UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



|FORM
      10-QSB
|-----------------

| X
|            Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
fiscal quarter ended February 28, 2007

|    
|Transition
report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____
to______.



Commission file number:
000-52409CHINA 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.

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
April 13, 2007.

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



|- 1
-
|-----

---

|TABLE OF CONTENTS                                                                    
|-------------------------------------------------------------------------------------
|PART I.                                                                              
|Item 1.                                                                              
|Consolidated Balance Sheets - November 30, 2006
      (Audited) and February 28, 2007
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Item 2.                                                                              
|Item 3.                                                                              
|PART
      II.                                                                       
|Item 1.                                                                              
|Item 2.                                                                              
|Item 3.                                                                              
|Item 4.                                                                              
|Item 5.                                                                              
|Item 6.                                                                              
|                                                                                     

- 2 -

---



|FORWARD
|-------

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.

- 3 -

---



|ITEM 1
      .           
      FINANCIAL STATEMENTS
|----------------------------------------------------



CHINA ENERGY
CORPORATION



|Consolidated Financial
      StatementsFEBRUARY 28,
      2007(Prepared Without
      Audit)
|--------------------------------------------------------------------------------------------

- 4 -

---

|                                                                                  | CHINA ENERGY
      CORPORATION                                                   |                       
|--------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------------
|                                                                                  | CONSOLIDATED BALANCE
      SHEETS                                                |                       
|ASSETS                                                                            |                                                                                  | Three Months
    Ended
|Current
      Assets:                                                             |                                                                                  | February 28,
    2007 
|                                                                                  |                                                                                  | (Unaudited)           
|Cash                                                                              |                                                                                  | $ 809,621             
|Notes and interest
      receivables                                              | 1,667,805                                                                        | 1,374,644             
|Accounts
      receivables                                                        |                                                                                  | 3,089,257             
|Other
    receivables                                                             |                                                                                  | 3,372,962             
|Advances to
      suppliers                                                       |                                                                                  | 3,476,391             
|Inventory                                                                         |                                                                                  | 590,219               
|Fixed
      Assets:                                                               | Total current assets                                                             | 13,006,255            
|Property, plant and
      equipment                                               | 21,945,029                                                                       | 21,731,353            
|Coal
      Mine                                                                   |                                                                                  | 208,636               
|Construction in
      Progress                                                    | 1,488,826                                                                        | 1,517,249             
|                                                                                  |                                                                                  | 23,642,491            
|Less
      accumulated depreciation and depletion                                 | 1,433,692                                                                        | 1,030,595             
|Other
      Assets:                                                               | Net fixed assets                                                                 | 22,208,799            
|Investment property, net
      depreciation of $ 35,328                           | 1,752,604                                                                        | 1,762,833             
|Intangible
      asset, net of amortization of $ 380,234                          | 3,276,497                                                                        | 3,341,165             
|Long term
      investment                                                        |                                                                                  | 226,255               
|Deferred
      charges                                                            |                                                                                  | -                     
|                                                                                  | Total other assets                                                               | 5,255,356             
|Total
    Assets                                                                  |                                                                                  | $
    40,470,410      
|LIABILITIES AND STOCKHOLDERS'
    EQUITY                                          |                                                                                  |                       
|Current
      Liabilities:                                                        |                                                                                  |                       
|Notes
    payable                                                                 |                                                                                  | 6,392,021             
|Accounts
      payable                                                            |                                                                                  | 4,575,511             
|Advances from
      customers                                                     | 2,409,584                                                                        | 793,561               
|Accrued
      liabilities                                                         |                                                                                  | 1,069,612             
|Other accounts
      payable                                                      | 1,879,784                                                                        | 2,774,380             
|Shareholder
      loans                                                           |                                                                                  | 8,319,974             
|                                                                                  | Total current liabilities                                                        | 24,646,486            
|Long Term
      Obligations                                                       |                                                                                  | 2,040,720             
|Stockholders'
      Equity:                                                       | Total liabilities                                                                | 26,687,206            
|Common stock : authorized
      75,000,000 shares of $0.001 par value; issued and | 45,000                                                                           | 45,000                
|outstanding 45,000,000                                                            |                                                                                  |                       
|Additional
      paid-in Capital                                                  | 8,655,805                                                                        | 8,655,805             
|Retained
    earnings                                                             |                                                                                  | 4,839,385             
|Statutory
      reserves                                                          |                                                                                  | 853,982               
|Other Comprehensive
      loss                                                    | (610,968)                                                                        | (587,228)             
|Total
      Stockholders' equity                                                  | 13,783,204                                                                       | 13,000,639            
|Total Liabilities
      and Stockholders' Equity                                  | $ 40,470,410                                                                     | $38,055,018           
|                                                                                  | The accompanying notes are
      an integral part of these financial statements. |                       



- 5 -



---



CHINA ENERGY CORPORATION.
CONSOLIDATED STATEMENTS OF INCOMEFor the Three Month Periods Ended February 28, 2007 and 2006
(Prepared Without Audit)

|                                                 | 2007            | 2006           
|------------------------------------------------ | --------------- | ---------------
|                                                
|Revenue                                          | $
4,406,688     | $
  2,149,315  
|Cost of
    Sales                                | 2,539,706       | 1,026,771      
|Gross
      Profit                               | 1,866,982       | 1,122,544      
|Other Operating
      expense                    | -               | (357,638)      
|                                                
|Expenses:                                        |                 |                
|Selling                                          | 58,250          | 36,748         
|General and
      Administrative                 | 456,617         | 219,040        
|Total
      expense                              | 514,67          | 255,788        
|Operating
      income                           | 1,352,115       | 509,118        
|                                                
|Other Income
      and Expense:                  |                 |                
|Other Income                                     | 8,248           | 12,950         
|Finance
      expense                            | (454,575)       | (19,231)       
|Non operating expense                            | (19,461)        | (18,199)       
|Income Before
      Income Taxes                 | 886,327         | 484,638        
|                                                
|Provision for Income
      Taxes:                |                 |                
|Current Provision                                | 92,844          | 100,646        
|                                                
|Net income                                       | 793,483         | 383,992        
|Other
      Comprehensive Income                 |                 |                
|Gain
      (Loss) on foreign currency conversion | (23,740)        | 42,979         
|Total
      Comprehensive Income                 | $
      769,743 | $
      426,971
|Income Per Share -                               |                 |                
|Basic and
      Diluted                          | $
    0.02      | $
    0.01     
|Weighted average number of shares                | 45,000,000      | 45,000,000     
|outstanding                                      |                 |                



|
|

The accompanying notes are an integral
part of these financial statements.

- 6 -

---

China Energy Corporation
Consolidated Statement of ChangesFor the Three Months Ended February 28, 2007 and 2006 (Prepared
Without Audit)

|                                                                                 | 2007        | 2006       
|-------------------------------------------------------------------------------- | ----------- | -----------
|CASH FLOWS
      FROM OPERATIONS:                                                |             |            
|Net income                                                                       | $ 793,483   | $ 383,992  
|Charges not requiring the outlay of
      cash:                                  |             |            
|Depreciation
      and amortization                                              | 477,993     | 128,483    
|Company share of loss on
      equity investment                                 | 1,807       | 3,251      
|Changes in assets and
      liabilities:                                         |             |            
|Decrease (Increase) in
      accounts receivable                                 | 1,589,599   | 311,319    
|Decrease in
      note receivables                                               | (293,161)   | 37,170     
|Increase in other
      receivables                                              | (3,172,858) | (563,700)  
|Increase in
      advances to suppliers                                          | (993,361)   | (7,655,471)
|Decrease (Increase) in
      inventory                                           | 34,056      | (141,146)  
|Increase in
      accounts payable                                               | 1,338,068   | 321,992    
|Increase (Decrease) in
      advance from customers                              | 1,616,023   | (361,878)  
|Increase
      (Decrease) in accrued liabilities                                 | (490,773)   | 31,794     
|Increase (Decrease) in
      other accounts payable                              | (894,596)   | 1,047,986  
|Net Cash Provided (Consumed) By Operating
      Activities                       | 6,280       | (6,456,108)
|                                                                                
|CASH FLOWS
      FROM INVESTING ACTIVITIES:                                      |             |            
|Purchase (Disposal) of fixed
      assets                                        | (213,676)   | 104,855    
|Increase in construction
      in progress                                       | 28,423      | 7,653,845  
|Decrease (Increase) in deferred
      charges                                    | 35,715      | (225,164)  
|Increase in long term
      investments                                          | -           | (844,389)  
|Purchase of investment property                                                  | -           | (1,619,586)
|Net Cash Provided (Consumed) By Investing
      Activities                       | (149,538)   | 5,069,561  
|                                                                                
|CASH FLOWS
      FROM FINANCING ACTIVITIES:                                      |             |            
|Advances from (repayments to)
      shareholder                                  | 585,632     | (308,953)  
|Decrease in long term
      liabilities                                          | (508,702)   | -          
|Net Cash
      Provided (Consumed) By Financing Activities                       | 76,930      | (305,885)  
|                                                                                
|Exchange rate effect on cash                                                     | (23,740)    | 39,911     
|Net change in
      cash                                                         | (90,068)    | (1,652,521)
|Cash balance, beginning of
      period                                          | 899,689     | 1,931,249  
|Cash balance, end of
      period                                                | $ 809,621   | $ 278,728  
|The accompanying notes are an integral part of these
      financial statements.

- 7 -

---

CHINA ENERGY
CORPORATIONNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS FEBRUARY 28, 2007 (Prepared Without
Audit)

|1. | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | The unaudited interim financial statements of China
      Energy Corporation. ("the Company") as of February 28, 2007 and for the
      three month periods ended February 28, 2007, and 2006, have been prepared
      in accordance with generally accepted accounting principles. In the
      opinion of management, such information contains all adjustments,
      consisting only of normal recurring adjustments, necessary for a fair
      presentation of the results for such periods. The results of operations
      for the quarter ended February 28, 2007 are not necessarily indicative of
      the results to be expected for the full fiscal year ending November 30,
      2007.
|  
|   | Certain information and disclosures normally included in
      the notes to financial statements have been condensed or omitted as
      permitted by the rules and regulations of the Securities and Exchange
      Commission, although the Company believes the disclosure is adequate to
      make the information presented not misleading. The accompanying unaudited
      financial statements should be read in conjunction with the financial
      statements of the Company for the year ended November 30,
  2006.                                                                                                                                                                       
|  
|2. | 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.                                                                                                                                                                                                                                                                 
|  

|                                       | 2007       | 2006      
|-------------------------------------- | ---------- | ----------
|                                       | Heat       | Coal      
|                                       | Power      | Group     
|                                      
|Sales to external
      customers      | 1,768,066  | 2,638,623 
|Intersegment revenues                  | -          | -         
|Interest expense
      (income)        | (326,808)  | (127,767) 
|Depreciation & depletion               | 379,278    | 98,715    
|Segment profit
      (loss)            | 164,605    | 1,187,511 
|Segment assets                         | 27,479,120 | 12,991,290
|Expenditures for segment
      assets: |            |           
|Construction in progress               | 678,328    | 810,498   
|Other
    assets                       | -          | 5,255,356 

- 8 -

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ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



|History
|-------

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").

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 acquired Coal
Group and Heat Power 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").

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



|Principal Products, Services
      and Their Markets
|----------------------------------------------------



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



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

Coal Group equired the LaiYeGou mine in
June of 1999. 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

- 9 -

---

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.

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.

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.



|LaiYeGou Expansion - Costs and
      Funding
|--------------------------------------------

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 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.

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 blasting down the roof mining technique 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.

As of February 28, 2007, we incurred
$810,498 in construction and progress costs.



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

Heat Power, a China Corporation, was
founded in September 2003 in XueJiaWan Town, Inner Mongolia. 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 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

- 10 -

---

coverage was also not specified in the
agreement however the area requiring service was approximately 120 hectares.

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.

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 Electric Power Group, a Government owned enterprise
and monopoly. 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.

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.

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.



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



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

Coal Group does not implement a formal
advertising and marketing strategy as result of the nature of its business
operations and current market conditions wherein the demand for coal products
exceed the supply. Coal Group does however prepare promotional materials for
distribution to potential customers of which may make bulk purchases. Coal Group
also incurs promotional and entertainment costs for establishing good current
and



|- 11
-
|------

---

potential customer relations. Contracts
awarded by Government are based upon Coal Group's level of output and size of
its mining facilities and not as a result of any marketing initiatives.



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

Heat Power also does not implement a
formal advertising and marketing strategy as result of the nature of its
operations being a monopoly for the supply of heating and its exclusive contract
with Electric Power Group for the supply of electricity. The granting of
expansion into rural regions by Government are based on Heat Power's facilities
and its capacity and capability to provide heating and electricity requirements
and not as a result of any marketing initiatives.



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

Due to existing market conditions, 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.



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

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.

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.

- 12 -

---



|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.



|- 13
-
|------

---

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.

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.

- 14 -

---

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.

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.



|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.

- 15 -

---

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.

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

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.

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").

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.



|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.

- 16 -

---

|Balance
    Sheet   |                                              | How did we arrive at
      these           | How Accurate have we been
      in         | How Likely to change
      in   
|------------------- | -------------------------------------------- | ------------------------------------------ | ------------------------------------------ | --------------------------------
|******Account****** | There is a risk of Change
      because?     | ******estimates?******                     | ******the
    past?******                  | ******the
    future?******     
|                   
|Accounts            | We provide an Allowance For                  | AFDA are made on accounts older            | These estimates of AFDA have               | This method of determining      
|Receivable          | 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             | We
      are subject to income taxes in      | Income tax provision is calculated         | Our
      estimates currently have been in | Taxes payable calculations      
|Liabilities         | 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 
|(Income Tax)        | 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.     

- 17 -

---



|Results of
      operations
|---------------------------

The following is an analysis of our
revenues and gross profit, details and analysis of components of expenses, and
variance; February 28, 2007 compared to February 28, 2006.

|                    | 2007              | %
      Sales | 2006              | %
      Sales
|------------------- | ----------------- | ------------- | ----------------- | -------------
|Sales               | 4,406,688         | 100%          | 2,149,315         | 100%         
|Cost of
      Sales | 2,539,706         | 58%           | 1,026,711         | 48%          
|Gross Profit        | $
      1,866,982 | 42%           | $
      1,122,544 | 52%          



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

Sales for Coal Group were $ 2,638,622 in
2007 compared to $ 1,487,900 in 2006. The $ 1,150,723 increase was a result of
the significant increase in demand in the market for coal, allowing for the
increase in price per ton of coal. 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.

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 2007
were $ 1,768,066 compared to $ 661,415 in 2006. The $ 1,106,652 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
increased, net by $ 1,512,934.74 as a result of the change in the following
expense:

|                         | 2007        | 2006        | Increase/(Decrease)
|------------------------ | ----------- | ----------- | -------------------
|                        
|Salaries                 | 145,679     | 32,042      | 113,637            
|Operating
      supplies | 67,665      | 19,160      | 48,505             
|Depreciation & depletion | 369,446     | 67,565      | 301,880            
|Repairs                  | 20,697      | 6,517       | 14,180             
|Coal                     | 1,828,177   | 760,235     | 1,067,942          
|Utilities                | 64,256      | 117,158     | (52,902)           
|Other                    | 43,786      | 24,093      | 19,692             
|                        
|Total                    | $ 2,539,706 | $ 1,026,771 | $ 1,512,935        

The increase in the cost of sales was
mainly attributed to new operations of the thermoelectric plant put into
operation in September 2006.

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

- 18 -

---

|Selling Expenses   |          |          |                    
|------------------ | -------- | -------- | -------------------
|                  
|                   | 2007     | 2006     | Increase/(Decrease)
|                  
|Salaries and wages | 2,944    | 6,847    | (3,903)            
|Office             | -        | 704      | (704)              
|Other expenses     | 55,306   | 29,197   | 26,109             
|                  
|Total Expenses     | $ 58,250 | $ 36,748 | $ 21,502           

|General and Administrative
      Expenses |           |          
|----------------------------------------- | --------- | ---------
|                                         
|                                          | 2007      | 2006     
|Salaries and wages                        | 67,552    | 40,990   
|Depreciation                              | 108,547   | 60,918   
|Office                                    | 64,427    | 37,611   
|Travel                                    | 105,209   | 18,243   
|Repairs                                   | 58,481    | 2,127    
|Professional and other fees               | 28,714    | 59,051   
|Other expenses                            | 23,685    | 101      
|                                         
|Total Expenses                            | $ 456,617 | $ 219,041

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.

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 during the last quarter in
2006.

Professional and other Fees.Professional fees in 2006 consist of fees
paid to engineer professionals to evaluate the overall efficiencies of the
LaiYeGou coal mine. Fees were also incurred in 2007 to retain environmental
professionals which assisted in the implementation of environmental protection
policies and procedures. Fees paid to environmental professionals is expected to
be a ongoing expense during the expansion of LaiYeGou and after new mining
methods are put into operation.



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

The $ 357,638 expense incurred in 2006 was
the cost of geological exploration in search of a new coal field that could be
mined. We did not incur such expenses in 2007.

- 19 -

---

The coal field is located in Dalu and was
tested to determine 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. Costs for
exploration 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.



|Finance Expense (2007-$ 454,575
      vs. 2006 - $ 19,231)
|----------------------------------------------------------

Coal Group obtained a loan from the
Agriculture bank amounting to $ 6,392,021. The loan assists in funding our
working capital needs in Heat Power's operations and Coal Group's expansion of
the LaiYeGou coal mine. The interest rate on this loan is 7.344% . Please refer
to "Sources of Capital" below.



|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 its supplier, Guanbanwusu .

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 February 28, 2007 we had a working
capital deficit of $ 11,640,231.

Not including funds required for expansion
of our facilities, we estimate our cash requirements for the next 12 months Coal
Group will require approximately $ 4,000,000 and Heat Power will require
approximately $ 2,070,000, a total of $ 6,070,000 in order to cover our working
capital needs as follows:

|                                     | Coal Group  | Heat Power 
|------------------------------------ | ----------- | -----------
|Materials/Labor/Overhead             | 2,500,000   | 2,000,000  
|Selling/Administrative
      expense | 1,500,000   | 70,000     
|Total                                | $ 4,000,000 | $ 2,070,000

- 20 -

---



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.

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 below.

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 further loans from the
Agriculture bank amounting to $ 6,392,021. The terms and principle amount of the
loans granted are as follows:

|Term                               | Interest rate | Principle  
|---------------------------------- | ------------- | -----------
|Sep 26, 2006 to Sep 25,
      2007 | 7.344%        | 2,301,128  
|Oct 19, 2006 to Oct 18, 2007       | 7.344%        | 1,534,085  
|Apr 11, 2006 to Apr 11,
      2007 | 7.254%        | 2,556,808  
|Total                              |               | $ 6,392,021

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.



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

Our cash flows provided and consumed by
operating activities were $ 6,280 for 2007 and $ 6,456,108 for 2006,
respectively. The following summarizes the inflow and outflow of cash for these
periods:

|                                                           | 2007        | 2006             
|---------------------------------------------------------- | ----------- | -----------------
|Net income                                                 | $ 793,483   | $ 383,992        
|Decrease (increase) in
      accounts receivable           | 1,589,599   | 311,319          
|Increase
      (decrease) in advances from customers       | 1,616,023   | (361,878)        
|Increase in advances to
      suppliers                    | (993,361)   | (7,655,471)      
|Decrease
      (increase) in inventory                     | 34,056      | (141,146)        
|Increase (decrease) in
      other accounts payable        | (894,596)   | 1,047,986        
|Other                                                      | (2,138,924) | (40,910)         
|Net Cash Provided (Consumed) By
      Operating Activities | $
6,280     | $
    (6,456,108)

- 21 -

---

Accounts Receivable.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.

Advances from customers.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.

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.

Inventory.Inventory mainly consists of operating supplies used by Heat Power for
heat generation.

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.



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

Our cash consumed and provided by
investing activities were $ 149,538 in 2007 and $ 5,069,561 in 2006,
respectively. The change was mainly attributed to the 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 incurred were 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.



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

Our cash flows provided and consumed by
financing activities were $ 134,263 in 2007 and $ 308,953 in 2006,
respectively.

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: | $ | 1,105,831 due on or before
      December 1, 2006
|- | ---------- | --- | - | -------------------------------------------------
|- | Instalment | #2: | $ | 510,180due on or before December1, 2007          
|- | Instalment | #3: | $ | 510,180due on or before December1,
      2008    
|- | Instalment | #4: | $ | 510,180due on or before December 1,
      2009   
|- | Instalment | #5: | $ | 510,180due on or before December1,
      2010    
|- | Instalment | #6: | $ | 510,180due on or before December1, 2011          

$ 2,040,720 ($ 510,180*4) has been
allocated to long term obligations.

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, 2006 was $ 7,734,345. An
additional $ 585,629 was advanced during the three months period ended 2007. The
February 28, 2007 balance was $ 8,319,974.

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

- 22 -

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|Zhiyang Guo                                                     |       | $ 1,257,624
|--------------------------------------------------------------- | ----- | -----------
|WenHua Ding                                                     |       | 516,255    
|Hangzhou Dayovan Group, Ltd.                                    |       | 4,843,465  
|Xinghe County Haifu Coal
      Transportation & Sales Co., Ltd. |       | 1,702,630  
|                                                                | Total | $ 8,319,974



|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.



|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.
|------------------------------------------------------------------------------------

- 23 -

---

ITEM 3. CONTROLS AND PROCEDURES

(A) Evaluation of Disclosure Controls
and Procedures

As of the end of the period covered by
this report, the Company carried out an evaluation, under the supervision and
with the participation of the Company's Chief Executive Officer/Chief Accounting
Officer of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. The Company's disclosure controls and
procedures are designed to provide a reasonable level of assurance of achieving
the Company's disclosure control objectives. The Company's Chief Executive
Officer/Chief Accounting Officer has concluded that the Company's disclosure
controls and procedures are, in fact, effective at this reasonable assurance
level as of the period covered. In addition, the Company reviewed its internal
controls, and there have been no significant changes in its internal controls or
in other factors that could significantly affect those controls subsequent to
the date of their last evaluation or from the end of the reporting period to the
date of this Form 10-QSB.

(B) Changes in Internal Controls Over
Financial Reporting

In connection with the evaluation of the
Company's internal controls during the Company's first fiscal quarter ended
February 28, 2007, the Company's Chief Executive Officer/Chief Accounting
Officer has determined that there are no changes to the Company's internal
controls over financial reporting that has materially affected, or is reasonably
likely to materially effect, the Company's internal controls over financial
reporting.

|PART
      II.    |                                                                          |                                    
|----------------- | ------------------------------------------------------------------------ | -----------------------------------
|OTHER INFORMATION
|ITEM
      1.     | Legal Proceedings-None.                                                 
|                  |                                                                         
|ITEM
      2.     | Unregistered Sales of Equity Securities and Use of
      Proceeds -None.
|                  |                                                                         
|ITEM
      3.     | Defaults Upon Senior Securities -None.                                  
|                  |                                                                         
|ITEM
      4.     | Submission of Matters to a Vote of Security Holders -None               
|                  |                                                                         
|ITEM
      5.     | Other Information -None.                                                
|                  |                                                                         
|ITEM
      6.     | EXHIBITS                                                                
|                  |                                                                         
|Exhibit Number    | Description                                                             
|31.1              |                                                                          | CEO
      Section 302 Certification
|31.2              |                                                                          | CAO Section 302
      Certification
|32.1              |                                                                          | CEO
      Section 906 Certification
|32.2              |                                                                          | CAO Section 906
      Certification

- 24 -

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SIGNATURES

In accordance with the Securities Exchange
Act of 1934, this Annual Report on Form 10-QSB 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: | April 13, 2007 |     |                                                      
|     
|     
|      |                |     | /s/
      WenXiang Ding                              
|      |                | By: |                                                      
|      |                |     | WenXiang
      Ding                                  
|      |                |     | President, Chief Executive
      Officer and Director
|     
|      |                |     | /s/ WuSheng
      Liu                                
|      |                | By: |                                                      
|      |                |     | WuSheng
      Liu                                    
|      |                |     | Secretary, Chief
      Accounting Officer            

- 25 -

---