts to service various regions. The meeting attendees
included National Planning and Reforming Committee, Railway Ministry
Communication Ministry, National Electric Power Corporation, Coal Industry
Association, and the Provincial Planning and Reforming Committee.

Coal Group obtains its contracts by
maintaining its current levels of production. It is classified as a mid scale
coal mine by the China Coal Industry Association. Production of less than 300
thousand tons are classified as small scale mines, 300 thousand to 900 thousand
classified as mid size scale mines and 900 thousand and above classified as
large scale mines. There are currently no other requirements to be awarded such
contracts. The level of production required per year for segregation of large,
mid or small scale mine is determined upon review of previous data of production
of coal and projected requirements with the consideration of growth in various
areas.

As new rural areas are developed, there
will be the need to supply heating and electricity to new users and thus the
requirement of raw coal material. With the increase in demand, the government
will award contracts to service these areas as needed. Coal Group was recently
awarded the contract to supply coal to Zhejiang Fuxing Power Fuel Co., Ltd.
Please refer to Exhibit 10.28.

LaiYeGou being a mid scale mine grants
Coal Group contracts not only to supply its products but also the guarantee of
transportation routes. Government granted transportation routes are far more
reliable and cost effective compared to the hire of 3rdparty contractors to
deliver products.



|LaiYeGou
      Expansion
|------------------------

In response to the escalating demand for
its coal products, Coal Group is investing in infrastructure improvements
necessary for increasing annual production capability of the LaiYeGou Coal Mine
by 20% to 600,000 tons per year. Infrastructure improvements commenced in May
2006. Coal Group has applied for and been approved by the Government for such
expansion plans in December 2005. In order to obtain approval, Coal Group was
required to sign an agreement with the Zhunger Coal Mining Industry
Administration Department, a sector of the Inner Mongolia Government specifying
the timeline of the construction process which is to be met monthly. Please
refer to Exhibit 99.11.

Our project timetable is as follows and
cost required during each phase is as follows:



|Phase 1: COMPLETED  ̈C Actual cost $
      80,000
|------------------------------------------------

|Milestone:              | Preparation                                                                                                       
|----------------------- | ------------------------------------------------------------------------------------------------------------------
|Work entails:           | Select and assign a
      project team, procurement of machinery and equipment, finalize the
      financing plan,
|                        | and provide training to
      the technical staff                                                                 
|Time to
      complete: | 1 month (April
      2006)                                                                                        

- 16 -

---

Phase 2: IN PROGRESS - Cost incurred
to date approximately $ 670,000

|Milestone:                                                |                                                                                                                        |                                                                                                               
|--------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------
|                                                          | Reconstruction of existing alley and
      excavation new alley                                                       
|Remark:                                                   |                                                                                                                        |                                                                                                               
|                                                          | In order to reduce construction period,
      parallel work shall be adopted, and the following three
      excavation
|                                                          | teams shall perform in respective
      area.                                                                         
|Work entails:                                             | 1) Excavation                                                                                                         
|                                                         
|                                                          | No.1 excavation group:                                                                                                
|                                                          | a)                                                                                                                     | Main passage for coal
      transportation is to be refitted and rebuilt using existing main plain
      well.
|                                                          |                                                                                                                        | Pipe to be laid for water
      supply and drainage. The distance is 245meters from mouth of
      well       
|                                                          |                                                                                                                        | to bottom of
      well.                                                                                      
|                                                          | b)                                                                                                                     | Excavation space for
      central transformer substation and water pump room. The
      central              
|                                                          |                                                                                                                        | transformer substation
      will contain electrical appliance including high-voltage
      switch,           
|                                                          |                                                                                                                        | transformer, input cable
      and output cable. The Water pump room is used to collect water
      from      
|                                                          |                                                                                                                        | water container and pump
      out of ground. During this stage there is anchor constructed
      for         
|                                                          |                                                                                                                        | protecting and supporting
      the roof structure. Excavation connecting passage to connect
      with       
|central transformer substation and
      water pump room.
|                                                          | c)                                                                                                                     | Main shipping lane should
      be refitted and dug for extension including shipping lane in                  
|                                                          |                                                                                                                        | exploiting
      area.                                                                                        
|                                                          | d)                                                                                                                     | Excavation shipping
      passage in recovery working area, as it is mainly used to ship
      coal           
|                                                          |                                                                                                                        | produced from recovery
      working area.                                                                    
|                                                          | e)                                                                                                                     | Excavation cutting area in
      working area, as it is mainly used to install standing and
      protecting  
|                                                          |                                                                                                                        | equipment, coal
      exploration equipment and coal shipping equipment.                                      
|                                                         
|                                                          | No.2 excavation group:                                                                                                
|                                                          | a)                                                                                                                     | Vice plain well is used to
      ship coal gangue, and other materials. Refit and rebuild existing
      vice 
|                                                          |                                                                                                                        | plain well including
      paving for water supply and drainage, cable, dustproof
      pipeline,             
|                                                          |                                                                                                                        | equipment installation.
      The distance is 176meters from mouth of well to the bottom of well
      in     
|                                                          |                                                                                                                        | vice plain
      well.                                                                                        
|                                                          | b)                                                                                                                     | Excavation warehouse of
      fire-control material, water container. Warehouse of
      fire-control         
|                                                          |                                                                                                                        | material is used to store
      fire-control material. Water container is used to collect gushing
      water 
|                                                          |                                                                                                                        | in well into wash
      container together.                                                                   
|                                                          | c)                                                                                                                     | Supplementary shipping
      lane should be refitted and dug for extension including
      supplementary      
|                                                          |                                                                                                                        | shipping lane in
      exploiting area. The supplementary shipping lane is used to ship material
      and    
|employees to the working area from
      vice plain well.
|                                                          | d)                                                                                                                     | Excavation water container
      to collect gushing water in well.                                            
|                                                          | e)                                                                                                                     | Excavation supplementary
      shipping passage in recovery working area, it is mainly used
      to          
|                                                          |                                                                                                                        | transport materials and
      employee.                                                                       
|                                                         
|                                                         
|                                                          | No.3 excavation group:                                                                                                
|                                                         
|                                                          | a)                                                                                                                     | Standing well for back
      wind(including wind well, standing and protecting
      construction):           
|                                                          |                                                                                                                        | enlarge existing standing
      well for back wind ( including wind well), where induced draft
      fan      
|                                                          |                                                                                                                        | will be
      installed.                                                                                      
|                                                          | b)                                                                                                                     | Excavation laneway for
      ventilation.                                                                     
|                                                          | 2) Civil engineering                                                                                                  
|                                                          | Civil
      engineering refers to construction in the ground, including dormitory,
      material warehouse,          
|                                                          | light
      room, pitprop room etc.                                                                                   
|                                                         
|                                                          | 3) Purchase of equipment                                                                                              
|                                                          | 4) Equipment installation                                                                                             
|                                                          |                                                                                                                        | Equipment installation
      includes equipment installation in the ground and under well.                    
|Time to
      complete:                                   | 18 months (May 2006-August
      2007)                                                                                
|                                                         
|Phase 3:                                                  |                                                                                                                        |                                                                                                               
|                                                         
|Milestone:                                                | Trial
      operation completed                                                                                       
|Work entails:                                             | Perform inspection and acceptance of the project
      work                                                           
|Time to
      complete:                                   | 2
      months (August 2007-September 2007)                                                                           

Infrastructure improvements consists of
enhancement of existing mining techniques and level of mining mechanization, in
order to reach production of 600,00 tons per year, using mechanized mining
method and



|- 17
-
|------

---

blasting down the roof mining
technique (*See definition below) with a 75% coal mining recovery rate. This reconstruction plan
is classified under the Government's policy and standard set for the coal mining
industry.

There are many coal mines in Inner
Mongolia using less efficient mining methods with low levels of mining
mechanization which result in wasting of natural resources (low mining recovery
rate). These coal mines will be phased out under the Government's policy and
standards for the coal mining industry.

On Dec 8, 2005, Coal Group received the
Government approval for its Design Plan for the LaiYeGou reconstruction project
which was contracted to Inner Mongolia Coal Mine design and Research
Institution. Please refer to Exhibit 10.20 (a) and (b). Coal Group undergoing
phase 2 of the expansion as mentioned above. Please refer to Exhibit 99.11 for a
timetable of each project phase.

The following are definitions and mining
methodologies recommended by the Government:



|*Mining Method and Equipment
      Selection
|--------------------------------------------

(Definition of mechanized mining method and blasting down the roof mining
technique)

Based on the characteristic, thickness,
structure, roof-to-floor lithology of the coal bed, and other mining conditions,
the face of a mine or tunnel should be equipped with Style No. ZH2200/17/22Z
combinatory integral ceiling girder suspension hydraulic support to perform
blasting down the roof mining, mining height 2.2m, caving mine (mine of blasting
down the roof) height 5.25m, mining and caving ratio: 1 :2.4.



|Costs and
      Funding
|-----------------------

The cost for improvements consisting of
construction costs including procurement of mining equipment are budgeted to
cost $ 10,353,195.

Funding for this project will be financed
roughly $ 3,623,618 by shareholder loan, $ 3,623,618 by bank loan and $
3,105,959 from the public market.

On April 11, 2006, Coal Group obtained a
loan from the Agriculture bank in the amount of $ 2,500,000 to fund the
expansion of the mine and also for general use in its operations. Please refer
to Exhibit 10.25. This loan was repaid during the year. Coal Group obtained
further loans from the Agriculture bank amounting to 50 million RMB or $
6,392,021. The loans assist in funding our working capital needs.

The terms and principle amount of the
loans granted are as follows:

|Term                               | Interest rate | Principle (RMB)
|---------------------------------- | ------------- | ---------------
|Sep 26, 2006 to Sep 25,
      2007 | 7.344%        | 18,000,000.00  
|Oct 19, 2006 to Oct 18,
      2007 | 7.344%        | 12,000,000.00  
|Apr 11, 2006 to Apr 11,
      2007 | 7.254%        | 20,000,000.00  
|Total                              |               | 50,000,000.00  

We intend on making public offerings and
engage investor relations and promoters for the Company once it has obtained
trading status on the OTC Bulletin Board.

Please refer to Exhibit 99.11 for a
timeline of infrastructure improvements and monthly costs.

- 18 -

---

|Costs totaling $
      10,353,195 are summarized as follows: |                   
|------------------------------------------------------------ | ------------------
|                                                            
|Item:                                                        | Cost              
|Sinking and driving
      engineering                        | 2,126,988         
|Civil work                                                   | 1,566,415         
|Equipment                                                    | 2,510,317         
|Installation                                                 | 860,415           
|Others                                                       | 2,422,549         
|Engineering                                                  | 664,073           
|Interest Expense during the Construction
    Period          | 202,439           
|                                                             | $
      10,353,195
|                                                            
|Exchange rate: 1USD = 8.2
      RMB                          |                   



|Heat
  Power
|------------

Heat Power, a China Corporation, was
founded in September 2003 in XueJiaWan Town, Inner Mongolia. Heat Power's
business licence is attached in Exhibit 99.2. Since its inception, Heat Power
operated an existing Heat Power plant in XueJiaWan as part of its agreement with
the Zhunger County Government to phase out the existing heating plant for
development of a more efficient and effective plant with heating and electricity
generation capabilities as per the monopoly granted as mentioned
below.



|Heat Supply
      License
|-------------------------

On July 29, 2003 Heat Power was granted
the license and monopoly by the Zhunger County Government to provide the entire
XueJiaWan area with its heating requirements. The monopoly was granted for an
undetermined period of time given Heat Power maintains production capabilities
and predetermined prices set by the Zhunger County Government. The grant of the
monopoly is attached in Exhibit 10.2 and 10.2(a)(b) .

Under the terms of the license agreement,
it states that Government agrees to transfer existing 4 heat power supply
stations previously operated by the Zhunger government in conjunction with Erdos
Xinxia Real Estate Co.,Ltd to Heat Power, granting us the exclusive right to
operate and manage the heat power station consisting of 4 heating plants to
supply centralized heating service to the municipal planning area of Xuejiawan
including Donghua residential area and Yinze residential area. The transfer
agreement is attached in Exhibit 10.2(a) .



| | Summary- Terms of the License
      Agreement
| | ---------------------------------------------

On July 29, 2003, Heat Power entered into
a license agreement with the Government to supply heating requirements to
Xuejiawan by transfer of 4 existing heating plants. The terms of the agreement
are summarized as follows and Heat Power is to comply with the
following:

|- | Manage the 4 stations                                                                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| 
|- | Retain existing employees                                                                                                                           
| 
|- | Supply heating needs to all of Xuejiawan -- total
      area of coverage was not noted                                                              
| 
|- | Report prices charged for heating                                                                                                                   
| 
|- | Construction of a new thermoelectric plant to provide
      heating and electricity to commence August 2003 for completion by October
      15, 2004
| 

An addendum to the license agreement
stated that Heat Power was responsible for:

- 19 -

---

|· | Providing heating requirements to Xuejiawan for Winter 2003                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|· | Prices charged for heating cannot be above the set standard as determined by the Government and any price charged about this standard shall require approval from the Government
| 

There were no penalty provisions stated in either the license agreement or addendum signed.

Heat Power complied with the above terms of the license agreement with the exception of completion of the thermoelectric plant as mentioned below. Heat Power met the heating requirements by construction a further 3
additional heating plants as mentioned below (Expansion  Construction of 3 Additional Heating Plants (80 Hectares of heating coverage)) for a total of
7 heating plants servicing Xuejiawan.

The License agreement requires Heat Power to construct thermoelectric plants to provide heating directly to users and electricity through Electric Power Group, (a government owned enterprise) to Xuejiawan. The area of
coverage was also not specified in the agreement however the area requiring service was approximately 120 hectares. Heat Power was to construct the thermoelectric plant by October 2004 and thereby replacing existing heating plants in operation.
Please refer to section Future operations  Thermoelectric Plant (120 Hectares of heating coverage)below.

October 2004 was the 1stextension granted and Heat Power was not able to meet this deadline as a result of harsh weather conditions. There were
no penalty provisions as such factors were beyond the control of Heat Power.

Heat Power signed a further agreement with the Government on June 2, 2005 stating the completion date of construction of the thermoelectric plant was to be extended to October 15, 2005 however because of connectivity
problems with Electric Power Group (Government owned enterprise) construction was not completed by this date. In both situations, Heat Power was not subject to penalty provisions as the delays were attributed to factors outside the control of Heat
Power.

Heat Power is currently meeting its obligations to provide heating to Xuejiawan with its newly constructed thermoelectric plant put into operation September 2006. Of the 7 heating plants previously put into operation, only
2 are supplying heating as 4 are in the process of being converted to heat transfer stations supporting the thermoelectric plant and one plant was sold in March 2006. See below.



|Previous operations  4 Heating Plants
|--------------------------------------

Heat Power previously provided heating needs with existing 4 heating plants as mentioned above to users of the XueJiaWan area. Upon granting of the license and transfer of ownership of the heating plants, Heat Power
initially supplied heat service to 40 hectares as of November 20, 2003 and 55 hectares by November 30, 2004. To supply a further 25 hectares would require expansion of our facilities by 3 additional heating plants as mentioned below.

As of to date, these 4 heating plants have been shut down and in the process of being converted to heat transfer stations supporting the efficiencies in heat transfer to users from the thermoelectric plant. The conversion
commenced September 2006 and is expected to be completed by December 2007 with a cost of approximately $ 40,000.

Expansion  Construction of 3 Additional Heating Plants (80 Hectares of heating coverage)

By October 15 2005 we completed construction of 3 additional heating plants to increase coverage of heating supply to 80 acres, covering Xuejiawan district and Shagedu Town. These 7 heating plants previously met our
obligations to supply heating to the Xuejiawan district temporarily until the thermoelectric plants have been fully tested and operational. Once the thermoelectric plant is operational these heating plants will be phased out and converted upon
completion and successful testing of the thermoelectric plant which will provide heating and electricity requirements.

- 20 -

---

As of to date, there are only 2 heating plants currently operational in addition to the thermoelectric plant put in operation September 2006. (Previous operations of 7 heating plants less 4 heating plans currently
undergoing conversion, less sale of 1 heating plant - Please see Sale of Heating Plant below).

The remaining 2 heating plants are currently undergoing construction pipeline construction to connect to the thermoelectric plant. Construction is expected to be completed by the end of 2007.

These 2 heating plants will support the thermoelectric plant operations until June 2007 whereby these plants will be shut down and will commence conversion to heat transfer stations in addition to the 4 heating plants
currently undergoing the same conversion process mentioned above. The completion date is expected to be the December 2007 with a cost of approximately $ 100,000. Operations at the end of 2007 will consist of the thermoelectric plant and 6
supporting heat transfer station.



|Sale of Heating Plant
|---------------------

On March 24, 2006, we entered into an agreement to sell 1 heating plant which was previously constructed in Shagedu Town to Hao Linmao for proceeds of approximately $ 300,000. This heating plant is located in the
outside suburb of XueJiaWan in Shagedu and was too costly to manage because of the location. Heat Powers market is in the heart of XueJiaWan and the sale of this plant has had limited impact on the results of operations. Shagedu is mostly
occupied by factories and the requirement for heating is limited. The coverage in Shagedu is approximately 2 hectares or less than 2% of our total coverage in XueJiaWan of 120 hectares.

To date we have received all proceeds of the sale. The agreement for sale is attached on Exhibit 10.26.

Current operations  Thermoelectric Plant (120 Hectares of heating coverage)

XueJiaWan Expansion was completed December 2005 and put into operation effective September 2006. Heating supply commenced in October and electricity supply commenced in September. The expansion has allowed for supply of not
only heating but also electricity requirements as well.

We provide electricity to users by merging an electrical network with Inner Mongolia Electric Power Co. Ltd, a Government owned enterprise and monopoly. This agreement is attached on Exhibit 10.3. The supply of electricity
may be widely dispersed and Heat Power does not have any control over which areas will be provided with electricity. Heat Power holds a license and monopoly for heating supply only. Only sectors of government can distribute and charge a fee for
electricity. However electrical networks can be established to provide this utility to this sector. Co-generation is encouraged as existing networks can be used as a renewable resource.

As mentioned above, we are currently converting 4 of our heating plants previously used in exclusive heat supply operations to heat transfer stations wherein efficiencies in heat distribution to users will be increased. The
remaining 2 heating plants will commence conversion in June 2007.

We are in the process of constructing a 3rdboiler at the thermoelectric plant as a necessary supplement to ensure stable and reliable heat supply
to users. Construction commenced July 2006 and is expected to be completed mid 2007. The estimated cost is $ 2.7 million.



|Supply of Powered Coal
|----------------------

The powdered coal required to generate heating is supplied by Guanbanwusu and has a heating capability of 4600-4,900 kcal and is low sulphur, low phosphorus, medium ash, and high ash melting point, which satisfies the
Government Environmental Protection Standard and is regarded as Green Coal or environmentally friendly.  Heat Power currently does not have a contract with
Guanbanwusu.  Heat Power will require approximately 180,000 tons of coal per year and a minimum of 15,000 tons per month. The coal shall have a minimum heating capacity of 4,600 Kcal or reduction of price per ton is implemented.  Guanbanwusu is
responsible for transporting coal to the plants. This contract is for supply of existing and new facilities which require 180,000 tons of coal per year or 15,000 tons per month as per completion of the expansion project. The contract is attached in
Exhibit 10.7.



|- 21 -
|------

---

Heat Power also obtains its supply of powdered coal from other suppliers of which there is no formal agreement. Suppliers are hesitant to enter into agreements for a fixed price as a result of the price of coal fluctuating
on an upward trend.



|XueJiaWan Expansion
|-------------------

Heat Power has completed constructing this project where such expansion covers 120 hectares, allowing for a centralized heat and electricity supply in the area with 110,400,000 Mega Joules and 144,000 Megawatts,
respectively generated per year.

We will provide electricity to users by merging an electrical network with Electric Power Group, a Government owned enterprise. The agreement is attached in Exhibit 10.3. Upon merging our systems with Electric Power Group,
it was found that the capacity of the sub transformer station used by Electric Power Group to be insufficient with our current systems.  To increase the capacity, during the 2ndquarter of 2006, Heat Power loaned Electric Power Group $125,000 without interest or stated terms of repayment. Electric Power Group has the option of offsetting fees Heat Power incurs for use of its network against the loan
amount. This issue has been resolved and Heat Power is currently providing electricity to Xuejianwan through Electric Power Group. The thermoelectric plant has been tested, has passed inspections and is fully operational.

Heat Powers efforts to improve the efficiencies and reliability of the thermoelectric plant are as follows:

|1. | Conversion of 4 heating plants (shut down as of June 2006) to heat transfer stations previously used in exclusive heat supply operations. These plants are to be linked to the thermoelectric plant for efficient and accurate
distribution of heat supply. Construction commenced June 2006 and was completed November 2006. The cost of conversion is $ 40,000 including civil and construction costs. Equipment costs amount to $ 260,000.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. | Conversion of 2 heating plants (currently in use for heating supply) to heat transfer stations also previously used for exclusive heat supply operations. Conversion will commence June 2007 for completion by the end of 2007.
The estimated cost of conversion is $ 100,000. The cost of converting these 2 heating plants is larger because of their size in comparison to the 4 heating plants mentioned above.                          
|  
|3. | Construction of a 3rdwater boiler as a necessary supplement to ensure stable and reliable heat supply. Construction commenced July 2006 and is
expected to be completed by mid 2007. The estimated cost is $ 2.7 million. As of to date the boiler is 60% completed and cost incurred were $ 1,500,000.                                                                                                                                      
|  

Total additional construction costs to improve the efficiencies and reliability of the thermoelectric plant total $ 2.84 million. Heat Power will receive shareholder and bank loans to fund construction.

With the expansion in place, Heat Power will require an additional 100,000 tons of powdered coal to sustain these thermoelectric stations. Guanbanwusu will supply the required 180,000 tons of coal per year on a non
contracted basis.

- 22 -

---



| | Assets and
      Plants
| | -----------------------

Please refer to Exhibit 99.13 for a
listing of assets, cost and usage.



| | Government
| | ----------

The Government has taken steps to monitor
and control the economic growth in the area. XueJiaWan Expansion is classified
by the Government as a development necessary for the steady growth of XueJiaWan.
Approvals would not be granted by the Government if this project were not
classified as such. This project was subject to obeying environmental and work
safety laws in order to continue with completion of the expansion. Heat Power
completed the expansion without any breach of these laws and continues to abide
by such laws.



| | Capacity
| | --------

The following is a comparison of new and
existing facilities:

|                                               | Previous
      Operations |       | Thermoelectric Plant
|---------------------------------------------- | ------------------------- | ----- | --------------------
|                                               |                           |       |                     
|Heating capacity (mega
      joules)           | 736,000                   |       |                     
|Electricity generation
    (megawatts)         | None                      |       |                     
|Coal requirements
      (tons)                 | 50,000                    |       |                     
|Coal price paid (per ton)                      | $ 10                      |       |                     
|Heating service charge
      (per square foot) | Residential:              | $0.10 |                     
|                                               | Commerce:                 | $0.15 |                     
|                                               | Office:                   | $0.13 |                     

Guanbanwusu Coal mine will supply Heat
Power with its supply of coal on a non contracted, non fixed price per ton
basis.

** Please refer to Exhibit 99.14 for
Heating Price Standard as determined by XueJiaWan Town Zhunger
County.



| | Tax
    Exemption
| | -----------------

The Ministry of Finance and National Tax
Administration Bureau has granted Value Added Tax ("VAT") exemptions for heat supply
industries operating in Inner Mongolia where VAT applicable on revenue or
expenses will not be required to be remitted or withheld, respectively. The
exemption is effective for fiscal years ended after completion of construction
of the plants.

Expenses paid for construction are subject
to VAT. Please see below "Taxation Rates". The grant is attached in exhibit
99.3. Tax exemptions were granted mainly as a result of the government
encouraging economic development in the area. XueJiaWan, prior to construction
of the plants, did not have efficient methods of providing heating and
electrical requirements to users, resulting in large amounts of raw material
coal being consumed with very low levels of output of heating and electricity.
Its plants allowed for a more efficient and effective means for distribution
with a centralized heat and electricity supply throughout the area.



| | Heat Power
  Markets
| | --------------------

Heat Power's marketing efforts are solely
devoted to obtaining heat supply monopolies and contracts with monopolized
divisions for supply of electricity through the Inner Mongolian government and
related city planning authorities. To obtain these monopolies, it must
demonstrate that it can meet the following requirements:

|1) | Reputation and operating history
      of the company                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | The company shall have a good
      reputation record, including never having been involved in illegal
      operations or default on payment of taxes.
|  

- 23 -

---

|2) | Production capability requirements                                                                                                                                                                                                                                    
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | No operating history is requested, but the company shall have the capability to manage the heat supply station and enlarge its production capacity if needed. The Government does not specify production capabilities, only
that heat supply stations are operational.
|  
|3) | Reputation of directors and officers                                                                                                                                                                                                                                  
|  
|   | The Companys directors, supervisor or top management must obey China Company Act and the Controlled Regulation of Artificial Person Registration.                                                                                                                
|  
|   | The following is an excerpt from China Company Act relating to the conduct of directors and officers:                                                                                                                                                                 
|  
|   | Item 147. If there is one of the following cases, person cannot be acted as director, or supervisor or official                                                                                                                                                      
|  
|   | a.                                                                                                                                                                                                                                                                    
|  
|   | b.                                                                                                                                                                                                                                                                    
|  
|   | of property, embezzlement of property, or destruction of economic rules in social market; or within 5 years after enforcing period of deprival of political right incurred by crime;                                                                                  
|  
|   | c.                                                                                                                                                                                                                                                                    
|  
|   | bankrupt liquidation, who bears personal responsibility to bankrupt of this company, within 3 years after completion of bankrupt liquidation;                                                                                                                         
|  
|   | d.                                                                                                                                                                                                                                                                    
|  
|   | ordered to close resulted from breach of law, who also bears personal responsibility to this company, within 3 years after withdrawal of business license; One who owns large debts and does not pay on due time.                                                     
|  

Company violates stipulation in preceding clause to elect or appoint director, supervisor or employ officials, this election or appointment is ineffective.

If there is one of case stipulated in clause 1 of this item occurred during term of office, company should relieve of his or her position.

As per the above, Heat Power and its management meet these requirements. Contracts are awarded through government appointment through evaluating these criteria in submission of contract bids.  In addition, these contracts
must specify prices charged which may be capped for a certain period as determined and approved by the local price control committee. Competition in obtaining monopolies is largely mitigated by a good review of operating history by the Government.
As to the knowledge of management, there are few entities which have the ability to maintain production and expansion capabilities and have a good operating history.

The monopoly is granted for an undetermined period of time given that production capabilities and prices are maintained. So as long as heat is supplied to the specified area, there are no termination provisions.



|Outlook on future demand for coal
|---------------------------------

Integral to Chinas industrial expansion and related energy demand escalation at the present time, the Central Government is encouraging sectors to build more power stations, coking factories, calcium carbide factories
and silicon iron factories across the country. As a consequence, the future demand in China for coal; a key factor underpinning the output of power stations and such factories reaching 1.650 billion metric tons during the present calendar year,
1.820 billion metric tons in 2010 and 2.100 billion metric tons by 2020.  However, estimates of supply deficiencies also are sizable at 120 million metric tons, 250 million metric tons and 700

- 24 -

---

million metric tons in 2005, 2010 and 2020, respectively. The coal industry is expected to grow at a rate of 9.5% per year. Source: The China Daily.

Diesel is an alternative competing factor to coal however it is generally not used as most energy generation plants and users are only equipped to receive coal as a raw material. The use of diesel is also not cost effective
as it is 4 times higher in price compared to coal products; however, diesel has a higher energy rate per ton compared to coal.

In addition to the excess demand, transporting coal from Shanxi Provice to Hebei Province proves to be a challenge as transportation routes are currently inefficient and or non-existent. Currently, the development and
improvement of roads and railways cannot keep up with levels of demand. There are plans for Government City Planners to rectify this issue with allocating resources to bettering and building transportation systems; however, to our knowledge, these
improvements are not expected to materialize for at least the next 5 years which could result in lost sales and other opportunities for expansion.

For Coal Groups situation, methods of circumventing transportation challenges are to receive contracts granted by the Government whereby transportation is guaranteed from LaiYeGou coal mine to final destination. Where
contracts which are privately arranged, transportation is arranged through hire of 3rdparty transporters or by customers.  In some instances, coal is purchased by
3rdparties close in proximity to train stations where transportation to customers destinations is more efficiently arranged for.  However, transportation to
destinations is limited to where routes are in place.

Heat Powers transportation from Guanbanwusu to its plants is provided by Guanbanwusu.

Heating requirements are supplied throughout the XueJiaWan area through underground pipelines.  Existing pipelines are used and in new areas expanded, the Government has constructed new networks for this area.



|Taxation Rates
|--------------

The following are taxes to which Coal Group and Heat Power are subject and the relating tax concessions if granted:

- 25 -

---

|Coal Group                                                    | Heat Power                                                  
|------------------------------------------------------------- | ------------------------------------------------------------
|VAT Output Tax for coal 13% of sales                          |                                                             
|                                                              |                                                             
|                                                              |                                                             
|                                                             
|                                                             
|Income taxes is 33% of Net Income                             | Because the company use gangue to generate electricity, it
|                                                              |                                                             
|                                                             
|                                                              |                                                             
|                                                              |                                                             
|                                                              |                                                             
|                                                              |                                                             
|                                                              |                                                             
|                                                              |                                                             
|                                                              |                                                             
|                                                             
|                                                             
|VAT Input tax payable                                         | SAME                                                        
|1)                                                            | Company or individual that purchases from any               
|                                                              | large company (or supplier) will receive a VAT             
|                                                              | special invoice and submit to the taxation bureau          
|                                                              | for tax deduction every month.                              
|Note: VAT rate varies from 0-17%; it depends on the nature of |                                                             
|                                                              | the products.                                               
|2)                                                            | With any transportation invoice Coal Group                
|                                                              | receives a rebate of 7% of total transportation             
|                                                              | expense from the taxation bureau.                           
|3)                                                            | These amounts are netted against VAT Output Tax             
|                                                              | payable.                                                    

---

*This rate is 50% lower than the standard rate of 17% because Heat Power uses gangue coal for electricity generation. Gangue coal is a kind of rock that contains small amount of coal and therefore less efficient
in terms of energy production. To encourage utilization of this resource, the Government provides tax concessions. Heat Power is currently under application to obtain this tax concession.

Please refer to Risks Relating to Our Business  Heat Power may be entitled to tax concessions in areas described as West Region Development Plan for a set period of time however may lose this benefit at
anytime as determined by the Government.



|Advertising and marketing strategy
|----------------------------------



|DistributionCoal Group
|----------------------

Coal Group does not have methods of distribution as sales of its large, middle mass and powdered coal are largely being transported by customers.  We also transport our products by truck and by railway for certain customers
that request this service.



|Heat Power
|----------

Supply of powdered coal is delivered to Heat Powers plants facilitated by Guanbanwusu. Guanbanwusu makes all necessary arrangements with third party transporters. The distance between the mine and operations is
approximately 3 km.

The transportation industry is fairly competitive and Heat Power or Guanbanwusu could retain other transporters should there be a need.

Subcontractors

Coal Group hires contractors to hire staff to work in the LaiYeGou coal mine. There is currently 1 contract hiring 70 employees.



|CompetitionCoal Group
|---------------------

Due to existing market conditions as discussed above in the Outlook on Future Demand of Coal, we do not have competition in the usual sense of the term.  There are approximately 30,000 coal mining companies
throughout China; however, since demand currently exceeds supply; competition is not a concern in the operation of our business.

We expect that Chinas coal industry will remain a large, growing and chronically under-supplied customer base for the foreseeable future.

There are pressures from the Government to use nuclear power instead of coal due to environmental concerns; however, coal reserves in China are abundant and less expensive and a switch to other forms of resources to
generate energy is unlikely. Chinas coal reserves are expected to last approximately 40 years. Source: The China Daily-January 4, 2005.

Heat Power does not have competition as it receives a monopoly to supply heating and electricity requirements to serviced areas. Competition in obtaining monopolies is largely mitigated by a good review of operating history
by the Government as to the knowledge of management, there are few entities which have the ability to maintain production and expansion capabilities and have a good operating history.

- 27 -

---

The monopoly is granted for an undetermined period of time given that production capabilities and prices are maintained. As long as heat is supplied to the specified area, there are no termination provisions.



|Patents, Trademarks and Labor Contracts
|---------------------------------------

We do not have any trademarks on our trade name or logo or patents on our products or production processes.



|Employees
|---------



|Principal Business Office
|-------------------------



|Coal Group
|----------

Coal Group has a total of 34 full time employees, and 70 contracted staff to operate the LaiYeGou coal mine. The 34 employees fill positions in its Administration, Accounting, Sales, Finance & Securities, and Management
department.

The Administration department is responsible for human resources, training, and payroll. The department also evaluates all processes to ensure certain levels of efficiency are maintained and provides any support services to
other departments should the need arise.

The Accounting department is responsible for compliance with accounting principles and national tax laws, bookkeeping, preparing budgets and analysis of financial reports.

The Sales department is responsible for launching advertising campaigns, market research and customer service.

The Finance and Securities department is responsible for all corporate matters relating to preparation of contracts and maintaining corporate books and records.

The Management department is responsible for overall direction and marketing efforts.  This department oversees all other departments.

Heat Power

Heat Power has 19 full time employees filling positions in our Administration, Finance, Heat Station Management and Project Management Departments.

Heat Powers Administration and Finance departments have similar functions as Coal Group as above.

Its Heat Station Management department is responsible for inventory levels, purchasing, transportation, maintenance, safety, and overall management of the efficiency and operation of thermoelectric plants.

The Project Management department is responsible for design and production process specifications of new projects and appointing and managing subcontractors.

In addition to these employees, Heat Power has over 200 employees working in its heating stations in XueJiaWan consisting of engineers, technicians and management staff overseeing operations.

Please refer to Exhibit 10.15 for our standard employment contract.



|Administrative Branch Office
|----------------------------

We have 2 consultants in our Administrative Branch Offices. Consultants provide translation and EDGAR filing services. The consultants also have access to legal counsel for the purpose of preparing the necessary reports to
comply with regulations applicable to fully reporting companies. Mr. Ding provides this office space rent free.

Management believes that relations with its employees are good.

- 28 -

---



|RISK FACTORS
|------------



|***You should read the following risk factorscarefully before purchasing our common stock. ***RISKS RELATING TO OUR BUSINESS
|----------------------------------------------------------------------------------------------------------------------------

Our management lacks technical training with operating a mine and as a result may cause the Company to suffer irreparable harm due managements lack of training.

The lack of technical training of our management requires us to rely on professional engineers as an integral part of our operations.  As a result of managements lack of training, we may not take into account standard
engineering or managerial approaches other mineral explorations companies commonly use.  Consequently without the technical expertise of either retained staff or contracted 3rdparties, we could suffer irreparable harm in our operations, earnings and ultimate financial success.

Compliance and enforcement of environmental laws and regulations may cause us to incur significant expenditures and resources of which we may not have.

Extensive national, regional and local environmental laws and regulations in China affect our operations. These laws and regulations set various standards regulating certain aspects of health and environmental quality,
which provide for user fees, penalties and other liabilities for the violation of these standards.  We believe we are currently in compliance with all existing China environmental laws and regulations.  However, as new environmental laws and
legislation are enacted and the old laws are repealed, interpretation, application and enforcement of the laws may become inconsistent. Compliance in the future could require significant expenditures, which may adversely effect our operations. The
enactment of any such laws, rules or regulations in the future may have a negative impact on our projected growth, which could in turn decrease our projected revenues or increase our cost of doing business.

The potential liability for violation of environmental standards consists of loss of our business licenses causing irreparable damage to our reputation and payment of penalties which range depending on the nature of the
violation and history of previous violations made. There is currently no fixed amount set by the Government and penalties are determined on a case by case basis. In addition, the project which we undertake will be ceased until compliance with
environmental standards is adhered to.

We are required to renew our business license every 10 years where if we are in violation of any environmental or company act laws, our business may be suspended until such violations are remedied.

If our business license is not granted renewal, our operations will be suspended causing not only loss in profits but loss of existing and potential customer base, damage to our reputation, and related costs incurred for
business interruption.

Heat Power may be entitled to tax concessions in areas described as West Region Development Plan for a set period of time however may lose this benefit at anytime as determined by the
Government.

Tax concessions are granted by the Provincial Government to encourage development in rural areas in XueJiaWan. Heat Power is currently under application for these tax concessions. Income taxes are exempt for 5 years upon
initial operation and subject to a 50% lower rate until 2010. The Government may at its discretion terminate such tax concessions at any time and we may not have the resources to cover our income taxes as they become due as our budgets are based
upon granting of these tax concessions.

We are dependent on a few key personnel, being our officers and directors

We are substantially dependent upon the efforts and skills of our executive officers, WenXiang Ding, YanHua Li and WuSheng Liu. The loss of the services of any of the executive officers could have a material adverse effect
on our business.

- 29 -

---

Our shareholders may not be able to enforce U.S. civil liabilities claims.

Our assets are located outside the United States and are held through a wholly-owned subsidiary incorporated under the laws of Nevada. Our current operations are conducted in China. In addition, our directors and officers
are residents of countries other than the United States. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United
States upon these persons. In addition, there is uncertainty as to whether the courts of China would recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the
securities laws of the United States or any state thereof, or be competent to hear original actions brought in these countries against us or such persons predicated upon the securities laws of the United States or any state thereof.

We carry no insurance policies and are at risk of incurring personal injury claims for our subcontractors, and incurring loss of business due to theft, accidents or natural disasters.

We currently carry no policies of insurance to cover any type of risk for our contractors. It is common practice in China not to carry such insurance. Should any of such events occur, we are liable for all costs incurred to
replace, repair any damage and or compensate for incidences.  The costs incurred may adversely affect our operations and we may not have the necessary capital to sustain minimum working capital needs.  Social insurance may mitigate such costs
however may not be sufficient to cover the full cost or compensation depending on the severity of the incident.

We require the approval from the Inner Mongolia Government for all of our expansion projects and, as a result, could face delays for an indefinite period of time should the Government determine that such expansion
project is not in accordance with the rate of economic growth projected over a certain period of time.

All approvals are made under the National Planning and Reform Committee of the Inner Mongolian Government.

The approval process varies depending on size of expansion plans and on average takes approximately 2.5 months.

The prices we charge to supply heating in Zhunger County is determined by the Inner Mongolia Zhunger Pricing Bureau (the Bureau) and we may not be able to recoup increases in the cost of raw materials or
expenses for an undetermined period of time until application to increase prices is approved.

We are under application to increase the pricing structures of heat supply with Bureau as a result of increases in the cost of coal. Should our application be rejected, this may effect the commencement or completion of new
and existing expansion projects and we may require capital from other sources such as shareholder or bank loans which may not be available to us.

In recent years, the price of raw materials has increased leading to increases in cost of heat supply. To increase the price charged to supply heating we must receive approval from the Bureau. The approval process begins
with preparation of cost analysis and thereon a hearing will be arranged determining whether the increase is justified.

During this time, the Bureau may grant us a subsidy when the price of raw material increase is more than 10% of the heat supply price. We are under no circumstances permitted to increase heat supply prices in order to
recoup raw material costs.

- 30 -

---

Our rate of profit is capped by government regulations as prices for heat supply are determined by the Bureau and we may not be able recoup our costs or cover our working capital needs.

Our level of profit is capped by the Bureau as determined from time to time upon review of economic circumstances such as the price of raw materials in comparison with the price point of heat usage charges. The level of
profit will not exceed the amount the Bureau determines to be the price charged.

We are operating under conditions where political and legal uncertainties exist whereby changes in the political climate may cause us to incur costs to rectify any changes either local, provincial or central governments
may impose on us at any time.

Chinese government policy is volatile as property rights are insecure and the rule of law is still in its infancy. We are subject to unpublished regulations from local, provincial, and national governments, which often have
different and sometimes conflicting agendas and demands. This may affect our operations in all aspects from the price we charge for coal, heat, hot water, electricity supply and the approval process of new expansion projects. The price we charge may
be lower than desired and new expansion projects may be delayed indefinitely as a result of conflict with various levels of government.

As a member of the Local Coal Sales Association the minimum price at which we sell coal in any area in China is determined by the Local Coal Sales Association and if there is any decrease in demand for a particular type
of coal, we cannot lower our prices beyond the minimum set price to adjust for a decrease in demand without loss of our membership.

If the demand for a particular type of coal decreases, we are not able to decrease our prices in order to generate cash flow when needed until the Local Coal Sales Association determines that such a decrease is warranted.
We may not be able to sell coal at such minimum prices and as a result may not be able to meet working capital needs and expansion projects may be delayed indefinitely.

The following are minimum price at which we are required to sell coal:

The price for mass coal (large, middle, and powdered individually sold) must be at least $13.30 per ton and the prices for mixed coal (assortment of mass coal) must be at least $11.50 per ton. Prices set by the Coal
Sales Association are reviewed periodically as market conditions change. Enforcement of these price points are also governed under this authority.

We may not be able to expand our production capabilities of the LaiYeGou mine by 20% due to capital constraints and therefore may not meet demand resulting in lost profits.

The expansion of LaiYeGou requires an investment of approximately $ 10,353,195 of which we will require such funds to be raised either through shareholder and bank loans or through the public market. There is no
guarantee that we will be able to raise such funds.

Collection of accounts receivables of Coal Group and Heat Power averages to 2 years and 6 months respectively, resulting in cash flow problems in meeting our working capital needs.

It is common in the industry to have the age of our accounts receivable to be of this term and cash flow problems may persist. We will require shareholder loans and or bank loans to cover working capital needs and we may
exhaust such loans at any time.

- 31 -

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|RISKS RELATING TO OUR COMMON SHARES
|-----------------------------------

There is no public market for our common stock and therefore the stock you purchase may be illiquid for an indefinite period of time.

There is no public market for the common stock. Although we intend to apply for quotation of our common stock on the OTC Bulletin Board, there can be no assurance that, even if our common stock is approved for quotation, an
active trading market for our common stock will develop or be sustained.

Broker-dealers may be discouraged from effecting transactions in our shares because they are considered penny stocks and are subject to the penny stock rules.

Rules 15g-1 through 15g-9 promulgated under theSecurities Exchange Act of 1934(the Securities Exchange
Act) impose sales practice and disclosure requirements on NASD broker-dealers who make a market in "penny stocks". A penny stock
generally includes any non-NASDAQ equity security that has a market price of less than $5.00 per share.

Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or "accredited investor"
(generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the
purchaser's written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt.

In addition, the penny stock regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, unless the
broker-dealer or the transaction is otherwise exempt. A broker-dealer is also required to disclose commissions payable to the broker-dealer and the registered representative and current quotations for the securities. Finally, a broker-dealer is
required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer's account and information with respect to the limited market in penny stocks.

Our stock is controlled by directors, officers and principal shareholders for the foreseeable future and as a result, will be able to control our overall direction.

Our insiders, being the directors, officers own 18% and together with 5% shareholders own an aggregate of 92% of our outstanding shares. As a result, the insiders could conceivably control the outcome of matters requiring
stockholder approval and could be able to elect all of our directors. Such control, which may have the effect of delaying, deferring or preventing a change of control, is likely to continue for the foreseeable future and significantly diminishes
control and influence which future stockholders may have in the Company. See "Principal Stockholders."

We may issue more shares for public offerings and this will dilute the value of the shares held by existing shareholders.

Our shareholders are offering 32,495,217 shares with 12,504,783 remaining, totaling 45,000,000 total shares issued. We may issue more shares to raise funds in the public and this will dilute the value of the value of the
shares currently outstanding as the price per share will decrease proportionately by the increase in number of shares outstanding; with market conditions held constant.  Our need to issue more shares will depend on the amount of shareholder or bank
loans which are granted to us from time to time.



|FORWARD LOOKING STATEMENTS
|--------------------------

This Form SB-2 includes forward-looking statements which include words such as "anticipates", "believes", "expects", "intends", "forecasts", "plans", "future",
"strategy" or words of similar meaning.  Various factors could cause actual results to differ materially from those expressed in the forward looking statements, including those
described in "Risk Factors" in this Form SB-2.  We urge you to be cautious of these forward-looking statements. Except as required by applicable law, including the securities
laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

- 32 -

---

Currency Exchange Between Chinese Renminbi and United States Dollars

While our consolidated financial statements are reported in United States dollars, a significant portion of our business operations are conducted in the Chinese currency Renminbi (RMB). In order to provide you with a better understanding of these operations as discussed in-depth in the section titled "Description of
Business", we provide the following summary regarding historical exchange rates between these currencies:

China previously did not allow it's currency to float on the open market. Rather, the currency was tied to the U.S. dollar. This means the RMB exchange rate versus the U.S. dollar was changed very infrequently. When it was
changed, it tends to be very significant. During a period of high inflation, a country with a fixed exchange rate such as China will use foreign currency reserves to hold their rate steady until those reserves are exhausted. In this instance the
exchange rate change will tend to be significant.

On July 21, 2005, China changed it policy and no longer values its RMB in terms of US dollars.  With this change, the Renminbi is expected to increase.

ITEM 2 DESCRIPTION OF PROPERTY

Principal Business Office

Coal Group



|Principal Business Office
|-------------------------

Our principal business office is located at No.57, Xinhua East Street, Hohhot City, Inner Mongolia, where our sales, legal, administration, accounting, finance and management departments are located.  The third floor is
approximately 5,050 square feet and is kept in good condition.

The office building was purchased by our President, Mr. Ding, in July 1998 on behalf of Coal Group and he subsequently transferred title to Coal Group once it obtained a business license. The full purchase price has been
paid and no amounts remain outstanding for this property. The building has 3 floors and is 14,674 square feet.

We occupy the 3rdfloor and the 1stand 2ndfloors are occupied by XianGrong Commercial & Trade Co., Ltd where they operate a restaurant.  Coal Group provides this space in exchange for property maintenance and catering services.
Catering services and various banquets held throughout the year for promotion purposes cost approximately $25,000. Only expenses exceeding $25,000 are paid. Please see Exhibit 10.18.

The property certificates for each floor are attached in Exhibit 99.6 (1stfloor), 99.7 (2ndfloor), and 99.8 (3rdfloor).

The land on which the office building is situated is leased from the PRC Government or previous holders of the lease for a period of 50 years, expiring in 2048.  A lease from the PRC Government grants use of land by
obtaining a State Owned Land Usage Certificate and a lease obtained through previous lease holders grants use of land by obtaining a Collective Land Usage Certificate. Land in China cannot be owned and the only form of ownership is by way of lease
for a period of up to 50 years. A regulation Coal Group must comply with in order to keep the lease is the use of the land as specified in the business license. Any changes in use must be approved by the PRC Government.



|Investment
|----------

In August 2005, Coal Group entered into and agreement with Deheng Assets Management Co., Ltd. (Deheng Assets) to purchase 2 office
buildings located at Building 3 in Hongqi Street in Hohhot City (Property Certificate No. 2003001090) and Building 8 in Hongqi Street in Hohhot City (Property Certificate No. 2003002197). The purchase price was approximately $ 1,625,125 and has
been paid in full from shareholder loans and bank loan obtained from the Agriculture Bank as mentioned herein. Other costs incurred were for property transfer taxes, real estate agent fees and legal fees which amounted to approximately $
162,808. Coal Group intends to hold this property as an investment and currently has no plans for improvements to this

- 33 -

---

property.  Coal Group plans to lease the units for commercial use.  The agreement with Deheng Assets Management Co., Ltd. is attached in Exhibit 10.27.

The 2 buildings are currently vacant with the exception of 3 floors which were previously occupied by 1 tenant which had a lease agreement effective September 2005 through September 2006. The agreement was signed with
Deheng Assets and therefore the tenant was making payment to Deheng Assets and not Coal Group. The transfer of the lease agreement was formally made in November 2006 and Deheng Assets reimbursed Coal Group approximately $ 13,000 for the lease
from September 2005 through September 2006.  Coal Group renewed the lease agreement with the tenant for a period of one year effective September 2006 with a lease rate of $ 13,000 per annum. Please refer to Exhibit 10.29.



|LaiYeGou MineLocation & Access
|------------------------------

The location of the LaiYeGou mine is south-east of Bianjia Road and is approximately 230 hectares.  The location is central as it intersects with national highways making access to the mine central to regional areas through
No. 210 National Highway. The distance from LaiYeGou to each location is as follows:

- Dongsheng  70 km
- Baotou City  170km
- XueJiaWan Town  145km
- Yulin City, Shangxi Province - 215 km
- Wuhai City - 370 km

There are other transportation routes. BaoShen Railway crosses Dongsheng where Dongsheng Coalfield and Shenfu Coalfield are located. These mines are 35 km away from a railway collection station and therefore a convenient
location where Coal Group is able to purchase raw materials and transport it to customers.

Please refer to Exhibit 99.16 for transportation routes to the Laiyegou Coal Mine. The mining production flow system and mine site plan map is attached in Exhibit 99.17(a) and 99.17(b) .

Access to the property is monitored strictly by mine managers. Prior to entering the premises, mine managers assess condition and safety reports from the previous day and determine location and safety parameters for
employees. Condition and safety reports are prepared on a daily basis and serves as a basis for permitting entry to the mine and locations where employees are assigned to work.



|Ownership & Previous Operations
|-------------------------------

In June 1999 the LaiYeGou mine was acquired and the purchase contract is attached in Exhibit 10.17. The land in which the mine is located is leased for a period of 50 years from the PRC Government. As mentioned previously,
land in China cannot be owned and the only form of ownership is by way of lease for a period of up to 50 years. A regulation we must comply with in order to keep the lease is the use of the land as specified in the business license. Any changes in
use must be approved by the PRC Government.

Since acquisition of LaiYeGou, Coal Groups activities have been coal exploration for the purpose of supplying raw materials mostly to heating and power industries and retail customers. The LaiYeGou mine was previously
owned by Inner Mongolia Dongsheng, Dongwang Cashmere and Weave Co., Ltd., which did not use the mine for any exploration.

In order to maintain our business license, we are required to pass random periodic safety inspections which check for gas and water seepage, ventilation, communication methods between in and outside of mine, any breach of
environmental laws and certifications of employees who work in the mine. Mine managers and staff must be trained and have mine management qualification certificates obtained through the Coal Safety Production Bureau. To date, we have not breached
any of the rules and regulations rendering our mine unsafe. Mine managers on site perform daily safety inspections.

- 34 -

---



|Current Conditions & Plans for Improvements
|-------------------------------------------

The LaiYeGou coal mine is an underground operation where capacity is 500,000 metric tons per year. Since acquisition, we have made enhancements such as reconstruction of wider laneways for access to the mine and from mine
to coal field, construction of 7 work stations and emergency exits, and improvements to the draught system.

Our current program for exploration consists of expanding mining capabilities.  Our plans for development consist of increasing annual production capability of the LaiYeGou Coal mine by 20% to 600,000 tons per year
commencing May 2006. The total cost for improvements including procurement of mining equipment would be approximately $ 10,353,195 funded by way of shareholder and bank loans, current cash flow and funds raised in the public market.



|Equipment Used
|--------------

The main equipment used on the mining site consists of drilling machines, a central transformer substation, and safety equipment such as a gas controller and exhaust fan which are located inside the mine. This equipment is
kept in good condition.  The useful life of the equipment is 10 years.  The source of power utilized for the equipment comes from a 10KV single circuit supplied by Changzhang Town and is converted to 380 volts by our transformer. The voltage used on
the surface of the mine and inside the mine varies from 220 to 380 volts and 127 to 380 volts, respectively. The expansion of the mine will require additional equipment and is listed in Exhibit 99.15.



|Proven and probable Reserves
|----------------------------

Occupying an area of 230 hectares at Dongsheng Coalfield near Dongsheng City, this underground coal mine has established proven and probable reserves of 26.09 million metric tons. As of May 2005, we have used 6.59 million
tons and 19.5 million tons remain. The product mined is high quality, coal that has low sulphur, low phosphorus and low ash contents. The estimate of proven and probable reserves was made by Inner Mongolia Coal Field Geology Bureau, an independent
3rdparty. The survey was completed in May 2005. Please refer to Exhibit 99.9 and 99.9 (a).

The coal produced meets the stringent environmental standards set by the Central Government of China. The companys environmentally friendly coal is ideal for general heating applications as well as for power
generation, with a heat rating of 6,8007,000 kcal.



|Heat Power
|----------



|Principal Business Office
|-------------------------

Heat Powers Administration, Finance, and Heat Station and Project Management Departments are located in newly constructed thermoelectric plants in Yingze Residential Area, Xuejiawan Town, Zhunger County. The office
space is approximately 24,272 square feet.



|XueJiaWan Thermoelectric Plant and Office Space
|-----------------------------------------------

The 3.96 hectares land where the office building is constructed and where our thermoelectric plant is located is leased from the PRC Government for a period of 50 years, expiring in 2053. Land in China cannot be owned and
the only form of ownership is by way of lease for a period of up to 50 years. A regulation we must comply with in order to keep the lease consists of using the land as specified in the business license.

- 35 -

---



|Administrative Branch
      Office
|----------------------------------

Our administrative branch office for North
American investor relations and U.S. regulatory reporting is located at 6130
Elton Ave., Las Vegas, Nevada 89107.

Our telephone number is 702-216-6000 and
our fax number is 604-697-8898. The facility includes answering and
English/Chinese translation services, EDGAR filing services, fax services,
reception area and shared office and boardroom meeting facilities. This office
is provided rent free by our President, Mr. Ding, and is kept in good condition.
There are currently no proposed programs for the renovation, improvement or
development of the facilities that we currently use. We believe that this
arrangement is suitable given the nature of our current operations, and also
believe that we will not need to lease additional administrative offices for at
least the next 12 months.

ITEM 3. LEGAL
PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS

At our Annual Meeting of Stockholders held
on December 1, 2006 the following individuals were elected unanimously to the
Board of Directors to serve until the next Annual Meeting of
Stockholders:

|Name            | Age |    | Position                  | Period Serving                        | Term(1) |             
|--------------- | --- | -- | ------------------------- | ------------------------------------- | ------- | ------------
|WenXiang Ding   |     | 52 | CEO, President, Director, | December 1, 2006 - November 30,       |         | 1
      year
|                |     |    | Secretary, Treasurer      | 2007                                  |         |             
|                |     |    |                           | December 1, 2006 -
      November 30, |         |             
|YanHua
      Li |     | 50 | Director                  |                                       |         | 1 year      
|                |     |    |                           | 2007                                  |         |             
|                |     |    |                           | December 1, 2006 -
      November 30, |         |             
|WuSheng Liu     |     | 44 | CFO                       |                                       |         | 1
      year
|                |     |    |                           | 2007                                  |         |             

|(1) | Directors hold office until the next annual
      stockholders' meeting or until a successor or successors are elected and
      appointed.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|   

We approved the appointment of Robert G.
Jeffrey as our independent accountants for the fiscal year ended November 30,
2006.



|PART
      II
|-------------

ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS



|MARKET FOR COMMON
      EQUITYStockholders of Our
      Common Shares
|---------------------------------------------------------------------

As of March 14, 2007, we had 30 registered
shareholders and 45,000,000 shares outstanding.



|Rule 144
  Shares
|-----------------

A total of 45,000,000 shares of our common
stock are available for resale in accordance with the volume and trading
limitations of Rule 144 of the Act. In general, under Rule 144 as currently in
effect, a person who has beneficially owned shares of a company's common stock
for at least one year is entitled to sell within any three month period a number
of shares that does not exceed the greater of:

- 36 -

---

|1. | 1% of the number of shares of the companys common stock then outstanding which, in our case, will equal 450,000 shares; or                                          
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. | the average weekly trading volume of the companys common stock during the four calendar weeks preceding the filing of a notice on form 144 with respect to the sale.
|  

Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about the company.

Under Rule 144(k), a person who is not one of the companys affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.



|Stock Option Grants
|-------------------

There are no outstanding options or warrants to purchase, or securities convertible into shares or equity compensation plans. Our issued and outstanding shares could be sold at the appropriate time pursuant to Rule 144 of
the Securities Act.



|Dividends
|---------

We do not anticipate that we will declare any dividends in the foreseeable future.  Although  there  are  no restrictions that limit our ability to pay dividends on our shares, our intention is to retain future earnings for
use in our operations and the expansion of our business. We also do not have any securities authorized for issuance under equity compensation plans.



|DESCRIPTION OF SECURITIES
|-------------------------

Pursuant to our articles of incorporation, the total authorized capital is 200,000,000 shares with a par value of $0.001 per share, of which 45,000,000 shares are issued to 30 shareholders as of March 14,
2007.

All of our authorized shares are of the same class and, once issued, rank equally as to dividends, voting powers, and participation in assets. Holders of shares are entitled to one vote for each share held of record on all
matters to be acted upon by the shareholders. Holders of shares are entitled to receive such dividends as may be declared from time to time by the Board of Directors, in its discretion, out of funds legally available.  However, our present intention
is not to pay any cash dividends to holders of shares but to reinvest earnings, if any. In the event of our liquidation, dissolution or winding up the holders of shares are entitled to share pro-rata in all assets remaining after payment of
liabilities.

Shares have no pre-emptive, conversion or other subscription rights. There are no redemption or sinking fund provisions applicable to the shares.

Our articles and by-laws do not contain any provisions that would delay, defer or prevent our change in control.



|Dividend Policy:
|----------------

We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future. Should we declare a dividend in the
future, such dividend will be paid to shareholders on a pro rata basis in accordance with their shareholdings at such time.



|Share Purchase Warrants:
|------------------------

We have not issued and do not have outstanding any warrants to purchase our shares.



|Options:
|--------

- 37 -

---

We have not issued and do not have outstanding any options to purchase our shares.

Convertible Securities:

We  have  not issued and do not have outstanding any securities convertible into shares  or  any  rights convertible or exchangeable into shares.

Changes in Control:

There are no arrangements which may result in a change in control.

- 38 -

---

|ITEM 6.   | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|--------- | -----------------------------------------------------------
|          | AND RESULTS OF OPERATIONS                                  
|         
|OVERVIEW. |                                                            



| | Critical Accounting Estimates
| | -----------------------------

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting periods. The application of GAAP involves the exercise of varying degrees of judgment. The resulting accounting estimates will not always precisely equal
the related actual results. Management considers an accounting estimate to be critical if:

- assumptions are required to be made; and
- changes in estimates could have a material effect on our financial statements.

|Balance Sheet       |                                        | How did we arrive at these            | How Accurate have we been in         | How Likely to change in    
|------------------- | -------------------------------------- | ------------------------------------- | ------------------------------------ | ---------------------------
|                    | There is a risk of Change because?     |                                       |                                      |                            
|Account             |                                        | estimates?                            | the past?                            | the future?                
|                   
|Accounts Receivable | We provide an Allowance For            | AFDA are made on accounts older       | These estimates of AFDA have         | This method of determining 
|                    | Doubtful Accounts (AFDA) based         | than 1 years. It is common in the     | been accurate in the past.           | AFDA will likely not       
|                    | on the credit ratings of customers     | industry for these accounts to be     |                                      | change as we have been able
|                    | and age of the account.                | considered current. Collection        |                                      | to collect the majority of 
|                    | Uncollectible accounts are also        | mostly occurs within 1.5 years.       |                                      | accounts within 1.5 years. 
|                    | written off, particularly when         | Accounts older than 1 years are       |                                      |                            
|                    | bankruptcy occurs. The allowance       | more at risk and the provision for    |                                      |                            
|                    | we provide is an estimate based on     | AFDA is heavily affected by these     |                                      |                            
|                    | historical information and may not     | risks.                                |                                      |                            
|                    | reflect current conditions as to       |                                       |                                      |                            
|                    | whether the account may be             |                                       |                                      |                            
|                    | collectible.                           |                                       |                                      |                            
|Fixed Assets        | We calculate our depreciation using    | The estimated lives of fixed assets   | Our fixed assets currently being     | We do not foresee any      
|                    | the straight line method based on      | are based on guidelines provided by   | utilized last for the length of the  | changes.                   
|                    | useful lives of the assets. The useful | Chinese tax authorities. These        | lives we are using for depreciation. |                            
|                    | lives of the asset could change due to | guidelines reflect the actual useful  |                                      |                            
|                    | technical innovation and or other      | lives of the assets.                  |                                      |                            
|                    | factors and we may write off or write  |                                       |                                      |                            
|                    | down obsolete assets.                  |                                       |                                      |                            
|Accrued Liabilities | We are subject to income taxes in      | Income tax provision is calculated    | Our estimates currently have been in | Taxes payable calculations 
|(Income Tax)        | China. The determination of the tax    | based on the statutory tax rate and   | line with the actual assessment in   | are based on a fixed rate  
|                    | liability is based on calculations     | level of operating income.            | our tax liability. Income tax        | which we do not foresee to 
|                    | which are further based on estimates   | Operating income is based on          | provisions are calculated monthly.   | be changed. However, our   
|                    | such as, for example allowances for    | various estimates we make             |                                      | estimates may change from  
|                    | bad debt. These estimates may          | regarding the above mentioned         |                                      | time to time and this may  
|                    | change from time to time and the       | items which may differ from actual    |                                      | affect the income tax      
|                    | final tax outcome may increase or      | results. This calculation is provided |                                      | provision. We may under or 
|                    | decrease our income tax expense        | monthly and instalments are made      |                                      | over remit our instalments 
|                    | provision made.                        | toward the tax liability.             |                                      | based on how our estimates 
|                    |                                        |                                       |                                      | differ from actual results.

Managements Discussion and Analysis of Financial Condition and Results of Operation

The following is an analysis of our revenues and gross profit, details and analysis of components of expenses, and variance; November 30, 2006 compared to November 20, 2005.

|              | 2006        | % Sales | 2005        | % Sales
|------------- | ----------- | ------- | ----------- | -------
|Sales         | 13,685,370  | 100%    | 13,052,620  | 100%   
|Cost of Sales | 5,752,276   | 42%     | 6,024,999   | 47%    
|Gross Profit  | $ 7,933,094 | 58%     | $ 7,027,621 | 53%    

- 39 -

---



|Coal Group
|----------

Sales for Coal Group were $ 11,748,378 in 2006 compared to $ 12,228,204 in 2005. The $ 479,826 decrease, despite the increase in the purchase price of coal, was mainly as a result of transportation limitations.
Transportation of coal products by customers proved to be difficult as roads were being reconstructed and a limited amount of transportation units were able to access the mine. The Government has taken steps to remedy this problem by guaranteeing
transportation routes via train and truck transportation however the standardization of these systems has not been established wherein such routes can be used as a reliable source of transport. Also, these routes are only available to coal
production entities providing raw materials to public utility companies. Transportation aid is expected to continue until the conditions of public routes are improved and new and more efficient routes are established.

Coal Group revenues are determined by Government regulation as a minimum price per ton is enforced. Coal Groups selling price per ton has consistently been above this minimum set standard. A significant amount of
revenues were generated from the coal mine. In addition we met the demands of customers by supplementing coal mine production with outside purchases. Our outside purchases accounted for 1% of our sales.

Coal Group does not typically sign contracts to fix its prices per ton. This allows Coal Group to sell its products at the going market rate which, to the best of managements knowledge, will continue its upward trend
in price. Locking in a fixed price does not allow Coal Group to capitalize on the increase in demand for its products.



|Heat Power
|----------

Revenues generated by Heat Power in 2006 were $ 1,936,992 compared to $ 824,416 in 2005. The $ 1,112,576 increase was attributed to income generated from newly constructed thermoelectric plant in XueJiaWan
completed September 2006.  The increase was also attributed to the increase in the prices of heat supply in response to increased cost of raw materials. Revenues generated are a function of Government regulation as the prices charged are approved by
the Government. The Government reviews the pricing of heating from time to time as market conditions change.  Also, the cost of raw materials being coal are also regulated by the Government as the price point which we obtain from suppliers is
controlled as the Government ensures that such prices are affordable for utility companies.  The incentive for the supplier to supply at such prices is that transportation routes are guaranteed and arranged by the Government, thereby saving
transportation costs on part of the supplier. Such savings outweigh the reduction in the selling price for the supplier.

Cost of goods sold by the Company decreased, net by $ 272,723 as a result of the change in the following expense:

|                           | 2006       | 2005      
|-------------------------- | ---------- | ----------
|                          
|Salaries                   | $ 629,797  | $ 204,988 
|Operating supplies         | 658,243    | 109,902   
|Depreciation and depletion | 281,516    | 62,342    
|Repairs                    | 7,990      |           
|Coal                       | 3,034,549  | 4,290,529 
|Utilities                  | 312,354    | 35,324    
|Freight                    | 827,827    | 1,321,914 
|                          
|Total                      | $5,752,276 | $6,024,999

Salaries, operating supplies, utilities increased as a result new operations of the thermoelectric plant put into operation in September 2006. The cost of coal decreased as we reduced our purchases from external sources and
therefore freight also decreased.

- 40 -

---

The following is a summary of the expenses
we incurred during the period:

|Selling
      Expenses            |           |            |           |           
|--------------------------------- | --------- | ---------- | --------- | ----------
|                                  | 2006      | % Expenses | 2005      | % Expenses
|                                 
|Salaries and
      Wages          | 10,520    | 3          | $ 7,265   | 2         
|Travel                            | 8,038     | 2          | 106,079   | 21        
|Repairs                           | 16,882    | 5          | 15,953    | -         
|Professional and other
      fees | 307,636   | 88         | 343,668   | 70        
|Other
      expenses              | 7,227     | 2          | 21,409    | 4         
|                                 
|Total
      expenses              | $ 350,303 | 100        | $ 494,374 | 100       

Salaries and Wages.Additional staff was retained in our sales department for the
purposes of establishing a marketing and transportation unit with the focus on
market research and client relations and research to identify the most cost
effective and efficient transportation avenues. This unit was established in
2005 and we intend on expanding this unit in the 2007 year as transportation
limitations are a pending problem. As mentioned above, such problems attributed
to the decrease in coal sales.

Travel.Travel expenses decreased as we did not launch any market research
initiates. Our efforts were locally based during the 2006 year.

Repairs.Repairs were made for maintenance of transportation equipment (trucks
used to transport from coal mine to coal field).

Professional and other Fees.Professional fees consist of fees to retain
professionals for the purposes of training our sales staff. This amounts also
includes sales taxes imposed.

|General and Administrative
      Expenses |             |            |             |           
|----------------------------------------- | ----------- | ---------- | ----------- | ----------
|                                          | 2006        | % Expenses | 2005        | % Expenses
|                                         
|Salaries and Wages                        | 344,515     | 20         | $ 100,995   | 9         
|Depreciation                              | 409,724     | 24         | 62,219      | 6         
|Postage and office                        | 203,352     | 12         | 22,576      | 2         
|Travel                                    | 382,561     | 22         | 21,622      | 2         
|Repairs                                   | 124,033     | 7          | 100,964     | 10        
|Professional and other fees               | 233,954     | 13         | 297,704     | 27        
|Conservation fees                         | -           | 0          | 177,058     | 15        
|Other expenses                            | 35,127      | 2          | 327,999     | 29        
|Total expenses                            | $ 1,733,268 | 100        | $ 1,111,137 | 100       

- 41 -

---

Salaries and Wages.Salaries and wages increased as a result of retaining additional staff in our Project Management departments of Heat Power, overseeing operations in XueJiaWan.  We
also retained additional technical staff such as engineers. The company also rewarded bonuses to staff.

Postage and Office.The increase was as a result of posting by our sales staff promotional materials to potential customers.  As a result of the opening of operations of the
thermoelectric plant, we incurred additional promotion, and entertainment costs as a result.

Travel.Travel expense increased as a result of expenses incurred by members of our senior management to attend trade conferences. Travel costs were also incurred by employees
operating the thermoelectric plant for training.  Coal Group also incurred costs for training new employees in coal mine operation.  Training also encompasses safety measures.

Repairs.Repairs were made mostly to Coal Groups office building as the facilities required repairs after flooding occurred. Heat Power also made repairs to its office
equipment.

Professional and other Fees.Professional fees in 2005 consist of appraisals made for a building, fixed assets, coal mine, investments and inventory in addition to retaining financial
consultants.  Appraisals were used, in part, to evaluate assets contributed to the capital of the Company. They were actually capitalized at the original cost to the contributing shareholders. Professional fees in 2006 consist of fees paid to
engineer professionals to evaluate the overall efficiencies of the LaiYeGou coal mine. Fees were also paid to environmental professionals which assisted in the implementation of environmental protection policies and procedures.

Conservation Fees.Conservation fees in 2005 consist of amounts paid for Water Conservancy Construction Fund. As underground mining may inadvertently pollute underground
water supply, the Government requires payment made to the tax department for use in preserving the quality of water. The amount is based on a rate of

$ 0.0875 (0.7 RMB) per ton of coal produced.  This fund was established in 2005 and is expected to be reoccurring every year.



|Other Operating Expense
|-----------------------

The $770,639 expense of 2005 was the cost of geological exploration in search of a new coal field that could be mined.

Interest Income (2006-$ 92,604 vs. 2005 - $ 10,768), Interest Expense (2006-$354,502 vs. 2005 - $ 10,768)

We earned interest income in 2006 on term deposits held by Coal Group and Heat Power in the amount of $ 92,604.

On April 11, 2006, Coal Group obtained a loan from the Agriculture bank in the amount of $ 2,500,000 to fund the expansion of the mine and also for general use in its operations. Please refer to Exhibit 10.25. This loan
was repaid during the year. Coal Group obtained further loans from the Agriculture bank amounting to 50 million RMB or $ 6,392,021. The loans assist in funding our working capital needs. The interest paid on this loan amounted to $ 354,502.
Coal Group obtained this loan originally and subsequently transferred the funds to Heat Power for funding of its operations. The transfer of such funds is not in violation of the loan agreement signed between Coal Group and China Construction Bank
Zhunger Branch. Please refer to Exhibit 10.21 (a) and (b). The loan was guaranteed by Inner Mongolia Yuansheng Investment & Guarantee Stock Co., Ltd of which the guarantee fees are $ 37,500 which is amortized over the life of the loan and a
refundable deposit upon repayment of the loan in the amount of $ 62,500 which is non interest bearing. The agreement is attached in Exhibit 10.21(c) .

- 42 -

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Effect of Government regulation on
our revenues and costs

A significant amount of our revenues and
costs are set by government regulation due to the nature of our business as the
industry of coal production sale and power generation is highly regulated by
various bureaus or the Inner Mongolia Government. The following is a listing of
costs for operation of Coal Group, Laiyegou Coal mine and Heat Power and the
effect of pricing by various government regulators:

Coal Group:

|Composition:                                                      | Pricing determined
      by:                
|----------------------------------------------------------------- | --------------------------------------------
|Revenue: Selling price of
      coal to Power Plant               | Government *                                
|                                                                 
|Fixed
      Costs:                                                |                                             
|                                                                 
|Depreciation                                                      | Tax Bureau                                  
|Salary                                                            | Market                                      
|                                                                 
|Welfare benefits, labor
      union expense and education expense | Government -
      Administration of Finance
|Social
      insurance                                            | Government -
      Administration of Finance
|Vehicle
      insurance                                           | Government -
      Administration of Finance
|Water and
      electricity                                       | Government - Local Price
      Bureau       
|                                                                 
|Subtotal                                                          |                                             
|Variable
      Costs:                                             |                                             
|                                                                 
|Purchase cost of
      coal                                       | Market                                      
|Sales tax(9% of
      value-added tax payable)                    | Tax Bureau                                  
|Stamp duty
      tax                                              | Tax Bureau                                  
|Repair
      expense                                              | Market                                      
|Entertainment
      expense                                       | Market                                      
|Office
      expense                                              | Market                                      
|Travel
      expense                                              | Market                                      
|Freight                                                           | Market                                      
|Consultation and
      other                                      | Market                                      
|Miscellaneous                                                     | Market                                      
|Other                                                             | Market                                      
|Subtotal                                                          |                                             
|Total                                                             |                                             

*The government ensures that power plants
obtain raw material coal at a reasonable price and therefore such selling prices
to power plants is regulated by the National Electric Power Co.

Laiyegou Coal Mine

|                          | Price Determined
      by:
|------------------------- | --------------------------
|Cost of
      Production: |                           

- 43 -

---

|Raw
      material:                           |                                             
|--------------------------------------------- | --------------------------------------------
|Explosive
      material                      | Government - Local Price
      Bureau       
|                                             
|Cost of
      sales:                          |                                             
|Electric
      power                          | Government - Local Price
      Bureau       
|Transportation                                | Market                                      
|Loading                                       | Market                                      
|Salaries                                      | Market                                      
|Safety funds                                  | Government - Coal
      Management Bureau   
|Overhead
      expense                        | Market                                      
|Other                                         | Market                                      
|Total Cost of Sales                           |                                             
|                                             
|General and
      Administrative expenses:    |                                             
|                                             
|Amortization                                  | Tax Bureau                                  
|Salaries                                      | Market                                      
|Welfare
      benefits                        | Government -
      Administration of Finance
|Depreciation                                  | Tax Bureau                                  
|Meals and
      entertainment                 | Market                                      
|Electricity                                   | Government - Local Price
      Bureau       
|Repair                                        | Market                                      
|Travel                                        | Market                                      
|Office                                        | Market                                      
|Conference                                    | Market                                      
|Occupancy                                     | Market                                      
|Research and
      development                | Market                                      
|Advertising                                   | Market                                      
|Labor union
      fees                        | Government -
      Administration of Finance
|Employee
      education/training             | Market                                      
|Labor protection
      fees/Social insurance  | Government -
      Administration of Finance
|Insurance                                     | Market                                      
|Consultant and audit
      expense            | Market                                      
|Tax                                           | Tax Bureau                                  
|Other                                         | Market                                      
|car fare                                      | Market                                      
|Fuel                                          | Market                                      
|Security
      detection                      | Market                                      
|Total General & Administrative
      expenses |                                             

- 44 -

---

|Selling expenses:                         |                                                      
|----------------------------------------- | -----------------------------------------------------
|                                         
|Travel                                    | Market                                               
|Loading                                   | Market                                               
|Custody charges                           | Market                                               
|Coal management                           | Coal Management
      Bureau                         
|Site management                           | Market                                               
|Management fees                           | Market                                               
|Irrigation construction fund              | Determined by the
      Administration of Finance    
|Auto                                      | Market                                               
|Other                                     | Market                                               
|Total Selling Expenses                    |                                                      
|Total                                     |                                                      
|Heat Power:                               |                                                      
|Composition:                              | Price Determined
      by:                           
|Revenue: Selling price of Electricity     | Government - Inner
      Mongolia Electric Power Co.,
|                                          | Ltd.                                                 
|Revenue: Selling price of Heating service | Government - Inner
      Mongolia Zhunger Pricing    
|                                          | Bureau                                               
|                                         
|                                         
|Total                                     |                                                      
|Expenses:                                 |                                                      
|                                         
|Cost of coal and freight                  | Market                                               
|Payment for material                      | Market                                               
|Water expense                             | Government - Local Price
      Bureau                
|Repair expense                            | Market                                               
|Oil expense                               | Government - Local Price
      Bureau                
|Electricity expense                       | Government - Local Price
      Bureau                
|Salary for employee in production         | Market                                               
|Welfare benefits                          | Market                                               
|Depreciation                              | Tax Bureau                                           
|Other                                     | Market                                               
|Total                                     |                                                      

To the best of management's knowledge, we
are subject to the following material laws and regulations:

Also refer to "Risks Relating to Our
Business- Compliance and enforcement of environmental laws and regulations may
cause us to incur significant expenditures and resources of which we may not
have."

- 45 -

---



|China National Labour Laws
|--------------------------

(Source- U.S. Department of State- Country Report on Human Rights Practices-2003 China). An excerpt of this report relating to Labour Laws is included in Exhibit 99.4.

We are subject to the following labour laws and to the best of our knowledge, we are not in violation of any labour laws in effect.

The Right to organize and Bargain Collectively:Chinas National Labor Law, which entered into force on January 1, 1995, permits workers in both state and private enterprises in
China to bargain collectively. The National Labor Law provides for collective contracts to be developed through collaboration between the labor union (or worker representatives in the absence of a union) and management, and should specify such
matters as working conditions, wage scales, and hours of work. The law also permits workers and employers in all types of enterprises to sign individual contracts, which are to be drawn up in accordance with the collective contract.

Minimum Age for Employment of Children:Chinas National Labor Law forbids employers to hire workers less than 16 years of age and specifies administrative review, fines and
revocation of business licenses of those businesses that hire minors. Laborers between the ages 16 and 18 are referred to as juvenile workers and are prohibited
from engaging in certain forms of physical work including labor in mines.

Acceptable Conditions of Work:The Labor Law provides for broad legal protections for workers on such matters as working hours, wages, and safety and health. The Trade Union Law
invests unions with the authority to protect workers against violations of their legal rights or contractually agreed conditions of work. The Law on the Prevention and Treatment of Occupational Diseases, and the Production Safety Law identify
responsibilities for work-related illness and accidents, and provide for specific penalties for violation of the law. However, there remained a substantial gap between the laws formal provisions for work conditions and the actual situation in
the workplace.

There was no national minimum wage. The Labor Law allows local governments to determine their own standards for minimum wages. Local governments generally set their minimum wage at a level higher than the local minimum
living standard but lower than the average wage. Widespread official corruption and efforts by local officials to attract and keep taxpaying, job-producing enterprises that might otherwise locate elsewhere undercut enforcement of the minimum wage
provisions.

The Labor Law mandates a 40-hour standard work week, excluding overtime, and a 24-hour weekly rest period. It also prohibits overtime work in excess of 3 hours per day or 36 hours per month and mandates a required
percentage of additional pay for overtime work.



|Compliance with China National Labor Laws
|-----------------------------------------

We have complied with these China National Labor Laws as discussed above. Our administration department takes a pro-active approach to ensuring that we and our employees adhere to labor laws.

The Role of the National Department and Reform Commission (NDRC)

The NDRC in its efforts to improve the efficiencies in coal mine operation, communication and transportation is taking the approach of shutting down smaller mines or any mine which does not meet its specified basic
production requirements. Our LaiYeGou mine is considered one of the larger mines in the area and therefore is not subject to these production requirements. Our production levels are determined by market demand.



|Heating Pricing Regulated by Zhunger Pricing Bureau
|---------------------------------------------------

The price charged to supply heating to XueJiaWan users is regulated and controlled by the Inner Mongolia Zhunger Pricing Bureau, a division of the Inner Mongolia Government. The pricing structure is approximately as follows
per square foot:



|- 46 -
|------

---



|1. Residential: $ 0.142. Commerce: $ 0.263. Office: $ 0.24
|----------------------------------------------------------

These prices are effective March 2, 2006 as stated on the Heating Price Standard issued by the XueJiaWan Town Zhunger County attached in Exhibit 99.14.

Please refer to Risks Relating to Our Business- The prices we charge to supply heating in any area in China is determined by the Inner Mongolia Zhunger Pricing Bureau and we may not be able to recoup increases in
the cost of raw materials or expenses for an undermined period of time until application to increase prices is approved.



|Coal Prices Regulated by Coal Sales Association
|-----------------------------------------------

The price for mass coal (large, middle, and powdered individually sold) must be at least $13.30 (110 RMB) per ton and the prices for mixed coal (assortment of mass coal) must be at least $11.50 (95 RMB) per ton.
Prices set by the Local Coal Sales Association are reviewed as market conditions change.

Please refer to Risks Relating to Our Business- As a member of the Local Coal Sales Association the minimum price at which we sell coal in any area in China is determined by the Local Coal Sales Association and if
there is any decrease in demand for a particular type of coal, we cannot lower our prices beyond the minimum set price to adjust for a decrease in demand without loss of our membership.



|Research and Development
|------------------------

We are not devoting any resources to research and development efforts on our products. The development efforts in expanding our production cycle and of constructing of new thermoelectric plants are subcontracted out to
3rdparties.



|Compliance with Environment and Safety laws
|-------------------------------------------



|Coal Group
|----------

The safety of Coal Groups coal mine employees is governed under Coal Laws of China under the authority of the Coal Safety Production Bureau. Such laws coincide with application and maintenance of its business license
obtained through the Department of Geology and Mineral Resources. Coal Group is required to pass random periodic safety inspections which check for gas and water seepage, ventilation, communication methods between in and outside of the mine, any
breach of environmental laws and certifications of employees who work in the mine. Mine managers and staff must be trained and have mine management qualification certificate obtained through the Coal Safety Production Bureau. To date, Coal Group has
not breeched any of the rules and regulations rendering its mine unsafe. Mine managers on site perform daily safety inspections.

To date Coal Group has had no accidents or death occurring in its mine. Its safety manual is attached in Exhibit 99.5.

Government Environmental Protection Standards consists of the following categories:

|1. | Environmental standard:         
|-- | --------------------------------
|  
|   | a.                              
|  
|   | b.                              
|  
|   | c.                              
|  
|2. | Contaminant discharge standard :
|  



|- 47 -
|------

---

|a. | Standard for atmospheric
      contaminant (GB13223-2003).                                                      
|-- | ----------------------------------------------------------------------------------------------------------------
|  
|b. | Standard for discharge of sewage
      (GB8978-1996).                                                           
|  
|c. | Standard for noise levels within
      factory boundary (GB12348-90).                                           
|  
|d. | Standard for atmospheric
      contaminant (GB16297-1996).                                                      
|  
|e. | Control standard for storage of
      industrial rejected material and ash field pollution
      (GB18599-2001).
|  

Please refer to Exhibit 99.12 for the
environmental standard specifications.



|Heat
  Power
|------------

Safety in Heat Power's thermoelectric
plant and heating plants are also regularly reviewed and monitored. On a
quarterly basis, tests are preformed on pressure vessels, insulation, levels of
toxicity and moisture, and overall operational efficiency by local Work Safe
Labor Departments and Electric Power companies operated by the PRC.

Heat Power also performs annual servicing
of the plant and a major inspection and thorough evaluation every 3 years. Such
inspections are contracted out to civil engineering companies.

To date Heat Power has not breached any
safety rules and regulations as set forth by the PRC and Work Safe Labor
Departments.

The potential liability for violation of
environmental standards consists of loss of our business licenses causing
irreparable damage to our reputation and payment of penalties which vary
depending on the nature of the violation and history of previous violations
made. There is currently no fixed amount set by the Government and penalties are
determined on a case by case basis. In addition, the project which we undertake
will be ceased, pending compliance with environmental standards.



|Performance
      indicators
|----------------------------

Our performance is affected by trends and
uncertainties which we experience.



|Financial
  Measures:
|---------------------

|1.                                         | Achieve consistent sales levels of $ 14,000,000 each fiscal
      year.
|------------------------------------------ | -----------------------------------------------------------------------
|                                          
|Our
      sales are summarized as follows: |                                                                        
|                                          
|                                           |                                                                        
|                                           |                                                                        
|                                           |                                                                        
|                                           | Sales                                                                  

|2. | Cash flows generated from
      collection of accounts receivables and customer advances (unearned
      revenues) of $ 500,000 per month.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. | Age of accounts receivable
      average 3 months.                                                                                        
|  

It is common in the coal industry to
consider accounts receivables within 1 year old to be current. This is a common
perception not only in the industry in which we operate but also among other
industries in China. Therefore improving our collection period from current
period of approximately 1.5 years to 3 months will be a



|- 48
-
|------

---

challenge.  However, we may use other tactics to meet these goals such as offering discounts to encourage prepayments on contracts.

Collection of accounts receivables for users of our heating and electrical network varies from 4-6 months.

|4. | Increase of the number of coal customers to 400.                                                                                           
|-- | -------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. | Secure 50 contracted coal customers, preferably obtaining deposits prior to delivery of goods.                                             
|  
|6. | Secure a further 2 more monopoly contracts with the Inner Mongolia Government to provide heating requirements in undeveloped rural regions.
|  



|Current trends in the Industry
|------------------------------

Given the increase in demand for coal production for electricity and heating production, the Central Government is encouraging sectors to build more power stations, coking factories, calcium carbide factories and silicon
iron factories across the country. The coal industry is expected to grow at a rate of 9.5% per year. Sources: China Daily. A challenge in meeting this demand is transporting coal to nearby regions, such as Shanxi and Hebei Provinces, as
transportation routes are currently inefficient or non existent.  These routes are expected to be completed in the next 5 years. As a result, sales to these regions during this period may not be at levels we desire.

For Coal Group, methods of circumventing transportation challenges are to receive contracts granted by the Government where transportation is guaranteed from LaiYeGou coal mine to the final destination.  Where contracts are
privately arranged, transportation is arranged through the hiring of 3rdparty transporters or by customers.  In some instances, coal is purchased by 3rdparties in close proximity to train stations where transportation to customer destinations is more efficiently arranged. However, transportation to destinations is limited to those for
which routes are in place.

For Heat Power, transportation of coal to our facility is provided by Guanbanwusu, our source for coal .

Coal Group does not have competition in the usual sense of the term that most other businesses experience. There are approximately 30,000 coal mining companies throughout China; however, since demand currently exceeds
supply, competition is not a variable which warrants concern in the operations of our business.

Chinas coal industry remains large and growing. Its customer base is chronically under-supplied. There are pressures from the Government to use nuclear power instead of coal due to environmental concerns; however,
coal reserves in China are abundant and less expensive and a switch to other forms of resources to generate energy is unlikely. Chinas coal reserves are expected to last approximately 40 years. Source: China Daily.

The electricity and heating supply industry is also growing; however, the government is taking steps to monitor and control economic growth in the rural areas to ensure that the economy is developing at a stable
rate.



|Liquidity and Capital ResourcesWorking Capital Needs:
|-----------------------------------------------------

As of November 30, 2006 we had a working capital deficit of $ 12,244,359.

Not including funds required for expansion of our facilities, we estimate our cash requirements for the next 12 months Coal Group will require approximately $ 4,580,000 and Heat Power will require approximately $
3,670,000, a total of $ 8,250,000 in order to cover our working capital needs as follows:

- 49 -

---

|                             | Coal
    Group  | Heat
    Power 
|---------------------------- | --------------- | ---------------
|Materials                    | 2,650,000       | 3,000,000      
|Labor/Overhead               | 430,000         | 600,000        
|Selling
    expense          | 200,000         |                
|Administrative
      expense | 1,300,000       | 70,000         
|Total                        | $
    4,580,000 | $
    3,670,000

We currently are able to sustain our
working capital needs through profits we generate and bank and shareholder
loans.

We anticipate sales will generate the cash
flow from collection of accounts receivables, customer deposits and proceeds
from bank and shareholder loans to be sufficient to sustain our working capital
needs. However we may require other sources of capital.



|Sources of
  Capital:
|---------------------

If additional capital is needed, we will
explore financing options such as shareholder loans. Shareholder loans are
payable on demand and interest is calculated at 6.31% per annum. Coal Group
obtained a $ 1,239,000 loan from the China Construction Bank Zhunger Branch for
the purpose of funding Heat Power's operation. This loan is for a term of 1 year
commencing October 13, 2005, with full payment of the loan due October 12, 2006.
This loan as currently been settled. The interest rate is 6.045% payable
monthly. Coal Group obtained this loan originally and subsequently transferred
the funds to Heat Power for funding of its operations. The transfer of such
funds is not in violation of the loan agreement signed between Coal Group and
China Construction Bank Zhunger Branch. Please see Exhibit 10.21 (a) and (b) and
the Guarantee agreement signed with Inner Mongolia Yuansheng Investment &
Guarantee Stock Co., Ltd in Exhibt 10.21(c) .

On April 11, 2006, Coal Group obtained a
loan from the Agriculture bank in the amount of $ 2,500,000 to fund the
expansion of the mine and also for general use in its operations. Please refer
to Exhibit 10.25. This loan was repaid during the year. Coal Group obtained
further loans from the Agriculture bank amounting to 50 million RMB or $
6,392,021. The loans assist in funding our working capital needs. There were no
Guarantee fees incurred for this loan.

The terms and principle amount of the
loans granted are as follows:

|Term                               | Interest rate | Principle RMB
|---------------------------------- | ------------- | -------------
|Sep 26, 2006 to Sep 25,
      2007 | 7.344%        | 18,000,000.00
|Oct 19, 2006 to Oct 18,
      2007 | 7.344%        | 12,000,000.00
|Apr 11, 2006 to Apr 11,
      2007 | 7.254%        | 20,000,000.00
|Total                              |               | 50,000,000.00

Shareholders loans are granted from time
to time as required to meet current working capital needs. We have no formal
agreement that ensures that we will receive such loans. We may exhaust this
source of funding at any time.

We may also receive capital contributions
from our shareholders.



|Plans for
      Expansion:Coal
      Group
|------------------------------------------

In response to the escalating demand for
its coal products, Coal Group is investing in infrastructure improvements
necessary for increasing annual production capability of the LaiYeGou Coal Mine
by 20% to

- 50 -

---

600,000 tons per year. Infrastructure improvements commenced April 2006. The total cost for improvements including procurement of mining equipment and construction as well as project management costs would be approximately
$ 10,353,195 funded through bank and shareholder loans or funds raised in the public market. This expansion is in its planning stages and we have received the necessary approvals from Government to commence such improvements.

Our budget and timeline for such expansion is attached in Exhibit 99.11.

Please refer to Exhibit 99.15 for a listing of equipment used in current operations.



|Heat Power
|----------

Heat Power completed its 2x12 megawatt thermoelectric station in XueJiaWan in December 2005.  It is presently operational as of September 2006. Heat Power does not intend to take on any other projects requiring substantial
capital in the next 12 months other than described above in Xuejiawan Expansion on page 22.

We do not know of any trends, events or uncertainties that are likely to have a material impact on our short-term or long-term liquidity other than those factors discussed above.



|Cash FlowsOperating Activities:
|-------------------------------

Our cash flows provided by operating activities were $ 1,963,397 for 2006 and $ 7,972,748 for 2005. The following summarizes the inflow and outflow of cash for these periods:

|                                                     | 2006        | 2005       
|---------------------------------------------------- | ----------- | -----------
|Net profit                                           | $ 3,008,805 | $ 3,382,777
|Increase in accounts receivable                      | (395,570)   | (612,214)  
|Increase in customer deposits                        | 58,774      | 731,172    
|Decrease (increase) in advances to suppliers         | (2,138,527) | 2,907,910  
|Increase in inventory                                | (448,036)   | (70,389)   
|Increase in other accounts payable                   | 2,235,958   | 137,539    
|Other                                                | (3,58,007)  | 1,495,953  
|Net Cash Provided (Consumed) By Operating Activities | $ 1,963,397 | $ 7,972,748

Accounts Receivable.It is common in the coal industry to consider accounts current if they are outstanding for 1 year. We normally have these accounts settled between 1.5 years and 2
years. The collection of accounts for users of our heating and electrical network varies from 4-6 months. The majority of accounts receivables relate to Heat Powers operations wherein collection of user fees were outstanding for less than 6
months. Coal Groups operations sales on account were also outstanding for less than 6 months.

Customer Deposits.Deposits on sales of coal are a normal business practice that ensures that the customer obtains Coal Groups Product at the market price determined on the date
of purchase. The decrease in 2006 was mainly attributed to transportation limitations experienced by Coal Group during 2006 as discussed above.

Advances to Suppliers.Advances were made to suppliers of materials required for the construction and completion of Heat Powers expansion plan and Coal Groups Laiyegou
coal mine expansion. Prepayment is also a common business practice in China as it allows for a determined price and in some instances will grant us discounts on purchases.

- 51 -

---

Inventory.Inventory consists of operating supplies used in coal mine operation and
raw materials for heat generation. The increase in 2006 was as a result of
obtaining the required amount of raw materials for new thermoelectric plant
operations.

Other Accounts Payable.These amounts consist of accruals made for
freight, repairs and maintenance of heating plants, labor union fees, social
insurance, and technical training for our employees. The increase was mainly as
a result of increase in technical training of the thermoelectric plan
operators.



|Investing
    Activities:
|-------------------------

Our cash consumed by investing activities
were $ 6,300,920 in 2006 and $ 13,062,104 in 2005. These consist mainly of
amounts expended on Heat Power's construction of its thermoelectric plant
wherein construction in progress costs were subsequently transferred to fixed
assets as the plant was completed September 2006. Construction in progress
charges increased as a result of funding for Coal Group Laiyegou coal mine
expansion and also Heat Power construction of additional boilers and conversion
of existing heating plants previously used in exclusive heat supply operations
prior to construction of the thermoelectric plant.

In August 2005, Coal Group entered into
and agreement with Deheng Assets Management Co., Ltd. ("Deheng Assets") to purchase
2 office buildings located at Building 3 in Hongqi Street in Hohhot City
(Property Certificate No. 2003001090) and Building 8 in Hongqi Street in Hohhot
City (Property Certificate No. 2003002197). The purchase price was approximately
$ 1,625,125 and has been paid in full from shareholder loans and bank loan
obtained from the Agriculture Bank as mentioned herein. Other costs incurred
were for property transfer taxes, real estate agent fees and legal fees which
amounted to approximately $ 162,810. Coal Group intends to hold this property as
an investment and currently has no plans for improvements to this property. Coal
Group plans to lease the units for commercial use. The agreement with Deheng
Assets Management Co., Ltd. is attached in Exhibit 10.27.



|Financing
    Activities:
|-------------------------

Our cash flows from financing activities
were $ 3,948,971 in 2006 and $5,289,828 in 2005.

All land in the China belongs to the PRC.
To extract resources from land, Coal Group is required to obtain a mining right.
The jurisdiction responsible for issuing such rights is the Provincial Bureau of
National Land and Resource, a division of the PRC Government. In December 2005,
Coal Group¡ ̄s mining right was assessed to be approximately $ 3,656,731 for a
period of 14 years commencing November 2005. This mining right is regarded as an
Intangible Asset to be amortized over a period of 14 years.



|The payment schedule is as
      follows:
|-----------------------------------------

|- | Instalment | #1: | $ | 1,105,821 due on or before
      December 1, 2006
|- | ---------- | --- | - | -------------------------------------------------
|- | Instalment | #2: | $ | 510,182due on or before December1 ,
      2007   
|- | Instalment | #3: | $ | 510,182due on or before December1,2008           
|- | Instalment | #4: | $ | 510,182due on or before December,
      2009     
|- | Instalment | #5: | $ | 510,182due on or before December1,2010           
|- | Instalment | #6: | $ | 510,182due on or before December1,2011           

Coal Group obtained additional loans from
the Agriculture bank amounting to 50 million RMB or $ 6,392,021 as of November
30, 2006. The loans assist in funding our working capital needs. There were no
Guarantee fees incurred for this loan.

A substantial portion of the cost of
construction of the thermoelectric plant has been provided by shareholder loans.
The outstanding balance of these loans at November 30, 2005 was $7,831,086. An
additional $767,030 was advanced during the 2006 year and interest of $658,343
accrued on these loans and was added to the outstanding balance. Repayments
during the year totaled $1,522,114. The remaining balance at November 30, 2006
was $ 7,734,345.

All of these shareholder loans detailed
below bear interest at 6.31% and are due on demand:



|- 52
-
|------

---

|Zhiyang Guo                                               |       | $1,226,253
|--------------------------------------------------------- | ----- | ----------
|Hangzhou Dayovan Group, Ltd.                              |       | 4,792,347 
|Xinghe County Haifu Coal Transportation & Sales Co., Ltd. |       | 1,715,745 
|                                                          | Total | $7,734,345



|Material Commitments
|--------------------

We committed to payment of bank loans, shareholder loans and payment of mining rights as mentioned above. Our expansion plans for the LaiYeGou mine will require approximately $ 10,353,195. We have title to all our
capital assets consisting of production equipment, automobiles, and office equipment.

Heat Powers offices are currently leased on a month to month basis and Coal Group occupies space purchased in 1998. Coal Group holds title to this property in the form of a 50 year lease from the Government. There are
no amounts owing.

Heat Power is obligated to make interest payments on a loan obtained through Coal Group as mentioned above.



|Seasonal Aspects
|----------------

Coal Groups business is seasonal in that sales are particularly low in February, due to the Chinese New Year holiday. During this time our business is closed for 2 weeks. As a result, sales in March are usually
higher.

Heat Power sales level relating to heat generation is not provided from April through October as the climate in the region is high, reducing heating requirements.



|Off Balance Sheet ArrangementsWe have no off balance sheet arrangements.
|------------------------------------------------------------------------

- 53 -

---

|ITEM 7.                                                          | FINANCIAL
      STATEMENTS |     
|---------------------------------------------------------------- | -------------------------- | ----
|                                                                
|November 30, 2006 and
      2005                                 |                           
|                                                                 |                            | Page
|                                                                
|Accountant's Audit
      Report                                  | F-1                       
|Consolidated Balance Sheets                                      | F-2                       
|Consolidated Statements of
      Operations and Earnings         |                           
|Accumulated                                                      | F-3                       
|Consolidated Statements of
      Changes in Stockholders' Equity | F-4                       
|Consolidated Statements of Cash
      Flows                      | F-5                       
|Notes to Consolidated
      Financial Statements                 | F-6                       

- 54 -

---

CHINA ENERGY CORPORATION

Consolidated Financial Statements

NOVEMBER 30, 2006

- 55 -

---

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM



|To the Board of Directors  China Energy Corporation
|----------------------------------------------------

I have audited the accompanying consolidated balance sheet of China Energy Corporation as of November 30, 2006, and the related consolidated statements of income, changes in stockholders equity, and cash flows for the
years ended November 30, 2006 and 2005. These consolidated financial statements are the responsibility of the Company management. My responsibility is to express an opinion on these financial statements based on my audit.

I conducted the audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. The Company is not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting. My audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate under the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, I express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.

In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Energy Corporation as of November 30, 2006 and the results of its operations
and cash flows for the years ended November 30, 2006 and 2005 in conformity with U.S. generally accepted accounting principles.



|/s/ Robert G. Jeffrey, Certified Public Accountant
|--------------------------------------------------



|February 14, 2007Wayne, New Jersey
|----------------------------------



|-F1-
|----

- 56 -

---

|CHINA ENERGY
      CORPORATION                                                 
|-------------------------------------------------------------------------------
|CONSOLIDATED BALANCE
      SHEET                                               
|November 30, 2006                                                              
|                                                                               
|ASSETS                                                                         
|Current Assets:                                                                
|Cash                                                                           
|Accounts
      receivable                                                      
|Notes
      receivable                                                         
|Advances to
      suppliers                                                    
|Other accounts
      receivable                                                
|Inventory                                                                      
|Total current assets                                                           
|Fixed Assets:                                                                  
|Office
      equipment and vehicles                                            
|Coal mine                                                                      
|Construction
      in progress                                                 
|Total fixed assets                                                             
|Less accumulated depreciation and
      depletion                              
|Net fixed assets                                                               
|Other Assets:                                                                  
|Investment property, net
      depreciation of $ 25,100                        
|Intangible
      asset, net amortization of $ 315,566                          
|Long term
      investment                                                     
|Deferred
      charges                                                         
|Total other assets                                                             
|Total Assets                                                                   
|                                                                               
|LIABILITIES AND
      STOCKHOLDERS' EQUITY                                     
|Current Liabilities:                                                           
|Notes
      payable                                                            
|Accounts
      payable                                                         
|Advances from
      customers                                                  
|Accrued
      liabilities                                                      
|Shareholder
      loans                                                        
|Other accounts
      payables                                                  
|Total current liabilities                                                      
|                                                                               
|Long Term
      Obligations                                                    
|                                                                               
|Stockholders'
      Equity:                                                    
|Common stock: authorized
      200,000,000 shares of $.001 par value;          
|45,000,000 issued and
      outstanding                                        
|Additional paid-in
      capital                                               
|Retained
      earnings                                                        
|Statutory
      reserves                                                       
|Other
      comprehensive income (loss)                                        
|                                                                               
|Total stockholders'
      equity                                               
|Total Liabilities and Stockholders' Equity                                     
|The accompanying notes are an integral part
      of these financial statements
|-F2-                                                                           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|- 57
      -                                                                   

---

CHINA ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF INCOMEYears Ended November 30, 2006 and
      20052006
    2005Revenue
    $13,685,370
    $13,052,620Cost of sales
    5,752,276
    6,024,999Gross profit
    7,933,094
    7,027,621Other operating expense
    (770,639)
    (270,708)Operating
      expenses:Selling
    350,303
    494,374General and
      administrative
    1,733,268
    1,111,137Total
      expenses
    2,083,571
    1,605,511Operating income
    5,078,884
    5,151,402Other income
      (expense):Interest
      income
    92,604
    -Interest
      expense
    (354,502)
    (10,768)Nonoperating
      income
    10,927
    37,361Nonoperating
      expense
    (145,631)
    (7,946)Income Before Income Taxes
    4,682,282
    5,170,049Provision for Income
      Taxes
    1,673,477
    1,787,272Net Income
    3,008,805
    3,382,777Other Comprehensive
      Income:Gain (loss) on foreign
      currency conversion
    (630,186)
    42,958Total Comprehensive
      Income
    $2,378,619
    $3,425,735Net Income per share -Basic and
      Diluted
    $.06
    $.08Weighted averagenumber of
      sharesoutstanding
    45,000,000
    45,000,000The accompanying notes are an integral part
      of these financial statements-F3-


- 58 -

---

CHINA ENERGY
CORPORATIONCONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended November 30, 2006, and
2005

OtherCommon
    Stock
    Additional
    Retained
    Statutory
    ComprehensiveShares
    Amount
    Paid in
Capital
    Earnings
    Reserves
    Income
    TotalBalance, November 30,
      2004
    45,000,000
    45,000
    8,655,805
    (1,491,698)
    -
    -
    7,209,107Net income for period
    
    
    
    3,099,115
    283,662
    
    3,382,777Other comprehensive income
    
    
    
    
    
    42,958
    42,958Balance, November 30,
      2005
    45,000,000
    $45,000
    $8,655,805
    $ 1,607,417 $283,662
    $42,958
    $10,634,842Net income for
      period
    
    
    
    3,008,805
    
    
    3,008,805Other comprehensive income
    
    
    
    
    
    (630,186)
    (630,186)Allocation of statutory
      reserve
    
    
    
    (451,320)
    451,320
    
    -Balance, November 30, 2006
    45,000,000
    $ 45,000
    $8,655,805
    $ 4,164,902
    734,982
    (587,228)
    $ 13,013,461The accompanying notes are an integral part
      of these financial statements-F4-


- 59 -

---

CHINA ENERGY CORPORATIONCONSOLIDATED STATEMENTS OF CASH
      FLOWSYears Ended November 30, 2006 and
      20052006
    2005CASH FLOWS FROM
      OPERATIONS:Net income
    $ 3,008,805
    $ 3,382,777Charges not requiring the outlay of
      cash:Depreciation and depletion
    691,240
    344,502Equity interest in loss of
      investment company
    10,586
    2,984Changes in assets and
      liabilities:Increase in accounts receivable
    (395,570)
    (612,214)Increase in customer deposits
    58,774
    731,162Decrease (Increase) in other receivables
    (156,252)
    711,481Decrease (Increase) in advances to
    suppliers
    (2,138,527)
    2,907,910Increase in inventory
    (448,036)
    (70,389)Decrease in prepaid expenses
    -
    89,931Increase in accounts payable
    2,559,135
    137,539Increase in accrued liabilities
    1,166,148
    86,641Decrease in advances to employees
    -
    50,161Increase in other accounts payable
    2,235,958
    247,066Increase in notes receivable
    (4,641,686)
    (37,170)Net Cash Provided By Operating Activities
    1,950,575
    7,972,748CASH FLOWS
      FROM INVESTING ACTIVITIES:Purchase of investment
    property
    (1,787,935)
    -Purchases of computers,
      automobiles, and equipment
    (16,620,103)
    (2,250,397)Increase in construction in
    progress
    12,108,219
    (11,448,196)Decrease (Increase) in
      deferred charges
    (1,101)
    153,221Increase in deposits
    -
    483,268Net Cash Consumed By
      Investing Activities
    (6,300,920)
    (13,062,104)CASH FLOWS FROM FINANCING
      ACTIVITIES:Financing of mining
      rights
    2,549,422
    -Borrowing under short term
    notes
    5,153,021
    1,239,000Purchase of intangible
      asset
    (3,656,731)
    -Advances from stockholders
    (96,741)
    4,050,828Net Cash Provided By
      Financing Activities
    3,948,971
    5,289,828Exchange rate effect on
      cash
    (630,186)
    42,958Net Change in Cash
      Balances
    (1,031,560)
    243,430Cash balance, beginning of
      period
    1,931,249
    1,687,819Cash balance, end of period
    $ 899,689
    $ 1,931,249The accompanying notes are an integral part
      of these financial statements-F5-


- 60 -

---

CHINA ENERGY
CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS November 30, 2006



|ORGANIZATION and
      BUSINESS1. Organization of
      the Company
|-------------------------------------------------------------------

China Energy Corporation (Energy) is a
Nevada corporation, formed October 11, 2002 as Omega Project Consultations, Inc.
The name was changed to China Energy Corporation on November 3, 2004. On
November 30, 2004, Energy acquired all of the equity interests of Inner Mongolia
Tehong Coal Group Co., Ltd. (Coal Group) a corporation organized under the laws
of the People's Republic of China (China), in return for shares of common stock.
This acquisition has been treated in substance as a capital transaction; it was
accounted for as a reverse merger, a procedure that treats the transaction as
though Coal Group had acquired Energy.

Historical financial and other information
of Coal Group will be presented in all public filings. Under the accounting for
a reverse merger, the assets and liabilities of Energy, which were nil at the
time, were recorded on the books of Coal Group, the continuing company, and the
stockholders' equity accounts of Coal Group were reorganized to reflect the
shares issued in this transaction.

The accompanying consolidated financial
statements include the effect of the acquisition on the financial position of
Coal Group and the results of its operations. The consolidated statements of
income for the years ended November 30, 2005 and 2004 are based on the
historical statements of operations of Coal Group and its subsidiary for those
periods.



|Business
|--------

Coal Group, a subsidiary of Energy, was
organized in China on August 8, 2000 as Inner Mongolia Zhunger Tehong Coal Co.,
Ltd. The name was changed in December 2003. Coal Group produces coal and buys,
sells and transports it, serving a large customer base in the Inner Mongolia
District of China. Coal Group owns a coal mine in the Inner Mongolia District.
The principal customer of this mine is a nearby coking factory. The Company does
not view this concentration as a significant risk.

A wholly owned subsidiary of Coal Group,
Inner Mongolia Zhunger Heat Power Co., Ltd. (Heat Power), a China Corporation,
supplies hot water to a portion of the Xuanjaiwan area of the Inner Mongolia
District.



|-F6-
|----

- 61 -

---

CHINA ENERGY
CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS November 30, 2006

1. ORGANIZATION and BUSINESS
(CONTINUED)

During 2003, Heat Power was granted a
license, which constitutes a monopoly, to supply hot water to the entire
XuanJiaWan area. To provide for this requirement, construction began in 2004 on
a thermoelectric plant, which was completed in November 2006. This facility will
produce hot water as a byproduct of power generation and will replace the
facilities which have produced hot water. The electricity will be sold to a
local government agency which supplies the electricity needs of the XuanJiaWan
area. Coal to power this thermoelectric plant will come from a local coal mine
with which Heat Power has a supply contract. Energy does not believe this
concentration constitutes a significant risk.



|Basis of
    Consolidation
|--------------------------

The consolidated financial statements
include the accounts of Energy and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES



|Cash
|----

For purposes of the statements of cash
flows, the Company considers all short term debt securities purchased with a
maturity of three months or less to be cash equivalents.



|Concentrations Of Credit
      Risk
|-----------------------------------

Financial instruments which potentially
subject the Company to concentrations of credit risk consist of cash, short term
receivables, advances to suppliers, accounts payable and accrued liabilities,
and short term loans payable. These instruments are denominated in the currency
of China. At November 30, 2005, Company cash balances were on deposit at
financial institutions in China.



|-F7-
|----

- 62 -

---

CHINA ENERGY
CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS November 30, 2006

2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT'D)



|Recognition Of
    Revenue
|--------------------------

Revenue is realized from sales of
products. Recognition occurs upon delivery. In determining recognition, the
following criteria are considered: persuasive evidence exists that there is an
arrangement between the buyer and seller; delivery has occurred; the sales price
is fixed or determinable; and collectability is reasonably assured.



|Fair Value Of Financial
      Instruments
|-----------------------------------------

The carrying amounts of the Company's
financial instruments, which include cash, receivables and advances, accounts
payable, accrued liabilities and amounts due on short term loans, approximate
their fair values at November 30, 2006.



|Fixed
  Assets
|--------------

Fixed assets are recorded at cost.
Depreciation is computed using the straight line method, with lives of five
years for electrical and office equipment, ten years for transportation
equipment, and 45 years for buildings. The cost of the coal mine is being
written off by depletion charges as coal is extracted. Cost per ton has been
calculated using a geological study to estimate the total quantity of coal
available in the mine; depletion charges are calculated by multiplying the cost
per ton by the quantities of coal extracted during each period. Costs include
the original purchase price of the mine plus costs of mine improvements,
principally the cost of road building. Depletion charges were $9,647 and $10,540
in 2006 and 2005, respectively.



|Income
  Taxes
|--------------

Coal Group and Heat Power generate their
income in China where Value Added Tax, Income Tax, City Construction and
Development Tax and Education Surcharge taxes are applicable. Energy, Coal
Group, and Heat Power do not conduct any operations in the U.S.; therefore, U.S.
taxes are not applicable.

Deferred income taxes are recorded to
reflect the tax consequences or benefits to future years of any temporary
differences between the tax basis of assets and liabilities and amounts recorded
on the accounting records, and of net operating loss carryforwards.



|-F8-
|----

- 63 -

---

CHINA ENERGY
CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS November 30, 2006

2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT'D)



|Inventories
|-----------

Inventories are valued at the lower of
cost or market, with cost being determined on the first in first out basis. At
November 30, 2006 inventories consisted solely of operating supplies.



|Use Of
  Estimates
|------------------

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



|Investments
|-----------

Investments in which the Company owns a
20% or greater equity interest are accounted for by the equity method of
accounting.



|Advertising
  Costs
|-------------------

The Company will expense advertising costs
when the advertisement occurs. There were no advertising expenses in 2006 and
2005.



|Net Income Per
    Share
|------------------------

The Company computes net income (loss) per
common share in accordance with SFAS No. 128, "Earnings Per Share" and SEC Staff
Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and
SAB 98, basic and diluted net income (loss) per common share are computed by
dividing the amount available to common shareholders for the period by the
weighted average number of shares of common stock outstanding during the period.
Accordingly, the number of weighted average shares outstanding as well as the
amount of net income per share are presented for basic and diluted per share
calculations for all years reflected in the accompanying financial
statements.



|Segment
  Reporting
|-------------------

Management accounts for the operations of
the Company in two segments: Coal Group and Heat Power.



|-F9-
|----

- 64 -

---



|CHINA ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNovember 30, 2006
|-----------------------------------------------------------------------------------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)



|Foreign Currency Translation
|----------------------------

All Company assets are located in the Republic of China. These assets and related liabilities are recorded on the books of the Company in the currency of China (Renminbi). They are translated into US dollars as follows: (a)
Current assets, current liabilities and long term monetary assets and liabilities, at the rate of exchange in effect as at the balance sheet date; (b) Non-monetary assets and liabilities at the exchange rates prevailing at the time of the
acquisition of the assets or assumption of liabilities; and, © Revenues and expenses, at the average rate of exchange for the year.

Gains and losses arising from the translation of foreign currency will be included in other comprehensive income. There had been no such gains and losses through July 21, 2005 as the exchange rate up to that date for the
Chinese currency was a fixed amount relative to the U.S. dollar.



|Statutory Reserve
|-----------------

The Company allocates 10% of its after tax profits, if any, to a Statutory Reserve Fund and 5% to a Statutory Public Welfare Fund, as determined from year to year. These funds are allocated appropriately until reserves
reaches 50% of Paid in Capital.



|-F10-
|-----

- 65 -

---



|CHINA ENERGY
      CORPORATIONNOTES TO CONSOLIDATED
      FINANCIAL STATEMENTSNovember 30,
      2006
|-----------------------------------------------------------------------------------------------------



|3. RELATED PARTY
      TRANSACTIONS
|-----------------------------------

A substantial portion of the cost of
construction of the thermoelectric plant has been provided by shareholder loans.
The outstanding balance of these loans at November 30, 2005 was $7,831,086. An
additional $767,030 was advanced during the 2006 year and interest of $658,343
accrued on these loans and was added to the outstanding balance. Repayments
during the year totaled $1,522,114. The remaining balance at November 30, 2006
was $ 7,734,345.

All of these shareholder loans detailed
below bear interest at 6.31% and are due on demand:

|Zhiyang Guo                                                     |                           | $1,246,444
|--------------------------------------------------------------- | ------------------------- | ----------
|Hangzhou Dayovan Group, Ltd.                                    |                           | 4,800,408 
|Xinghe County Haifu Coal Transportation & Sales Co.,
      Ltd. |                           | 1,687,493 
|                                                                |                           | Total     
|                                                               
|                                                               
|4.                                                              | ACCOUNTS
      RECEIVABLE |           

The balance of accounts receivable has
been reduced by a provision for doubtful accounts in the amount of
$1000.



|-F11-
|-----

- 66 -

---



|CHINA ENERGY CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSNovember 30, 2006
|-----------------------------------------------------------------------------------



|5. ADVANCES TO SUPPLIERS
|------------------------

As is customary in China, the Company has made advances to its suppliers. At November 30, 2006, advances had been made to 43 suppliers; these totaled $2,379,601. There is no interest due on these advances; the advances
are offset against billings as they are made by the suppliers. All of the advances were made in support of the construction project at Heat Power and an expansion project of the coalmine.

|6.                                                      | OTHER ACCOUNTS RECEIVABLE |           |         
|------------------------------------------------------- | ------------------------- | --------- | --------
|Other accounts receivable is composed of the following: |                           |          
|                                                       
|Loans to suppliers and other associated firms           |                           | $ 102,368
|Deposit to secure a loan guarantee                      |                           | 187,500  
|Employee expense advances                               |                           | 13,665   
|                                                        |                           | Total     | $303,533
|                                                       
|7.                                                      | LONG TERM INVESTMENT      |           |         

Coal Group has an investment in a customer of the coal mine. This investment is a 20% equity interest which has been accounted for by the equity method of accounting. This resulted in a $ 10,586 loss in the 2006 year,
which is included in nonoperating income on the statement of income.



|8. SHAREHOLDER LOANS
|--------------------

The shareholder loans are due on demand and bear interest at 6.31% .



|9. SEGMENT REPORTING
|--------------------

The Company is made up of two segments of business, Coal Group which derives its revenue from the mining and purchase and sale of coal, and Heat Power which derives its revenue by providing hot water to residents and
businesses of a local community. Each of these segments is conducted in a separate corporation and each functions independently of the other.

During the periods reported there were no transactions between the two segments. There also were no differences between the measurements used to report operations of the segments and the consolidated operations of the
Company. In addition, there were no differences between the measurements of the assets of the reported segments and the assets reported on the consolidated balance sheet.



|-F12-
|-----

- 67 -

---

CHINA ENERGY
      CORPORATIONNOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSNovember 30,
  2006Significant financial statement amounts are
      presented below, by segment.Summary of
      Segment OperationsFor the Years
      Ended November 30,2006
    2005Heat Power
    Coal
      Group
    Total
    Heat Power
    Coal
    Group
    TotalSales to externalcustomers
    $
1,936,992
    $
    11,748,378
    $ 13,685,370 $
      824,416
    $12,228,204
      $13,052,620Gain on disposalof fixed
    assets
    -
    -
    -
    -
    212,249
    212,249Interest income
    48,254
    44,350
    $ 92,604
    -
    -
    -Interest
    expense
    113,240
    241,263
    354,502
    -
    -
    -Depreciation anddepletion
    16,282
    674,958
    691,240
    182,711
    161,798
    344,502Segment profit(loss)
    (428,106)
    5,506,989
    5,078,883
    (668,539)
    5,819,941
    5,151,402Significant noncash items:Segment
    assets
    23,316,853
    14,738,165
    38,055,018
    16,296,952
    5,753,732
    22,050,684Expenditures for segment
    assets:Constructionin progress
    786,151
    731,098
    1,517,249
    13,625,468
    -
    13,625,468Other
    assets
    -
    5,367,777
    5,367,777
    -
    273,264
    273,264-F13-


- 68 -

---

|    | CHINA ENERGY
      CORPORATION                  
|--- | ------------------------------------------------
|    | NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS
|    | November 30,
      2006                         
|10. | EXPENSES                                        

Major items included in the selling and
general and administrative expenses reported on the statements of operations for
the years 2006 and 2005 are detailed below:

General and AdministrativeSelling Expenses
    Expenses2006
    2005
    2006
    2005Salaries and wages
    $ 10,520
    $7,265
    $ 344,515
    $
  100,995Depreciation
    -
    -
    409,724
    62,219Postage and office supplies
    -
    -
    203,352
    22,576Travel
    8,038
    106,079
    382,561
    21,622Repairs
    16,882
    15,953
    124,033
    100,964Professional and other fees
    307,636
    343,668
    233,954
    297,704Conservation fees
    -
    -
    -
    177,058Other
      expenses
    7,227
    21,409
    35,127
    327,999Total expenses
    $ 350,303
    $ 494,374
    $1,733,268
    $1,111,137Details of the cost of goods sold of 2006 and 2005 are as
      follows:2006
    2005Salaries
    
    $ 629,797
    $ 204,988Operating supplies
    
    658,243
    109,902Depreciation and depletion
    
    281,516
    62,342Repairs
    
    7,990Coal
    
    3,034,549
    4,290,529Utilities
    
    312,354
    35,324Freight
    
    827,827
    1,321,914Total
    
    $5,752,276
    $6,024,999






The $ 770,639 expense of 2006 and $
270,708 of 2005 was the cost of geological exploration in search of a new coal
field that could be mined.



|-F14-
|-----

- 69 -

---



|CHINA ENERGY
      CORPORATIONNOTES TO CONSOLIDATED
      FINANCIAL STATEMENTSNovember 30,
      2006
|-----------------------------------------------------------------------------------------------------

12. SUPPLEMENTAL DISCLOSURES OF CASH
FLOWS INFORMATION

There was no cash paid for interest during
the 2006 period; payments for interest totalled $10,768 during the 2005 period.
There was $1,950,027 paid for income taxes during 2005 and $1,862,645 paid
during 2006. There was no interest paid on the shareholder loans during either
2006 or 2005; all of the interest accrued on those loans has been capitalized by
Heat Power.



|13. INCOME
  TAXES
|------------------

The Company is required to file income tax
returns in both the United States and China. Its operations in the United States
have been insignificant and income taxes have not been accrued. In China, the
Company files tax returns for Heat Power, Coal Group and, although it is part of
Coal Group, a separate tax return is required for the operations of the coal
mine. During 2006 and 2005, taxes accrued for the coal mine. Net operating
losses were reported on the other tax returns. The laws of China permit the
carryforward for a period of five years of net operating losses. At November 30,
2006, the Chinese entities had net operating losses of $1,296,004 available for
future use. If not used, these carryforwards will expire as follows:

2007
    325,4892008
    177,7782009
    1,118,2262010
    610,769


Under SFAS No. 109, "Accounting for Income
Taxes", recognition of deferred tax assets is permitted unless it is more likely
than not that the assets will not be realized. The Company has recorded deferred
tax assets as follows:

Deferred tax
      assets
    $ 401,807Valuation allowance
    401,807Balance
      recognized
    $ -




|-F15-
|-----

- 70 -

---

CHINA ENERGY
CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS November 30, 2006

14. CONTINGENCY

As is traditional in China, Coal Group and
Heat Power do not carry insurance.

15. RECENT ACCOUNTING
PRONOUNCEMENTS

The Company does not anticipate the
adoption of recently issued accounting pronouncement to have a significant
effect on the Company¡ ̄s results of operations, financial position or cash
flows.

-F16-

- 71 -

---

ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL STATEMENTS

None.

ITEM 8A CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.The Securities and Exchange Commission defines the term disclosure controls and
procedures to mean a companys controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Commissions rules and forms. Our chief executive officer and chief financial officer have concluded, based on the evaluation of the effectiveness of the disclosure controls and
procedures by our management, with the participation of our chief executive officer and chief financial officer, as of the end of the period covered by this report, that our disclosure controls and procedures were effective for this purpose, except
as noted below under Changes in Internal Controls.

Changes in Internal Controls.As of the end of the period covered by this report, we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure and procedures (as defined in Exchange Act Rule 13a-15(e) and
15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that as of the end of the period covered by this Annual Report on Form 10-KSB our disclosure controls and procedures were effective to enable
us to accurately record, process, summarize and report certain information required to be included in the Companys periodic SEC filings within the required time periods, and to accumulate and communicate to our management, including the Chief
Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

Prior to the issuance of our financial statements, we completed the account reconciliations, analyses and our management review such that we can certify that the information contained in our financial statements for the
year ended November 30, 2006, fairly presents, in all material respects, the financial condition and results of operations of the Company.

Limitations on Effectiveness of Controls and Procedures.Our management, including our Chief Executive Officer and Chief Accounting
Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to,
the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.

- 72 -

---

|ITEM
      8B. | OTHER
      INFORMATION                                            
|-------------- | -------------------------------------------------------------------
|None.          |                                                                    
|PART III      
|ITEM
      9.  | DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
|               | ****COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE
      ACT****   

The following information sets forth the
names of our officers and directors, their present positions, ages and
biographical information within the last 5 years. Also provided is a brief
description of the business experience of our directors and executive officers
and significant employees during the past five years and an indication of
directorships held by the directors in other companies subject to the reporting
requirements of the Securities Exchange Act.

|Name            | Age |    | Position                        | Period Serving                              | Term (1) |             
|--------------- | --- | -- | ------------------------------- | ------------------------------------------- | -------- | ------------
|WenXiang Ding   |     | 50 | CEO,
      President, Director, | December 1, 2006 ¡§C November 30,2007       |          | 1
      year
|                |     |    | Secretary, Treasurer            |                                             |          |             
|                |     |    |                                 | December 1, 2006 ¡§C
      November 30,2007 |          |             
|YanHua
      Li |     | 48 | Director                        |                                             |          | 1 year      
|                |     |    |                                 | December 1, 2006 ¡§C November 30,2007       |          |             
|WuSheng Liu     |     | 43 | CFO                             |                                             |          | 1
      year

|(1) | Directors hold office until the next annual
      stockholders' meeting or until a successor or successors are elected and
      appointed.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|   



|Mr. WenXiang
      Ding
|-----------------------

Mr. Ding became our CEO, President,
Director, and Treasurer on November 5, 2004. Mr. Ding is responsible for
implementing our investment projects, financial budgets and forecasts,
overseeing research and development and human resources and
marketing.

Mr. Ding is also responsible for our
overall direction and various initiatives as needed from time to time in
maintaining the health of the Company. Mr. Ding is currently overseeing our
marketing and public relations efforts in maintaining current customers and
attracting new customers and also initiating contracts with sectors of the Inner
Mongolia Government for expansion of electrical and heating networks.

In August, 2000, Mr. Ding became the
Executive Director and General Manager of Coal Group where he brought his
experience in the coal industry from serving as the Chief Accountant and,
Operations Director of Inner Mongolia Coal of the People's Republic of China
General Political Department. Mr. Ding also founded Heat Power in September 2003
where he serves as the General Manager. Mr. Ding's position as General Manager
of Coal Group and Heat Power holds the same responsibilities as his position as
our President.

In 1993, Mr. Ding obtained training in
coal mine management from the Beijing coal Management Institute. During 2002, he
obtained further training in coal mine production and public utility management
from the Inner Mongolia Coal Industry Bureau and Erdos City Construction Bureau,
respectively.

Mr. Ding works on average 52 hours per
week on Company affairs and has an employment contract with the Company. Please
refer to Exhibit 10.14 (a).



|Ms. YanHua
    Li
|-----------------

Ms. Li became our Director on November 5,
2004. Her responsibilities include overseeing our finance and human resources
departments.

- 73 -

---

Ms. Li is also the General Manager of Inner Mongolia XiangRong Commercial and Trade Co., Ltd. where she oversees the finance department and responsible for operations management and has been for the past 5 years.

Ms. Li does not have any technical training in her field of finance, human resources and operations management.

Ms. Li works on average 48 hours per week on Company affairs and is the spouse of Wenxiang Ding.

Ms. Li has an employment contract with the Company. Please refer to Exhibit 10.14(b) .



|Mr. Wu Sheng Liu
|----------------

Mr. Liu became our CFO on November 5, 2004 and oversees our financial department, and works closely with Mr. Ding in implementing our investment projects, financial budgets and forecasts.

Mr. Liu previously held the position of Chief Financial Officer at Sinopetro Hohhot Petro Co., Ltd., an oil refinery commencing from 2003 to 2005. This company is unrelated and unassociated with Coal Group, Heat Power and
the Company. Mr. Lius is responsible for management of financial reporting.

Mr. Liu brings his experience in financial management and internal audit from his work with Petro China Hohhot Oil & Chemical Branch from 1992-2003.



|Mr. Liu does not have any technical training in his field.
|----------------------------------------------------------

Mr. Liu has an employment contract with the Company. Please refer to Exhibit 10.14(c) .



|Audit Committee Financial Expert
|--------------------------------

We do not have an audit committee financial expert serving on the audit committee. Under the applicable Securities and Exchange Commission standard, an audit committee financial expert means a person who has the following
attributes:

- An understanding of generally accepted accounting principles and financial statements;
- The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
- Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth
and complexity of issues that can reasonably be expected to be raised by the registrants financial statements, or experience actively supervising one or more persons engaged in
such activities;
- An understanding of internal controls and procedures for financial reporting; and
- An understanding of audit committee functions.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a)of the Exchange Act requires our officers and directors, and persons who own more than 10% of the its common stock, to file reports of ownership and changes of ownership of such securities with the United
States Securities and Exchange Commission. As of the year ended November 30, 2006, our officers and directors and person who own more than 10% of our common stock filed timely Form 4s and Form 5s.



|Code of Ethics
|--------------

We do not have a code of ethics and expect to develop a code of ethics in the next 12 months.

- 74 -

---



|DIRECTORS'
      COMPENSATION
|-----------------------------

Our Directors are paid on a salary basis
and do not receive compensation for serving on the Board of Directors. Directors
are reimbursed for any expenses incurred on behalf of the Company.



|ITEM
      10.             
      EXECUTIVE COMPENSATION
|--------------------------------------------------------

The table below summarizes all
compensation awarded to, earned by, or paid to our executive officers by any
person for all services rendered in all capacities to us for the fiscal year
ended November 30, 2006 and 2005.

|                                                                                                                 |               | LONG TERM COMPENSATION |               |       |              |                    
|---------------------------------------------------------------------------------------------------------------- | ------------- | ---------------------- | ------------- | ----- | ------------ | -------------------
|                                                                                                                 |               |                        |               |       |              | RESTRICTED         
|                                                                                                                 |               |                        |               |       |              | OPTION             
|                                                                                                                 |               |                        |               |       | OTHER ANNUAL | STOCKS/PAYOUTS SARS
|NAME                                                                                                             | TITLE         | YEAR                   | SALARY        | BONUS | COMPENSATION | AWARDED            
|WenXiang Ding                                                                                                    | President,    | 2006                   | $
      6,800 | -0-   | -0-          | -0-                
|                                                                                                                 | CEO,          |                        |               |       |              |                    
|                                                                                                                 | Secretary and |                        |               |       |              |                    
|                                                                                                                 | Director      |                        |               |       |              |                    
|                                                                                                                 |               | 2005                   | $
      6,800 | -0-   | -0-          | -0-                
|YanHua Li                                                                                                        | Director      | 2006                   | $ 5,100       | -0-   | -0-          | -0-                
|                                                                                                                 |               | 2005                   | $ 5,100       | -0-   | -0-          | -0-                
|WuSheng Liu                                                                                                      | CFO           | 2006                   | $
      9,000 | -0-   | -0-          | -0-                
|                                                                                                                 |               | 2005                   | $
      9.000 | -0-   | -0-          | -0-                
|                                                                                                                
|We
      have employment agreements with Mr. Ding, Mrs. Li or Mr. Liu. Please see
      Exhibit 10.14 (a)(b)(c). |              

The terms of the employment agreements are
summarized as follows:

- Duration of the agreement - usually set for 2
  years and renewable at the discretion of management.
- Work content - responsibilities and title
  held.
- Labor protection laws applicable to the
  employee - type of training to be received.
- Compensation - frequency of payments and any
  other benefits received.
- Labor discipline laws applicable to the
  employee.
- Social insurance - benefits received under
  the applicable laws such as unemployment insurance, paid maternity leave, etc.
- Occupational training - training period
  specified and repayment to employer if employee has terminated employment.
- Termination - grounds for termination and
  procedures.

All of our officers and directors listed
above have a compensation agreement effective for the period of January 1, 2006
through January 1, 2008.

Mr. Ding, Mrs. Li and Mr. Li's yearly
compensation is $ 6,800, $ 5,100, and $ 9,000, respectively.



|Stock Option
  Grants
|---------------------

We have not granted any stock options to
our executive officers since our incorporation.



|Consulting
  Agreements
|-----------------------

We do not have any employment or
consulting agreement with any of our officers or directors and we will not pay
our directors any amount for acting on the Board of Directors.

- 75 -

---

|ITEM
      11. | SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
|-------------- | ---------------------------------------------------------
|               | MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS         

The following table sets forth as of March
14, 2007 certain information regarding the beneficial ownership of our common
stock by:

|1. | each person who is known by us to
      be the beneficial owner of more than 5% of the common stock,
|-- | ----------------------------------------------------------------------------------------------------
|  
|2. | each of our directors and
      executive officers and                                              
|  
|3. | all of our directors and
      executive officers as a group.                                       
|  

The persons or entities listed below have
sole voting and investment power with respect to all shares of common stock
beneficially owned by them, except to the extent such power may be shared with a
spouse. No change in control is currently being contemplated.

As of March 14, 2007, 45,000,000 shares
with a par value of $0.001 per share were issued and outstanding. We are
authorized to issue 200,000,000 shares with a par value of $0.001 per
share.

|                                  |                                                        | Amount and Nature of Beneficial |           
|--------------------------------- | ------------------------------------------------------ | ------------------------------- | ----------
|Title of Class                    | Name and Address of Beneficial Owner                   | *Owner*                         | % Class(1)
|Officers and
      Directors:     |                                                        |                                 |           
|Common Stock                      | WenXiang Ding, President, CEO, Director,               | 12,504,583 (2)                  | 28%       
|                                  | Secretary                                              |                                 |           
|                                 
|                                  | No.1-3,Building 1,Residential Area, West
      Street, |                                 |           
|                                  | XinCheng District, Hohhot City, Inner
      Mongolia,  |                                 |           
|                                  | China, 010010                                          |                                 |           
|Common Stock                      | YanHua Li,
      Director                              | 703,786 (2)                     | 2%        
|                                 
|                                  | No.1, Building 7, No.23
      Jianshe Street, Xincheng |                                 |           
|                                  | District, Hohhot City,
      Inner Mongolia, 010010    |                                 |           
|Common Stock                      | WuSheng Liu, CFO                                       | 200                             | *         
|                                 
|                                  | Xiguanjin Street, Kekeyiligeng Town, Wuchuan           |                                 |           
|                                  | County, Inner Mongolia China, 011700                   |                                 |           
|Officers and Directors as a Group |                                                        | 12,504,783                      | 28%       
|                                 
|5%
      Shareholders:            |                                                        |                                 |           
|Common Stock                      | QingZe Bai                                             | 3,564,967                       | 8%        
|                                  | No.3-10, Building23,HuLunBer North Road,               |                                 |           
|                                  | XinCheng District, Hohhot City, Inner
      Mongolia,  |                                 |           
|                                  | China
      010050                                     |                                 |           
|Common Stock                      | Qun
      Ding                                         | 4,197,200                       | 9%        
|                                  | No.2-1-3,N0.3 Jianshe
      North Street, Xincheng     |                                 |           
|                                  | District, Hohhot City,
      Inner Mongolia 010010     |                                 |           
|Common Stock                      | WenHua Ding                                            | 2,886,571 (3)                   | 6%        
|                                  | No.22-2, First Housing, Wendur Road,
      Dongsheng   |                                 |           
|                                  | City,
      Inner Mongolia, China 017000               |                                 |           
|Common Stock                      | Yi
      Ding                                          | 4,407,572 (2)                   | 10%       
|                                  | No.21, AnDeLi North Road,
      DongCheng District,    |                                 |           
|                                  | Beijing, China
      100000                            |                                 |           
|Common Stock                      | Yee King                                               | 2,400,000                       | 5%        
|                                  | Room
      2005, Ping Hei House, Tai Ping Estate,      |                                 |           
|                                  | Sheung Shui, N.T. Hong Kong                            |                                 |           
|Common Stock                      | Junhua
      Li                                        | 3,456,644                       | 8%        
|                                  | No. 27 Bangalow,
      Provincial No. 3 Printery       |                                 |           
|                                  | Housing, Dongfeng East
      Road, ChangAn District,   |                                 |           
|                                  | Shijiazhuang City, Hebei
      Province, 0500000       |                                 |           
|Common Stock                      | Zhimin Li                                              | 3,500,200                       | 8%        
|                                  | Xichiyang Village, Donghoufang Town, Wuji              |                                 |           
|                                  | County, Hebei Province, 052400                         |                                 |           

- 76 -

---

|                           |                                                   | Amount and Nature of Beneficial |            
|-------------------------- | ------------------------------------------------- | ------------------------------- | -----------
|Title of Class             | Name and Address of Beneficial Owner              | **Owner**                       | % Class (1)
|Common Stock               | YuhHsin Liu                                       | 3,200,000                       | 7%         
|                           | Room
      1308, Wan De Mansion, No.1019 Shen Nan |                                 |            
|                           | Zhong
      Lu, Shenzhen 518046, China            |                                 |            
|Common
    Stock           | Hangzhou
      Dayuan Group Co. Ltd. (4)          | 3,323,742                       | 7%         
|                           | No.198 GongKang, Hangzhou
      City, Zhejiang    |                                 |            
|                           | Province China
      310015                       |                                 |            
|Common Stock               | Xinghe County Haifu Coal Transportation
    &     | 2,798,765                       | 6%         
|                           | Sale Co., Ltd. (5)                                |                                 |            
|                           | Overseas Apartment, Zhuguan Street,
    Xincheng  |                                 |            
|                           | District, Hohhot City, Inner Mongolia
    010010  |                                 |            
|                          
|Officers, Directors and 5% |                                                   | 41,832,872                      | 92%        
|Shareholders as a Group    |                                                   |                                 |            



| | * Less than
1%
| | --------------

|(1) | Based on 45,000,000 shares
      outstanding as of March 14, 2007.                                                                                                                                                                                                
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Wenxiang Ding owns 7,393,225
      directly, his spouse, YanHua Li owns 703,786, and his son, Yi Ding owns
      4,407,572. The total of these shares is 12,504,583.                                                                                              
|   
|(3) | Wenhua Ding is the brother of
      Wenxiang Ding.                                                                                                                                                                                                                
|   
|(4) | Shareholders of Hangzhou Dayuan
      Group Co., Ltd are Li Weijun, ,Yu Jianping, Wu Weidong, Gao Zhixiang, Ma
      Zhiming, Lin Xia, Qin Lihong, Jin Lu, Zhang Yong, Chai Meichang, Gao
      Hualiang and Hangzhou Dayuan Group Co., Ltd Holding
  Committee**.
|   
|(5) | Shareholders of Xinghe County
      Haifu Coal Transportation & Sale Co., Ltd are Zhang Liguo, Zhang
      Junfa, and Yang Peixiu.                                                                                                                                
|   

|** | Hangzhou Dayuan Group Co., Ltd
      was originally a Government owned enterprise and was subsequently
      privatized. During this transition, a separate committee was established
      so original owners including the Government, former management and
      employees retain interest in the company.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | These shareholders are not
      shareholders in Coal Group, Heat Power or the Company. The privatizing of
      Government owned companies is a common practice in China.                                                                                                                                    
|  

ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS



| | Acquisition of
      Subsidiary
| | -------------------------------

On November 30, 2004, we entered into a
Share Exchange Agreement with Coal Group and Heat Power, both Chinese
Corporations, whereby we acquired all the issued and outstanding stock of Coal
Group and 49% of the issued and outstanding stock of Heat Power for
consideration of 45,000,000 shares of our common stock. These shares were exempt
from registration under Regulation S of the Securities Act as they were made to
off-shore, non US residents.

The remaining 51% of Heat Power is owned
by Coal Group. In September 2003, our President and majority shareholder, Mr.
Ding, acquired a 70% interest in Heat Power. That interest was acquired through
a contribution of property which is used by Heat Power in its operations. The
property has been capitalized at the original cost to Mr. Ding. In February,
2004 Mr. Ding transferred this equity interest to Coal Group. In March 2004,
Coal Group sold 15% of its interest to another shareholder. In August of 2004, a
further 4% interest was sold to a shareholder leaving 51% to be owned by Coal
Group. As a result of the Share Exchange Agreement, Coal Group and the Company
together now own 100% of the outstanding capital stock of Heat Power.

Coal Group and Heat Power thus became our
wholly-owned subsidiaries. The shareholders of both companies unanimously agreed
to enter into the Agreement for the purposes of restructuring in anticipation of
becoming listed on the OTC Bulletin Board. We were formed by the shareholders of
Coal Group and Heat Power for this purpose and prior to entering into the
Agreement; we had no assets, liabilities or equity and had not issued any of our
shares. As a result of entering into the Agreement; the shareholders of Coal
Group and Heat Power became our shareholders. The 45,000,000 shares were
allocated based on the capital contributions or ownership of Coal Group and Heat
Power. The Agreement therefore was a non-arms length transaction.

- 77 -

---



|Shareholder
      Loans
|-----------------------

Our shareholders have advanced the
following amounts to Heat Power for the purposes of satisfying working capital
needs and funding for XueJiaWan Expansion as of November 30, 2006:

|Zhiyang Guo                                                     |       | $1,246,444
|--------------------------------------------------------------- | ----- | ----------
|Hangzhou Dayovan Group,
      Ltd.                              |       | 4,800,408 
|Xinghe County Haifu Coal Transportation & Sales Co.,
      Ltd. |       | 1,687,493 
|                                                                | Total | $7,734,345

These loans are payable upon demand and
interest is charged at 6.31% per annum on balances owing. We have no formalized
agreements with our shareholders guaranteeing that certain amounts of funds will
be available to us. We may exhaust this source of funding anytime.

We expect this source of funding to
continue; however, in the event shareholder loans are no longer granted to us,
we may obtain long or short term financing or downsize our operations. There are
no formal agreements in place with respect to shareholder loans.

To date, we have not entered into any
transactions with promoters. Transactions involving our directors, officers,
principal shareholders consist of the above noted principal shareholders
providing shareholder loans to fund our thermoelectric plant expansion and
working capital needs. There is no formal agreement with principal
shareholders.



|Investments in Related
      Parties
|------------------------------------

In September 2003, our President and
majority shareholder, Mr. Ding, acquired a 70% interest in Heat Power. That
interest was acquired through a contribution of property which is used by Heat
Power in its operations. The property was capitalized at the amount Mr. Ding
paid for the assets he contributed. In February, 2004 the Mr. Ding transferred
this equity interest to Coal Group. In March 2004, Coal Group sold 15% of its
interest to another shareholder. In August of 2004, a further 4% interest was
sold to a shareholder. The price of each of these transactions was
proportionately equal to the total of the appraised value of the property
contributed at the time of Mr. Ding's contribution. In the case of each of these
sales, the proceeds were loaned to Heat Power.

- 78 -

---

ITEM 13.
    EXHIBITSDescriptionExhibit
      Number3.1
    Certificate of
      Incorporation, dated October 14, 2002-Omega Project Consultations Inc.
      *3.2
    Certificate of Incorporation, dated November
      3, 2004- China Energy Corporation *3.3
    Articles of Incorporation,
      dated October 11, 2002- Omega Project Consultations Inc. *3.4
    Certificate Amending Articles of
      Incorporation dated November 3, 2004 changing our name to
      "ChinaEnergy Corporation" and
      increase our authorized capital to 200,000,000 from 75,000,000.
      *3.5
    Bylaws, effective October 12, 2002
      *10.1
    Share Exchange Agreement
      between China Energy Corporation and Inner Mongolia Tehong Coal
      GroupCo., Ltd and Inner Mongolia Zhunger Heat
      Power Co., Ltd., dated November 30, 2004. *10.2
    Monopoly license granted
      by the Zhunger County People's Government, dated July 29, 2003
      *10.2(a)
    Heating Plant transfer agreement with
      Zhunger County People's Government dated July 29, 2003***10.2(b)
    Addendum to licence granted by the Zhunger
      County People's Government dated June 2, 2005.***10.3
    Contract with Inner Mongolia Electric Power
      (Group) Co., Ltd., dated April 30, 2005**10.4
    Contract with Inner
      Mongolia Litai Coking Co., Ltd, January 17, 2006**10.5
    Contract with Inner Mongolia Litai Coking
      Co., Ltd, January 18, 2005 *10.6
    Contract with Zhejiang
      Energy Fuxing Fuel Co., Ltd, dated January 8, 2005 *10.7
    Contract with GuanBanWuSu Coal Mine, dated
      January 10, 2006**10.14(a)
    Employment Contract dated
      January 1, 2006 - Mr. Ding**10.14(b)
    Employment Contract date January 1,
      2006 - Ms. Li**10.14(c)
    Employment Contract dated
      January 1, 2006 - Mr. Liu**10.15
    Standard employment contract *10.17
    Acquisition of LaiYeGou
      Coal Mine, dated June 18, 1999 *10.18
    Lease Agreement with Xiangrong Commerce
      & Trade Co., Ltd dated July 28, 2004**10.19(a)
    Investment in 15% of LiTai
      dated September 18, 2002**10.19(b)
    Investment in 5% of LiTai dated April 18,
      2004**10.20(a)
    Approval Received from
      EerDouSi City Coal Bureau for LaiYeGou Expansion Plan dated December
      8,2005.**10.20(b)
    Addendum to Approval
      Received from EerDouSi City Coal Bureau for LaiYeGou Expansion Plan
      datedDecember 8, 2005.**10.21(a)
    Capital Loan contract with
      China Construction Bank Zhunger Branch dated October 13,
      2005**10.21(b)
    Transfer of Capital Loan from Coal Group to
      Heat Power dated October 13, 2005.**10.21(c)
    Guarantee of Capital Loan
      Agreement with Inner Mongolia Yuansheng Investment & Guarantee Stock
      Co.,Ltd dated September 29, 2005.
      ***10.22(a)
    Contract with Wu Lingwen dated November 1,
      2003***10.22(b)
    Renewed contract with Wu Lingwen dated March
      9, 2006***10.23
    Promissory letter signed with Zhunger County
      Keyuan Water Supply Co., Ltd dated February 25, 2005***10.24
    Power supply agreement
      with Erdos Power Industry Bureau***Dated November 1,
      200510.25
    Capital Loan Agreement
      with the Agriculture Bank dated April 11, 2006***10.26
    Sale of Heating Plant to
      Hao Linmao dated March 24, 2006. ***10.27
    Purchase Agreement with
      Deheng Assets Management Co., Ltd. dated August 11, 2006***10.28
    Coal Group contract with
      Zhejiang Fuxing Electric and Fuel Co., Ltd. date January 11,
      200710.29
    Coal Group rental
      agreement with Bai Jinlan dated September 23, 200623.1
    Consent Letter from Robert
      Jeffrey, CPA31.1
    RULE 13A-14(A) CERTIFICATION OF THE CHIEF
      EXECUTIVE OFFICER31.2
    RULE 13A-14(A) CERTIFICATION OF THE CHIEF
      FINANCIAL OFFICER32.1
    SECTION 1350 CERTIFICATION99.1
    Coal Group Business license, effective
      August 8, 2000 *99.2
    Heat Power Business
      License, effective September 28, 2003 *99.3
    Ministry of Finance and National tax
      administration bureau: Tax exemption for Heat Supply Industries
      *99.5
    Standard Mine Safety
      Manual *99.6
    Coal Group Property Certificate:
      1stFloor-Left *99.6(a)
    Coal Group Property
      Certificate: 1stFloor-Right *99.7
    Coal Group Property Certificate:
      2ndFloor-Left *99.7(a)
    Coal Group Property
      Certificate: 2ndFloor-Right *99.8
    Coal Group Property Certificate:
      3rdFloor-Left *99.8(a)
    Coal Group Property
      Certificate: 3rdFloor-Right *99.9
    Geological survey of LaiYeGou Mine dated
      August 10, 1999 *- 79 -


---

|99.9
      (a) | Consent letter from Inner Mongolia Coal Field Geology
      Bureau dated March 13, 2006.**       
|-------------- | -------------------------------------------------------------------------------------------------
|99.11          | LaiYeGou Construction
      Timetable and Monthly Cost**                                         
|99.12          | Environmental Protection Standards**                                                             
|99.13          | Heat Power Equipment
      Listing**                                                             
|99.14          | Heating Price Standard determined XueJiaWan Town Zhunger
      County, dated November 14, 2005 **
|99.15          | Coal Group LaiYeGou Coal
      Mine Expansion - Equipment Listing**                              
|99.16          | Map
      of transportation to LaiYeGou Mine - May 2004***                                       
|99.17(a)       | LaiYeGou mining production
      system***                                                       
|              
|99.17(b)       | LaiYeGou mine site plan
      map***                                                             

|- | *Incorporated by reference from our Form SB-2 that was
      originally filed with the SEC on September 27, 2005.           
|- | ----------------------------------------------------------------------------------------------------------------------------
| 
|- | ** Incorporated by reference from our Form SB-2/A No. 1
      that was originally filed with the SEC on April 17, 2006.     
| 
|- | *** Incorporated by reference from our Form SB-2/A No. 2
      that was originally filed with the SEC on September 8, 2006  
| 
|- | **** Incorporated by reference from our Form SB-2/A No.
      2 that was originally filed with the SEC on November 20, 2006 
| 
|- | **** *Incorporated by reference from our Form SB-2/A No.
      2 that was originally filed with the SEC on December 22, 2006
| 
|- | ^ Incorporated by reference from our Form SB-2/A No. 2
      that was originally filed with the SEC on January 12, 2007     
| 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

Below is the aggregate amount of fees
billed for professional services rendered by our principal accountants with
respect to the Company's last two fiscal years:

|                       | 2006    | 2005         
|---------------------- | ------- | -------------
|Audit
      fees       | $50,000 | $ 
    50,000
|Audit-related
    fees | -       | -            
|Tax
      fees         | -       | -            
|All other
    fees     | -       | -            
|Total                  | $50,000 | $50,000      

All of the professional services rendered
by principal accountants for the audit of the our annual financial statements
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for last two fiscal years were approved by the
Audit Committee.

- 80 -

---

SIGNATURES

In accordance with the Securities Exchange
Act of 1934, this Annual Report on Form 10-KSB has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

|      |                    |     | CHINA ENERGY
      CORPORATION                       
|----- | ------------------ | --- | -----------------------------------------------------
|Date: | March 14,
    2007 |     |                                                      
|     
|     
|      |                    |     | /s/ WenXiang Ding                                    
|      |                    | By: |                                                      
|      |                    |     | WenXiang Ding                                        
|      |                    |     | President,
      Chief Executive Officer and Director
|     
|      |                    |     | /s/ WuSheng Liu                                      
|      |                    | By: |                                                      
|      |                    |     | WuSheng Liu                                          
|      |                    |     | Secretary,
      Chief Accounting Officer            

- 81 -

---