**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





Amendment
      No. 1 to


**FORM 10-K**




(Mark
      One)




x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934**




For
      the
      fiscal year ended December 31, 2007




or




o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934**




For
      the
      transition period from __________ to __________




**Commission
      file number: 01-31937**





**SHENGDATECH,
      INC.**


(Exact
      name of registrant as specified in its charter)




**Nevada**
            
            **N/A**(State
                or other jurisdiction
              of
                incorporation or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)





**Youth
      Pioneer Park**


**Taian
      Economic and Technological Development Zone**


**Tai’an
      City, Shandong Province 271000**


**People’s
      Republic of China**


(Address
      of Principal Executive Offices)




**(86-538) 856-0668**


(Registrant’s
      Telephone Number, Including Area Code)




**Not
      Applicable**


(Former
      Name, Former Address and Former Fiscal Year, If Changed Since Last
      Report)





**Securities
      registered pursuant to Section 12(b) of the Act:** None




**Securities
      registered pursuant to Section 12(g) of the Act:**





**Title
                of Each Class:**
            
            **Name
                of Each Exchange on Which Registered**Common
                Stock, par value $.00001
            
            The
                NASDAQ Stock Market LLC





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes o No þ









Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes o No þ




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days. Yes þ No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not 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-K or any
      amendment to this Form 10-K.




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filed. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filero
            Accelerated
                filerþ
            Non-accelerated
                filero




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act):


Yes o No þ





The
      aggregate market value of the 30,139,540 shares of voting and non-voting
      common equity stock held by non-affiliates of the registrant was $160,342,353
      as
      of June 30, 2007, the last business day of the registrant’s most recently
      completed second fiscal quarter, based on the last sale price of the
      registrant’s common stock on such date of $5.32 per share, as reported by The
      NASDAQ Stock Market, Inc.





As
      of March 14, 2008, there were 54,202,036 shares of common stock of
      ShengdaTech, Inc. outstanding.




**Explanatory
      Note**





This
      Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended
      December 31, 2007 initially filed with the Securities and Exchanged Commission
      on March 17, 2008 is being filed to correct some financial data and explanations
      including Management’s Discussion and Analysis of Financial Condition and
      Results of Operations and to restate the Consolidated Financial Statements.









**SHENGDATECH,
      INC.**


**(A
      Nevada Corporation)**





**TABLE
      OF CONTENTS**




**Page****PART
                I**Item
                1
            Business
            
            3Item
                1A
            Risk
                Factors
            
            13Item
                1B
            Unresolved
                Staff Comments
            
            24Item
                2
            Properties
            
            24Item
                3
            Legal
                Proceedings
            
            24Item
                4
            Submission
                of Matters to a Vote of Security Holders
            
            24**PART
                II**Item
                5
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            25Item
                6
            Selected
                Financial Data
            
            26Item
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operation
            
            27Item
                7A
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            42Item
                8
            Financial
                Statements and Supplementary Data
            
            42Item
                9
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            
            43Item
                9A
            Controls
                and Procedures
            
            43Item
                9B
            Other
                Information
            
            43**PART
                III**Item
                10
            Directors,
                Executive Officers and Corporate Governance
            
            44Item
                11
            Executive
                Compensation
            
            46Item
                12
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            48Item
                13
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            48Item
                14
            Principal
                Accounting Fees and Services
            
            48**PART
                IV**Item
                15
            Exhibits
                and Financial Statement Schedules




-2-




**PART I**





**Item 1.
      Business**





**Our
      Industry**





**Overview**





We
      are
      engaged in developing, manufacturing and marketing nano precipitated calcium
      carbonate (“NPCC”), as well as manufacturing and marketing coal-based chemicals,
      including ammonium bicarbonate, liquid ammonia, methanol and melamine. The
      two
      operating businesses possess their own unique strategic direction and tactical
      plans respectively, as well as separate manufacturing operations, sales and
      distribution capabilities. We sell our chemical products to plants and farmers
      mainly through a direct sales force. Our NPCC products are sold through our
      sales and marketing staff. Geographic markets cover several provinces in North
      China, among which Shandong Province accounts for a large share of sales.





*Nano
      Precipitated Calcium Carbonate*





NPCC
      refers to ultra fine precipitated calcium carbonate with an average particle
      diameter of under 100 nano-meters for application as an additive in various
      products. Due to its special physical and chemical properties, NPCC has been
      widely applied in paper, paints, rubber and plastic industries. We currently
      supply NPCC products primarily to the tire and polyvinyl chloride (“PVC”)
      building materials industries while attempting to penetrate the paper and paint
      industries with several newly developed NPCC products.





*Coal
      Based Chemicals*





We
      manufacture coal based chemicals including ammonium bicarbonate, liquid ammonia,
      methanol and melamine. Ammonium bicarbonate is mainly used for nitrogenous
      fertilizers and methanol is used as raw materials of chemical products. Methanol
      is a chemical material and a clean alternative to fossil fuel. It is used in
      the
      chemical industry, pharmaceutical industry, light industry and textile industry.
      Melamine is the intermediate product of environment friendly resin.





**Our
      Reorganization and Corporation Structure**





In
      March
      of 2006, our company completed a reverse acquisition of Faith Bloom Limited,
      a
      British Virgin Islands company, as a result of which Faith Bloom became our
      wholly-owned subsidiary and is deemed to be the accounting acquiror of our
      company. In December of 2005, Faith Bloom completed a reorganization in which
      it
      acquired Shandong Haize Nano Co. Ltd. and Shandong Bangsheng Chemical Co. Ltd.
      as Faith Bloom’s wholly-owned subsidiaries. Except as expressly stated
      otherwise, all financial information contained in this Annual
      Report has been restated on a retroactive basis to present the
      reorganizations as though they had been in place for all periods presented.
      The
      functional currency of our operating subsidiaries in the PRC is the Chinese
      Yuan
      Renminbi (“CNY”); however, our consolidated financial statements have been
      expressed in United States Dollars (“USD”). The consolidated balance sheets have
      been translated into USD at the exchange rates prevailing at each balance sheet
      date. The consolidated statements of operations have been translated using
      the
      weighted average exchange rates prevailing during the operating periods of
      each
      statement. In addition, all share information contained in this prospectus
      gives
      effect to a one-for- two reverse split of our common stock effected in February
      2006. Please see “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations - Reorganization” and Note 1 to our consolidated
      financial statements contained elsewhere in this prospectus for a more detailed
      description of these reorganizations.





On
      April
      4, 2006, we formed Shanxxi Haize Nano-Material Co., Ltd., a wholly-owned
      subsidiary in Shanxxi, China to run the new NPCC facility in
      Shanxxi.




-3-





On
      January 3, 2007, we amended our articles of incorporation to change the name
      of
      our company from Zeolite Exploration Company to ShengdaTech, Inc.




**Market
      Opportunity**




*The
      Markets for NPCC*





China
      began to research and manufacture NPCC products in the early 1980’s. The total
      output has increased due to an increase in demand. With continued research
      and
      development in the application of NPCC, we believe demand for NPCC will
      increase.





We
      believe the fastest growing area for NPCC will be in the tire and PVC building
      material market. We believe that our NPCC products provide highly effective
      fillers and additives for tires and PVC building materials. NPCC products are
      ultra fine and pure, and its particle size and crystal shape can be controlled
      effectively in the production process. NPCC is highly compatible with rubber
      if
      modified by a surface coating agent. It fills the spatial structure in rubber
      and enhances the property of rubber products. It can be used solely as a filler
      which has a reinforcing effect, and it also can be applied with other fillers
      such as precipitated calcium carbonate, argil and titanium oxide for
      reinforcement, filling, and improving the process and property of products,
      and
      reducing rubber content. NPCC can partially substitute some expensive materials
      such as titanium oxide and silicon dioxide.





When
      modified with a surface coating agent, NPCC becomes oleophilic and hydrophobic.
      The surface coating agents for plastics include fatty acid and a coupling agent,
      and they are compatible with organic substances. As a result, the modified
      NPCC
      can be used to fill in plastics such as PVC to increase their glossiness.
      Applying modified NPCC to plastics has many positive effects such as increased
      strength, heat resistance and dimension stabilization. More importantly, such
      application reduces cost substantially. In addition, the oleophilic and
      hydrophobic traits of modified NPCC can improve the property of tires,
      increasing wear resistance. Modified NPCC can be used as a substitute for more
      expensive additives such as titanium oxide and silicon dioxide.





China
      has
      become a large tire producing country due to the rapid and tremendous growth
      in
      its domestic automobile industry and its status as an international
      manufacturing center. According to a report by China Economic Daily dated
      October 10, 2005, China’s total tire output was 239,000,000 units in 2004 which
      represents a 18.7% increase from 2003. From 1999 to 2004 the average annual
      growth in tire output was 15%. Currently, we are the only Chinese manufacturer
      of NPCC that is able to supply the tire market. Consequently, we believe that
      the tire market will continue to be one of the growing markets for our NPCC
      products.





China’s
      PVC building materials market is also growing substantially as a result of
      China’s continuing urbanization drive and growing real estate market. We
      anticipate the demand for PVC building materials will continue to grow. We
      expect that the PVC building materials market will continue to be one of the
      growing markets for our NPCC products.





With
      China’s continuing urbanization and its growing investment in the auto industry,
      the demand for oil based paints has increased. NPCC products are also used
      in
      water based paints, paper and ink. With the application of NPCC products
      expanding as result of China’s economic growth, we believe our NPCC products
      will find increased use in these markets.





*The
      Markets for our Coal Based Chemicals*





According
      to a report in China Petro-Chemical Journal, dated February 15, 2006, the
      agricultural sector in China makes extensive use of chemical fertilizers,
      consisting of approximately 1/3 of the world’s total consumption. Of this
      amount, about 70% is nitrogenous fertilizers. According to China Statistics
      Almanac dated December 31, 2004, in 2004, the national total output of synthetic
      ammonia fertilizers was 42,222,000 metric tons, a 14.6% increase over the total
      output in 2003.




-4-





Methanol
      is a major raw material chemical next to ethylene, propylene and benzene. Since
      2002, the price of methanol has risen due to the large demand. However, the
      price began to fluctuate as much as 30% in 2005 due to competition and cost
      of
      raw materials. The price of methanol dropped sharply in 2005 due to a supply
      surge and experienced an increase of 10% in 2006 because of the large domestic
      demand using methanol as a gasoline additive as well as the demand from its
      downstream products. China’s melamine market has grown but China’s melamine
      production capacity has grown even faster. Consequently, its supply exceeds
      demand at the present time.





*New
      Market Segments We Are Targeting*





While
      maintaining our lead and expanding our market share in the tire and PVC building
      materials markets, we plan to enter into more new industries in 2008, including
      polypropylene/polyethylene, silicon adhesive, water paint, paper, etc. and
      generating sales in the oil based paints market, we are targeting the paper
      industry and the oil based paints industry.





The
      first
      new market segment we are targeting is the paper making market. The papermaking
      industry will be one of the developing markets for NPCC. China’s paper making
      industry has entered into a stage of growth. NPCC products are particularly
      suitable for making newsprint and coated paper. The estimated total output
      of
      newsprint in 2005 was around 3.9 million metric tons, a 20% increase over 2004.
      We successfully developed a NPCC product for paper and received trial orders
      in
      Q4, 2007.




The
      second new market we are targeting is the paints and ink market. NPCC products
      are widely used in the paints industry. We have succeeded in introducing our
      NPCC to the water based paints market and received a small amount of orders,
      averaging 200 tons per month, China’s consumption of oil based paints has grown
      due to the growing auto industry. We are conducting research in this
      area.




The
      third
      new market is the polypropylene and polyethylene market. Plastic building
      materials are generally adopted in the construction and building industry and
      chemical pipelines industry. Our NPCC products are not only widely used in
      PVC
      industries, we also aims at the high standards plastic building materials,
      which
      have a similar market price to or 10% higher than that of PVC. We have recently
      finished the polypropylene and polyethylene sample testing.





**Our
      Business**





**Overview**





We
      are
      engaged in the business of manufacturing, marketing and selling of a variety
      of
      NPCC products and coal based chemicals for use in various applications. We
      convert limestone into NPCC by a proprietary method. The unique chemical and
      physical attributes make NPCC a valuable ingredient in tire, paints, PVC
      building materials and other industries. We are also engaged in the manufacture
      and sale of coal based chemical products, namely, ammonium bicarbonate, liquid
      ammonia, melamine and methanol. We market and sell the coal based products
      mainly as chemical fertilizers and raw materials for the production of organic
      and inorganic chemical products, including formaldehyde and
      pesticides.




Our
      company owns the only exclusive NPCC development and research lab in China.
      It
      is located in Pudong, Shanghai and its excellent working environment has
      attracted intelligent and excellent NPCC researchers and scholars. Currently
      there are thirteen staff working in this lab, including one professor, one
      senior engineer, six doctorates, and five masters. They engaged primarily in
      furthering NPCC related technologies. We believe that our development and
      research team will enable us to obtain more technological improvements, which
      will allow us to offer cost-effective and high-quality NPCC products. We
      recently developed new NPCC products for paper , paints, coatings, polypropylene
      and polyethylene industries. We began to receive orders from the paper and
      paints manufacturers in 2007. We expect to ship our NPCC products to the
      polypropylene and polyethylene market gradually in the first half of
      2007.




-5-





We
      deliver our chemical products directly to our customers, including manufacturers
      and distributors of agrochemicals. We operate sales liaison offices in three
      major cities in China mainly for the sale and marketing of our NPCC products.
      The majority of our income is generated from the sale of our NPCC products
      for
      the tire and PVC building materials industries and coal-based chemicals for
      the
      use of agriculture and other chemical manufacturers. Our current growth strategy
      includes expanding our production capacity to meet demand, increasing our
      product line, intensifying our research and development efforts to gain
      advantages in cost and quality and increasing our marketing effort both
      domestically and abroad.





We
      believe we are one of the leading Chinese manufacturers of NPCC products. In
      fiscal year 2004, we estimate that we manufacture 10% of the total NPCC products
      in China. Our products have been sold primarily in Shandong and other parts
      of northern China. We believe we are the only Chinese NPCC manufacturer that
      has
      successfully marketed our products to the tire industry, which gives us the
      ability to maintain high-margins. Due to its special physical and chemical
      properties that are compatible with a variety of products, we are also marketing
      NPCC products to the paper, paints, rubber, and plastics industries.





**Our
      Competitive Strengths**





We
      believe we have the following competitive strengths:





·
            *Cutting-edge
                technology*.
                We adopted the high gravity precipitation technology in our current
                manufacturing process in our facilities in Tai’an. Although there are five
                licensees of the technology developed by Beijing University of Chemical
                Technology, we are the only licensee that has been successful in
                commercializing this technology, which enables us to produce
                higher-quality NPCC products and yield a higher percentage of nano
                particles. In our new facilities recently completed in Shaanxi, we
                employ
                the membrane-dispersion technology co-developed with Qinghua University
                and exclusively owned by us. This advanced technology enables us
                to
                manufacture NPCC products of even higher quality and at lower cost.
                We
                believe we are one of the few companies that utilize this advanced
                technology worldwide.





·
            *Proprietary
                modification formulas.*In
                cooperation with Qingdao University of Science and Technology, we
                developed our proprietary formulas for modifying NPCC products to
                suit a
                particular end product. With our formulas, we have developed NPCC
                products
                for tires, PVC plastics, papers, etc. We believe we are the only
                NPCC
                manufacturer that has successfully penetrated the tire industry.
                We also
                have successfully tested our NPCC products with some customers in
                the
                paint and paper industries.





·
            *Strategic
                alliances with universities*.
                We have had partnerships with various universities in China to develop
                new
                NPCC technologies and new NPCC products since the start of our NPCC
                business. We are working to renew our relationship with Qinghua University
                to conduct research in the application of NPCC .





·
            *Greater
                capacity to meet the demand.*We
                currently have a capacity of 130,000 metric tons per year. That makes
                us
                the one of the largest suppliers of NPCC in China. Most of our NPCC
                costumers engage in manufacturing tires, PVC plastic building materials
                and require a large amount of NPCC supply as much as 4000 metric
                tons per
                year. They need a supplier which can steadily supply NPCC in large
                quantities. Due to our capacity, we are in a better position to attract
                such customers.





·
            *Stable,
                low-cost supply of limestone*.
                The major raw material for our NPCC products is limestone. To insure
                a
                stable, low-cost, and high quality supply of limestone, we have built
                our
                new NPCC facility in Xianyang, Shaanxi, a location close to a mine
                which
                produces the highest quality limestone in the country. The close
                vicinity
                of the mine reduces our shipping cost for limestone. These advantages
                will
                enable us to manufacture high-quality NPCC products at a lower cost.




-6-




·
            *Superior
                Research and Development Capability*.
                Our company owns the only exclusive NPCC development and research
                lab in
                China. It is located in Pudong, Shanghai and its excellent working
                environment has attracted intelligent and excellent NPCC researchers
                and
                scholars. Now there are thirteen*Research
                and Development*staff working in this lab with one professor, one senior engineer,
                five
                masters and six doctorates. They engaged primarily in furthering
                NPCC
                related technologies. We believe that our development and research
                team
                will enable us to obtain more technological improvements, which will
                allow
                us to offer cost-effective and high-quality NPCC products.





**Our
      Strategy**





Our
      primary business strategy is to capitalize on the rising demand of NPCC products
      and to concentrate on the development, manufacture and marketing of NPCC
      products. We strive to become the market leader of NPCC products in the world.
      At the same time, we will be opportunistic in expanding our coal-based chemical
      business by acquiring existing facilities or undertaking new coal-based chemical
      projects.





*Expanding
      Our Capacity to Meet Demand*





Our
      current NPCC production capacity is130,000 metric tons per year. To meet the
      expected rising demand for NPCC products of existing customers and potential
      new
      customers, we will continue to expand the NPCC capacity in our new facility
      in
      Shaanxi. We are adding 60,000 tons of NPCC production capacity which will be
      operational in March, 2008. By then, our total NPCC annual production capacity
      will reach 190,000 tons and we will be the largest NPCC manufacturer in
      China. We are also looking to expand our NPCC capacity further in 2008 and
      beyond and are in the process of selecting sites and procuring land and
      identifying sources of raw material supply.





*Providing
      High Quality Products*





We
      believe our products are of the highest quality. We are one of the five Chinese
      NPCC producing companies that use the ultra gravity manufacturing method
      developed by the Beijing University of Chemical Technology. However, among
      the
      five companies, we are the only one that has successfully integrated the
      ultra-gravity method with a distribution control system, which gives us the
      ability to maintain high quality NPCC products. Our NPCC products were ISO
      9001
      certified in 2003 and won accolades such as “Shandong Top Brand” in Q4, 2006. In
      addition, the membrane-dispersion technology jointly developed by us and
      Tsinghua University deployed for our new NPCC facility in Xianyang, Shanxxi
      provides us with an even more improved control over the quality of our NPCC
      products. This technology also enables a very stable production and high yield
      of nano particles. Our new NPCC products in Xianyang, Shanxxi is in the process
      of beingISO9001 certified. In addition, the lime stone used by our Xianyang
      facility is mined near the facility and is of very high quality.





*Developing
      Cutting Edge Products Through Research and Development*





Our
      research and development efforts are aimed at finding new varieties of products,
      improving existing products, improving existing product quality and reducing
      production costs. We believe we are the only NPCC manufacturer in China that
      supplies the tire industry due to the fact that we have developed our own
      proprietary technology for particle modification. This technology enables us
      to
      modify the property of a particular NPCC product so that it integrates well
      with, and improves the general property of, a particular end product to which
      the NPCC product serves as an additive. We have also jointly developed a new
      proprietary membrane-dispersion based technology for the manufacture of
      high-quality NPCC products with lower costs and have successfully adopted this
      technology in our new factory in Xianyang City, Shaanxi Province. We will
      continue our research and development efforts in these areas. We have
      already strengthened our research and development capability by
      establishing a research and development center in Shanghai. We intend to focus
      significant efforts on opening new markets for our new products. New products
      being developed and marketed include NPCC products for the paper, paints,
      coatings, polypropylene and polyethylene industries. We believe these new
      products will contribute to our growth.




-7-




**Our
      Products**





We
      are
      now focusing on the production of NPCC products and coal based chemicals, which
      can be divided into the following two categories by function:





**NPCC
                Products**
            
            **Primary
                Use**601
            
            Additive
                for PVC building materials602
            
            Additive
                for rubber tire102
            
            Additive
                for inks201
            
            Additive
                for adhesives and rubber sealsSlurry
            
            Additive
                for coatingsNPCC-100
            
            Additive
                for paper**Coal
                Based Chemicals**
            
            **Primary
                Use**Ammonium-Bicarbonate
            
            FertilizerLiquid
                ammonia
            
            Raw
                material for pesticides, compound fertilizers, refrigerantMethanol
            
            Raw
                material in the manufacture of organic chemicalsMelamine
            
            Raw
                material in the manufacture of melamine xylenol- formaldehyde
                resin





We
      continuously focus on the production of high-quality and low-cost products,
      and
      on increasing our sales volume of our NPCC products. We may also acquire
      existing coal-based chemical businesses that will provide us with a strong
      cash
      flow or enter into new coal-based chemical projects that will provide strategic
      advantages





Our
      efforts to participate in the tire market and the market for PVC building
      material products have been relatively successful so far. We have launched
      new
      products for water-based paints and generated sales. In the future, we plan
      to
      launch new NPCC products for water based paints and enter into new markets,
      such
      as polypropylene, polyethylene and silicon adhesive. We have received positive
      results in the paper industry. We expect growth in high-end NPCC products for
      such markets will increase our profitability with a corresponding increase
      in
      enterprise value.





We
      take
      pride in our quality control. We have established quality assurance systems
      for
      our NPCC products from purchases to sales. Our NPCC products passed ISO 9001
      in
      2003 and won accolades such as “Shandong Top Brand” in the fourth quarter of
      2006. Our new products are in the ISO 9001 certification process. We are seeking
      to continuously improve our production systems and processes and to meet the
      latest requirements of ISO 9001 (Version 2000).





**Our
      Intellectual Property**





We
      have a
      nonexclusive license from Nano Material Technology Pte. Ltd. and its rights
      under several patents and related technology for ultra-gravity
      manufacturing method, developed by Beijing University of Chemical
      Technology, for twenty years. In addition, we jointly own a patent developed
      by
      Tsinghua University on next generation NPCC particle producing technology based
      on membrane-dispersion techniques. The patent was officially issued in December,
      2007.





We
      also
      own a proprietary technique for NPCC chemical modification that is applicable
      to
      different types of end products critical to adding value to downstream industry
      plants.




-8-




We
      have
      obtained from our affiliate and our predecessor two registered trademarks with
      the Trademark office of the State Administration for Industry and Commerce
      of
      China relating to the Chinese words “Shengke” and “Taifeng”, the former for our
      NPCC products and the latter for our coal based chemical.





**Our
      Research and Development Efforts**





We
      currently have 13 staff members on our research and development team. Among
      them, six hold a PhD degree, five hold a masters degree. Most of our research
      and development staff have been working in this field for more than four years.
      Mr. Zhude Xu, our Director of research and development, graduated from
      University of Southern California with a Ph.D. in Chemistry and now serves
      as a
      professor at Zhejiang University - ranked as No. 3 among universities in China.
      He is leading the effort to develop and improve proprietary technology for
      chemical modification in NPCC products. This new technology can be used to
      modify the property of a specific NPCC product to fit a particular end product
      and in addition, improve the property of such end product, and much progress
      has
      been made in the applications in paper, PE and asphalt. With this new
      technology, tires, PVC building materials, paints, adhesives and paper of equal
      or better quality can be made at a lower cost.





Our
      research and development activities can be described as a three-stage process.
      During the first stage, we apply surface coating agents to NPCC according to
      different pre-designed formulas for comparative studies. The modified NPCC
      is
      tested for mass, size, oil absorbance and other traits to determine if it
      displays the appropriate features. During the second stage, about two kilograms
      of NPCC product is produced with lab equipment using a formula selected at
      the
      first stage. The NPCC product produced is applied to an end product such as
      tire, paint or ink. The end product is then tested for a set of properties
      and
      other parameters to see if they meet expectations. If the formula is successful
      at the second stage, it will be further tested. During the third stage, several
      tons of the NPCC product is manufactured at the NPCC facility using the formula
      that passed the second test and is sent to potential customers for an industrial
      scale test. Our research and development staff is dispatched to such customers’
sites to assist with the test.




We
      are
      focused on further developing and improving our core manufacturing technologies
      so that we can expand our product lines and reduce overall costs. In 2007,
      we
      completed samples testing of our NPCC products with approximately 36 companies
      in various industries, such as PVC, rubber, adhesive, latex and coating. We
      have
      received positive results from about 60% of these companies after testing our
      products and we consider most of them to be potential new
      customers.





We
      had
      entered into joint development agreements with Tsinghua University and Tsingdao
      University of Science and Technology to develop new NPCC technologies. Under
      the
      agreement with Tsingdao University of Science and Technology, we have exclusive
      ownership to any technology developed. Under the agreement with Tsinghua
      University, we jointly own any technology developed but with an exclusive right
      to use such technology. Our joint program with Tsinghua University has produced
      one patent application filed with the Patent Office of the State
      Intellectual Property Office of China in May, 2006 with approval pending. These
      agreements have recently expired and we are seeking to renew our agreement
      with
      Tsinghua University.





In
      addition, we have adopted advanced new technology used exclusively for our
      processing system in our new Xianyang, Shanxxi facility, including micro-mix
      reactors. These improvements not only reduce production costs, but also enable
      us to further diversify our product lines. We haven’t fully expensed our budget
      of $9 million for establishing research and development centers in Beijing,
      Shanghai and Tsingdao, mainly because we purchased a *Research
      and Development* building
      with a total investment of $2.5 million. This center is able to meet our
      current *Research
      and Development* demand;
      therefore, we terminated our research and development cooperation with Tsinghua
      University and Qingdao University of Technology. We believe we can better
      attract senior research personnel at a reasonable cost. At present, the13 *Research
      and Development* staff in
      the center are devoted to our research and development efforts. The center
      will
      be a base for training research and technical personnel and developing
      proprietary technologies.





**Our
      Marketing Efforts**





We
      have
      established our position as the only Chinese supplier of NPCC products for
      the
      tire industry. Our NPCC products have successfully entered the PVC building
      material industry and we are a leading supplier. We have also succeeded in
      marketing our NPCC products to the paints and paper industries and generated
      a
      small amount of sales. We are actively marketing our NPCC products to the PP,
      PE
      and asphalt industries. We have successfully completed sampling and testing
      of
      our products with a number of companies in these industries and we have already
      got small orders from PE customers. We expect to start supplying our products
      to
      PP and asphalt manufacturers in the near future.




-9-





Our
      marketing efforts have made us one of the leading suppliers of NPCC products
      in
      China. We are also a major supplier of coal based chemicals in Tai’an City. All
      of our products are sold in local and regional markets including Shandong
      province and several provinces in northern China. Presently, our main method
      of
      selling our coal-based chemical products is direct marketing supplemented with
      indirect marketing. Our coal-based chemical products are sold directly to
      manufacturers and farmers. Our NPCC products are sold and marketed by our sales
      and marketing staff. We are actively expanding our NPCC marketing network into
      other parts of China. We have established sales offices in multiple locations
      in
      China including Shanghai, Xian, and Dongying. We also intend to expand into
      the
      international market for NPCC products. We have sold a small amount of our
      products for latex and PE to NPCC customers in Singapore, Thailand, Korea,
      Malaysia and India. Additionally, our products are being tested by customers
      in
      North America.





Our
      sales
      team has approximately 42 members with six in coal-based chemical division,
      15
      in Shandong Haize Nanomaterials Co., Ltd. and 21 in Shaanxi Haize Nano-materials
      Co., Ltd. Six of our sales and marketing staff are devoted to international
      sales and have begun to generate sales in several countries in Asia. To expand
      distribution channels and increase our market share, we regularly attend
      industry fairs and exhibitions, and we have become a member of www.alibaba.com.cn ,
      the
      largest business-to-business internet website in China.




**Raw
      Materials**





Given
      the
      importance to our business of key raw materials such as coal and limestone,
      materials purchasing and materials management are important activities for
      us.
      We carefully manage our purchasing efforts and have established company policies
      involving raw materials procurement. The cost of raw materials amounts to almost
      60% of our total production cost.





*Supplier
      Management System*





Over
      the
      last two years, the price for raw materials such as coal has undergone a great
      deal of fluctuation in China, which has affected our profit margin. We have
      adopted measures to reduce risks in raw material supply, including establishing
      long term relationships with suppliers, diversifying suppliers and supply
      sources, and seeking long-term contracts with suppliers.





*Purchasing
      Procedures Bidding with View to Quality and Stability of Supplier*





Purchasing
      transactions are conducted in accordance with an invitation for bidding
      procedure. Potential suppliers are provided the quality standard for the raw
      material and are invited to make initial offers, which are compared objectively
      according to relevant quality guidelines. After validating the various
      suppliers’ service and capabilities for stable supply, we acquire the needed
      materials from the supplier offering at the lowest cost. Our financial
      department establishes an oversight process by appointing individuals to conduct
      independent market research of key price points periodically. There is a
      standard procedure for conducting such bidding processes and accepting the
      bids
      to insure that the all purchasing procedures are being strictly adhered to.





*Major
      Suppliers*





The
      table
      below lists our major suppliers (5%) as of December 31, 2007.





**Major
      Suppliers for NPCC Business**





**Suppliers**
            
            **Amount**
              **Purchased
                in**
              **2007**
              **(RMB**
              **1,000,000)**
            
            **%
                of Total**
              **Purchases
                in**
              **2007**Soft
                Coal
            
            
            Shandong
                Taifeng Minerals Co.
            
            
            10.04
            
            
            8.47
            %Soft
                Coal
            
            
            Xianyang
                Chuangfa Trading Co., Ltd.
            
            
            37.24
            
            
            31.42
            %Modification
                agent
            
            
            Qingdao
                Siwei Chemical Co. Ltd.
            
            
            42.95
            
            
            36.24
            %Anthracite
            
            
            Feicheng
                Longxin Supply Storage & Transport Co.
            
            
            8.60
            
            
            7.26
            %**Total**
            
            
            
            
            
            
            
            
            **83.39**
            **%**




-10-




**Major
      Suppliers for Coal Based Chemical Business**





**Suppliers**
            
            **Amount**
              **Purchased
                in**
              **2007**
              **(RMB**
              **1,000,000)**
            
            **%
                of Total**
              **Purchases
                in**
              **2007**Anthracite
            
            
            Gaoping
                Xingjie Trading Co., Ltd.
            
            
            22.33
            
            
            12.46
            %Anthracite
            
            
            Jincheng
                Qinshui Road Coal Sales Co.
            
            
            21.87
            
            
            12.21
            %Anthracite
            
            
            Jincheng
                Riyuejiu Trading Co., Ltd.
            
            
            21.81
            
            
            12.17
            %Anthracite
            
            
            Feicheng
                Tongyun Coal Co.
            
            
            20.39
            
            
            11.38
            %Anthracite
            
            
            Feicheng
                Longxin Supply Storage & Transport Co.
            
            
            20.29
            
            
            11.33
            %Urea
            
            
            Shandong
                Feicheng City Fertilizer Factory
            
            
            23.06
            
            
            12.87
            %Urea
            
            
            Shandong
                Feida Chemical Technology Co.
            
            
            21.16
            
            
            11.81
            %**Total**
            
            
            
            
            
            
            
            
            **84.23**
            **%**





**Our
      Major Customers**





We
      have
      customers in the Shandong province and other parts of northern China. Some
      of
      our NPCC customers are large-scale manufacturers of tires or PVC building
      materials. Our coal based chemical customers are mainly located in Shandong.
      We
      have long-term relationships with most of our customers. Our major customers,
      based on sales revenue over (5%) as of December 31, 2007, were as follows:




***Major
      Customers of our NPCC Products***




**Name**
            
            **Industry**
            
            **Amount
                of**
              **Sale
                in 2007**
              **(RMB**
              **1,000,000)**
            
            **Percentage
                of**
              **Total
                Sales**Triangle
                Tire
            
            
            Tire
            
            
            18.44
            
            
            11.00
            %Zhaoyuan
                Liao
            
            
            Tire
            
            
            16.96
            
            
            10.12
            %Double
                Star Tire
            
            
            Tire
            
            
            16.10
            
            
            9.60
            %Zhengjiang
                Suhui
            
            
            Tire
            
            
            11.32
            
            
            6.75
            %**Total**
            
            
            
            
            
            
            
            
            **37.47**
            **%**Dalian
                Jinyuan
            
            
            PVC
            
            
            17.09
            
            
            12.58
            %Yiyuan
                Ruifeng
            
            
            PVC
            
            
            12.82
            
            
            9.43
            %Quanzhou
                Lida
            
            
            PVC
            
            
            7.78
            
            
            5.73
            %**Total**
            
            
            
            
            
            
            
            
            **27.74**
            **%**




-11-





***Major
      Customers of Our Coal Based Chemicals***





**Name**
            
            **Product**
            
            **Amount
                of**
              **Sale
                in 2007**
              **(RMB**
              **1,000,000)**
            
            **Percentage
                of**
              **Total
                Sales**Jiulong
                Experiment Chemical
            
            
            Liquid
                Ammonia
            
            
            7.43
            
            
            4.94
            %Taixin
                Chemical
            
            
            Liquid
                Ammonia
            
            
            7.23
            
            
            4.80
            %Huayangdier
                Chemical
            
            
            Liquid
                Ammonia
            
            
            7.50
            
            
            4.98
            %Linyi
                Zhengfa Chemical
            
            
            Liquid
                Ammonia
            
            
            7.36
            
            
            4.89
            %Laiwu
                Jinjian Chemical
            
            
            Liquid
                Ammonia
            
            
            7.14
            
            
            4.74
            %**Total**
            
            
            
            
            
            
            
            
            **24.35**
            **%**Tongfa
                Formaldehyde Factory
            
            
            Methanol
            
            
            4.99
            
            
            6.20
            %Jinan
                Fushihongxin
            
            
            Methanol
            
            
            5.41
            
            
            6.71
            %Linyi
                Yongda Formaldehyde Factory
            
            
            Methanol
            
            
            4.86
            
            
            6.03
            %Xinhua
                Construction Materials
            
            
            Methanol
            
            
            4.31
            
            
            5.36
            %**Total**
            
            
            
            
            
            
            
            
            **24.30**
            **%**





**Our
      Competition**





We
      are
      subject to intense competition. Some of our competitors have greater financial
      resources, larger staff, and more established market recognition in both
      domestic Chinese and international markets than we have.




In
      our
      industry, we compete based upon proprietary technologies, manufacturing
      capacity, product quality, product cost, and ability to produce a diverse range
      of products.




Our
      competitors include NPCC product manufacturers around the world and coal based
      chemical manufacturers in Shandong. Below is a list of the companies we view
      as
      our competitors based on the markets in which we sell our products.





***NPCC
      Products Competitors***





**Name**
            
            **Production
                Capacity**
            
            **Price
                ($)**Guangdong
                Enping Jiawei Chemical Co, Ltd.
            
            PCC:
                90,000 mt/year
              NPCC:
                10,000 mt/year
            
            161-198
                /metric tonShanghai
                Perfection Co. Ltd.
            
            N/A
            
            223-297
                /metric tonShanghai
                Xuemei Refined Chemical Factory
            
            
            
            371
                /metric tonShiraishi
                Calcium Kaisha, Ltd.
            
            N/A
            
            496-620
                /metric ton





Our
      competitors in the paper and ink industries mainly come from Japan such as
      Shiraishi Calcium Kaisha which sells to Chinese auto paints makers and Japanese
      ink makers in China.





***Competitors
      in Coal Based Chemicals***





**Name**
            
            **Production
                capacity**Hongda
                Chemical
            
            30,000
                metric tons synthetic ammoniaLuye
                Chemical
            
            50,000
                metric tons synthetic ammoniaShuangfeng
                Chemical
            
            5,000
                metric tons methanolFeida
                Chemical
            
            10,000
                metric tons methanol




-12-




**Regulation**





In
      China,
      waste gas and water discharges in our chemical manufacturing process are
      regulated and must meet certain standards under China’s environmental laws and
      regulations. The local branch of China’s Administration of Environmental
      Protection samples and tests our gas and water discharge regularly. The
      specifications of these discharges must be consistent with the regulations
      for
      industrial waste water and gas and relevant laws and standards, including the
      Water Pollution Discharge Standard for the Synthetic Ammonia Industry issued
      by
      the China Administration of Environmental Protection. Our waste water and gas
      discharge in the NPCC manufacturing process is not regulated at the present
      time.





Our
      business is also regulated by a number of provincial authorities which license
      the production of chemical products such as those we manufacture. Our coal
      based
      chemical facility has been granted a Production Safety License from Shandong
      Bureau of Safe Production Supervision. Our other NPCC facilities are not
      required to obtain a Production Safety License.





The
      Chinese government often adopts temporary measures to achieve its short term
      economic goals. For example, it issued policies that encourage farmers in China
      to increase their production of grains in order to boost the income of
      millions of Chinese farmers and enhance China’s national security. To achieve
      that goal, it limited the price of ammonium fertilizers while at the same time
      provided the fertilizer industry some relief, including capping the price
      of raw materials, allowing preferential price for electricity, and exempting
      value added tax. Such policies have enabled our chemical business to enjoy
      a
      healthy margin.





**Our
      Employees**





As
      of
      December 31, 2007, we employed 1,276full-time employees with 440 in Shandong
      Haize Nano-materials Co., Ltd., 315 in Shaanxi Haize Nano-materials Co., Ltd.
      and 521 in the chemical division. Of our total employees, 9% are management
      personnel and 3% are sales staff members.   We believe that we maintain
      a satisfactory working relationship with our employees and we have not
      experienced any significant labor disputes or any difficulty in recruiting
      staff
      for our operations.





As
      required by applicable Chinese law, we have entered into employment
      contracts with all the employees. Key employees in our NPCC division are also
      required to sign a confidentiality and non-compete agreement prohibiting them
      from disclosing our trade secrets or using them for purposes other than
      benefiting the company. They are also prohibited from competing with the company
      for five years after termination of employment with the company.





Our
      employees in China participate in a state pension program organized by
      Chinese municipal and provincial governments.  We are required to
      contribute to the program at the rates ranging from 4% to 15% of the
      average monthly salary.  In addition, **** we
      are
      required by Chinese law to cover employees in China with other types of social
      insurance. Our total contribution may amount to as much as 30% or more of the
      average employees’ monthly salary. We have purchased social insurance for all of
      our employees. Social insurance expenses were approximately $302,864 and
      $393,520 for fiscal year 2006 and 2007, respectively.





**Item
      1A. Risk Factors**





**Cautionary
      Statement Regarding Future Results, Forward-Looking Information And Certain
      Important Factors**





In
      this
      report we make, and from time to time we otherwise make, written and oral
      statements regarding our business and prospects, such as projections of future
      performance, statements of management’s plans and objectives, forecasts of
      market trends, and other matters that are forward-looking statements within
      the
      meaning of Section 27A of the Securities Act of 1933 and Section 21E
      of the Securities Exchange Act of 1934. Statements containing the words or
      phrases “will likely result,” “are expected to,” “will continue,” “is
      anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,”
“intends,” “target,” “goal,” “plans,” “objective,” “should” or similar
      expressions identify forward-looking statements, which may appear in documents,
      reports, filings with the Securities and Exchange Commission, news releases,
      written or oral presentations made by officers or other representatives made
      by
      us to analysts, stockholders, investors, news organizations and others, and
      discussions with management and other of our representatives. For such
      statements, we claim the protection of the safe harbor for forward-looking
      statements contained in the Private Securities Litigation Reform Act of
      1995.




-13-




Our
      future results, including results related to forward-looking statements, involve
      a number of risks and uncertainties. No assurance can be given that the results
      reflected in any forward-looking statements will be achieved. Any
      forward-looking statement speaks only as of the date on which such statement
      is
      made. Our forward-looking statements are based upon assumptions that are
      sometimes based upon estimates, data, communications and other information
      from
      suppliers, government agencies and other sources that may be subject to
      revision. Except as required by law, we do not undertake any obligation to
      update or keep current either (i) any forward-looking statement to reflect
      events or circumstances arising after the date of such statement, or
      (ii) the important factors that could cause our future results to differ
      materially from historical results or trends, results anticipated or planned
      by
      us, or which are reflected from time to time in any forward-looking
      statement.





In
      addition to other matters identified or described by us from time to time in
      filings with the SEC, there are several important factors that could cause
      our
      future results to differ materially from historical results or trends, results
      anticipated or planned by us, or results that are reflected from time to time
      in
      any forward-looking statement. Some of these important factors, but not
      necessarily all important factors, include the following:





**Risks
      Related To Our NPCC Business**





**We
      may not be able to maintain our lead in NPCC technology.** **** At
      present, we are the only NPCC manufacturer that supplies the tire industry
      in
      China and also the largest NPCC manufacturer in China in terms of manufacturing
      capacity. Our competitive edge depends heavily on the new technology employed
      in
      our NPCC manufacturing process. If a better technology than ours can be
      developed for manufacturing NPCC or a new product can be developed to replace
      NPCC, we may lose our competitive advantage and our results may be adversely
      impacted.





**Our
      NPCC products have limited application** . ** **We
      may not be able to increase the market for our NPCC
      products** . ** Presently,
      our existing NPCC products are used as additives for tires, polyvinyl chloride
      (“PVC”) building materials, paints and inks. Our products, therefore, depend
      heavily on a limited number of industries. Our growth potential may be limited
      if we cannot expand the market for our existing NPCC products or develop new
      products for other industries. Although we have increased our research and
      development to expand the range of application of our NPCC products, there
      is no
      assurance that we will succeed in our effort.





**We
      may not be able to continue to produce high-quality NPCC products, which may
      negatively impact our business.** **** Our
      NPCC
      products are in demand because of their high quality. If we fail to continue
      to
      produce high quality NPCC products, our reputation may be harmed and our
      business may suffer as a result.





**Our
      NPCC business depends significantly on the tire industry. If the composition
      of
      tires changes and we fail to develop formulas that are applicable for the new
      composition, our NPCC business could be harmed.** ** Currently,
      our NPCC business derives a significant amount of revenues from sales to tire
      manufacturers. Due to our modification technology, our modified NPCC products
      can be used in tire production to obtain desired properties since the current
      tire composition allows for calcium carbonate as an additive. If the composition
      of tires changes in the future, our modification technology may not be
      compatible with the change. As a result, our NPCC business could
      suffer.




-14-





**Risks
      Related to Our Coal-Based Chemical Business**





**Our
      revenues from coal-based chemical products depend heavily on government
      policies. If the government changes its policies, our revenues and profit from
      our chemical products could decrease significantly.** ** **** To boost
      the income of millions of Chinese farmers and enhance China’s national security,
      the Chinese government has instituted policies that encourage farmers in China
      to increase their production of grains by limiting the price of ammonium
      fertilizers while at the same time providing the fertilizer industry some
      relief, including capping the price of raw materials, providing for preferential
      pricing for electricity and exempting value added tax. Due to the policies,
      our
      chemical business is able to realize a profitable margin. However, the Chinese
      government changes its policies from time to time. If the Chinese government
      changes the policies currently in place that compensate our loss due to the
      price control, our revenues and profit from our chemical business could
      suffer.





**Our
      coal-based chemical manufacturing business is highly risky and hazardous. We
      may
      face environmental and safety problems.** ** Our
      chemical manufacturing process produces exhaust gas and waste water which may
      pollute the environment. If an accident occurs in our chemical plant, toxic
      gas
      and other pollutants could leak and cause serious pollution problems. Moreover,
      most of our chemical products are flammable, explosive, and dangerous, and
      pose
      a threat to the health and safety of our employees and residents around our
      facility, and if any accident occurs during manufacturing or in transportation,
      there could be dire consequences.





**Some
      of our coal-based chemical products experience a glut of supply. Our chemical
      business may suffer if the oversupply lasts for an extended
      period.** ** ****** Due to
      an overcapacity of production facilities and increase in foreign imports, the
      price for coal based chemicals, especially methanol and melamine, has decreased
      significantly in the last two years. Due to the low cost of our production
      process, this price decrease has not had a significant impact on our results.
      However if the oversupply lasts for an extended period, our chemical business
      may suffer.





**China
      is tightening its environmental law and strengthening its enforcement, which
      could adversely affect our chemical business.** With
      increased environmental awareness among Chinese citizens, the Chinese government
      is beginning to tighten environmental laws and regulations. Recently, the
      Chinese government has stepped up its enforcement efforts due to the occurrence
      of several significant environmental disasters. Our coal-based chemical plant
      is
      located very close to residential and business properties. At present time,
      we
      think it is very likely that the government will decide to relocate our coal
      based chemical business although we have not received any formal instruction.
      If
      the government decides to order us to cease operation or relocate, we could
      be
      asked to move and relocate in six months and our business could be significantly
      harmed. Although we are taking steps to identify alternatives for the
      replacement of volume at risk or to redeploy the business ahead of the
      government's action, there is no assurance that our effort will
      succeed.





**Risks
      Related to Our Operations**




**Our
      business, financial condition and operating results depend on our customers’
future success with their products, which may fail to achieve the results we
      and
      our customers expect.** Currently,
      we supply the tire industry, the PVC building materials industry, and the
      paints/coating/ink industry. The potential for growth and success of our NPCC
      business largely depend on our customers’ future success in their products. If
      our customers are not successful in developing their products, their demand
      for
      our NPCC products may decrease. Our business may be adversely impacted as a
      result.




**We
      and our suppliers and customers are vulnerable to natural disasters which could
      severely disrupt the normal operation of our business and adversely affect
      our
      business, financial condition and operating results** .
      We
      operate multiple facilities and source products from companies who operate
      facilities, which may be damaged or disrupted as a result of natural disasters
      such as earthquakes, floods, and heavy rains, technical disruptions such as
      electricity or infrastructure breakdowns, computer glitches and electronic
      viruses. Such events may lead to the disruption of information systems and
      telecommunication services for sustained periods. They also may make it
      difficult or impossible for employees to reach our business locations. Damage
      or
      destruction that interrupts our provision of products could adversely affect
      our
      reputation, our relationships with clients, or cause us to incur substantial
      additional expenditure to repair or replace damaged equipment or facilities.
      We
      may also be liable to our customers for disruption in service resulting from
      such damage or destruction. Furthermore, the operations of our suppliers could
      be subject to natural disasters and other business disruptions, which could
      cause shortages and price increases in various materials essential for the
      manufacturing of our products or result in shortage of our products. If we
      are
      unable to procure an adequate supply of raw materials that are required for
      us
      to manufacture our products, our revenue and operating results would be
      adversely affected.




-15-




**The
      sales cycle for our products is difficult to predict, which may make it
      difficult to plan our expenses and forecast our operating results and could
      have
      an adverse effect on our financial results and share
      price** .
      If our
      sales cycle lengthens, our quarterly operating results may become less
      predictable and may fluctuate more widely than in the past. Due to the
      relatively large size of some orders, a delayed sale could have a material
      adverse effect on our quarterly revenue and operating results. If our projected
      revenue does not meet our expectations, we are likely to experience a shortfall
      in our operating profit relative to our expectations. As a result, we believe
      that period-to-period comparisons of our historical results of operations are
      not necessarily meaningful and that you should not rely on them as an indication
      for future performance. It is also possible that our quarterly results of
      operations may be below the expectations of public market analysts and
      investors. If this happens, the price of our common stocks will likely
      decrease.





**Risks
      Related to Our Material Supply and Product Distribution**





**The
      cost of our raw materials fluctuates significantly, which may adversely impact
      our profit margin and financial position.** Both our
      NPCC and chemical businesses use coal as raw material. In the last few years,
      coal prices have fluctuated substantially. Although the price for coal dropped
      last year, it may increase in the future due to the rapid development of the
      Chinese economy and the resulting demand for energy. If the price for coal
      increases again, our profit margin could decrease considerably.





**We
      are dependent on our suppliers for key materials such as coal and
      limestone** .
      Coal
      and limestone are the key raw materials for our business. We use a large amount
      of coal and limestone in our manufacturing process. We have to purchase these
      raw materials from suppliers since we do not mine coal or limestone ourselves.
      As a result, any failure to secure and maintain the purchase and management
      of
      such key raw materials could materially and adversely affect our business,
      financial condition and operating results.





**We
      receive a significant portion of our revenues from a small number of customers.
      Our business will be harmed if our customers reduce their orders from
      us.** Our NPCC
      products are sold to only a small number of major customers mainly located
      in
      Shandong Province and northern China with large orders each year. Our major
      chemical product liquid ammonia is sold only to a small number of major
      customers with large orders located within a short distance of our facilities
      due to the fact that shipping any product long-distance will make it
      non-competitive in price. Although no customer individually accounted for more
      than 10% of our total revenues for the fiscal year ended December 31, 2006
      in
      our aggregate business, our four largest customers in the tire and PVC segments
      accounted for 42.5% and 59.48%, respectively, of our revenues from these
      segments in fiscal 2006. Dependence on a few customers could make it difficult
      to negotiate attractive prices for our products and could expose us to ****** the risk
      of substantial losses if a single dominant customer ceases purchasing. If we
      lose any customers and are unable to replace them with other customers that
      would purchase a similar amount of our products, our revenues and net income
      would decline considerably.




**We
      extend relatively long payment terms for accounts
      receivable** . ** **If
      any of our customers fails to pay us, our revenues may be affected as a
      result.** As is
      customary in China, we extend relatively long payment terms to our customers
      ranging from 45 to 90 days. As a result of the size of many of our orders,
      these
      extended terms adversely affect our cash flow and our ability to fund our
      operations from our operating cash flow. The failure of our customers to pay
      us
      timely would negatively affect our working capital, which could in turn
      adversely affect our cash flow.




-16-





Our
      customers often place large orders for products, requiring fast delivery, which
      impacts our working capital. If our customers do not incorporate our products
      into their products and sell them in a timely fashion, for example, due to
      excess inventories, sales slowdowns or other issues, they may not pay us in
      a
      timely fashion, even on our extended terms. This failure to pay timely may
      defer
      or delay further product orders from us, which may adversely affect our cash
      flows, sales or income in subsequent periods.





**Risks
      Related to Our Management and Personnel**





**Expansion
      of our business may put added pressure on our management and operational
      infrastructure impeding our ability to meet any increased demand for our NPCC
      products and possibly hurting our operating results** ***.*** Our
      business plan is to significantly grow our operations to meet anticipated growth
      in demand for existing NPCC products. Growth in our business may place a
      significant strain on our personnel, management, financial systems and other
      resources. The evolution of our business also presents numerous risks and
      challenges, including:




·
            the
                continued acceptance of our NPCC products by the tire
                industry;




·
            our
                ability to successfully and rapidly expand sales to potential customers
                in
                response to potentially increasing
                demand;




·
            the
                costs associated with such growth, which are difficult to quantify,
                but
                could be significant;




·
            rapid
                technological change; and




·
            the
                highly competitive nature of the fine calcium carbonate
                industry.





If
      we are
      successful in obtaining rapid market growth of our NPCC products, we will be
      required to deliver large volumes of quality products to customers on a timely
      basis at a reasonable cost to those customers. Meeting any such increased
      demands will require us to expand our manufacturing facilities, to increase
      our
      ability to purchase raw materials, to increase the size of our work force,
      to
      expand our quality control capabilities and to increase the scale upon which
      we
      produce products. Such demands would require more capital and working capital
      than we currently have available.





**We
      depend on key personnel for our business operations.** Our
      future success depends substantially on the continued services of our executive
      officers, especially Xiangzhi Chen, our chief executive officer and chairman
      of
      our board of directors, Xukui Chen, head of chemical business, and Zhaowei
      Ma,
      head of our NPCC business. If one or more of our executive officers are unable
      or unwilling to continue in their present positions, we may not be able to
      replace them readily, if at all. Therefore, our business may be severely
      disrupted, and we may incur additional expenses to recruit and retain new
      officers.





**We
      have difficulties attracting highly-trained personnel. Our business may be
      harmed as a result.** ** Our
      business is located in a small city where there are few institutions of higher
      learning. Our business, however, requires well-trained technical and engineering
      personnel. Experienced personnel typically tend to be concentrated in major
      metropolitan areas and may be unwilling to relocate to a small city. If we
      are
      not able to recruit the necessary experienced personnel, we could have a
      shortage of skilled workers and may not be able to cope with the rapid expansion
      of our business.





**Risks
      Related to Our Technology**




**Our
      business depends on our ability to protect our intellectual property
      effectively. If any of our patents are not protected or any of our trade
      secrets are divulged, we may lose our competitive
      edge** *.* The
      success of our business depends in substantial measure on the legal protection
      of the patents which we are licensed to use or we may co-own as a result of
      our
      joint development program with Tsinghua University in China and other
      proprietary rights in technology we hold. We hold licensed patents in China
      and
      have a patent application pending in China regarding technologies important
      to
      our business. Monitoring infringement of intellectual property rights is
      difficult, and we cannot be certain that the steps we have taken will prevent
      unauthorized use of our intellectual property in China where it may be difficult
      to enforce the law to protect our proprietary rights as compared to the laws
      of
      the United States. The validity and breadth of claims in patents and trade
      secrets involve complex legal and factual questions and, therefore, the extent
      of their enforceability and protection is highly uncertain. Issued patents
      or
      patents based on pending patent applications or any future patent applications
      or trade secrets may not exclude competitors or may not provide a competitive
      advantage to us. In addition, patents that are licensed to us or that may be
      issued to us may not be held valid if subsequently challenged and others may
      claim rights in or ownership of such patents. Furthermore, we cannot assure
      you
      that our competitors have not developed, or will not develop similar products,
      will not duplicate our products, or will not design around any patents issued
      to
      or licensed by us.




-17-





**We
      claim proprietary rights in various unpatented technologies, know-how, trade
      secrets and trademarks relating to products and manufacturing
      processes.** We
      protect our proprietary rights in our products and operations through
      contractual obligations, including nondisclosure agreements. If these
      contractual measures fail to protect our proprietary rights, any advantage
      those
      proprietary rights provide to us would be negated. Our NPCC products are
      differently formulated for different applications. The formulas are maintained
      as trade secrets and are revealed only to a small number of technical and
      management personnel. The trade secrets provide us a competitive edge in the
      tire industry and no other NPCC manufacturers have successfully entered the
      tire
      industry. If any of the trade secrets are divulged, we could lose our
      competitive edge in the tire industry and others.





**We
      may have difficulties in enforcing our intellectual property rights through
      litigation.** Litigation may be necessary to enforce our intellectual property rights, protect
      our trade secrets or determine the validity and scope of proprietary rights
      of
      others. We cannot assure you that the outcome of such potential litigation
      will
      be in our favor. Such litigation may be costly and may divert management
      attention as well as our other resources away from our business. An adverse
      determination in any such litigation will impair our intellectual property
      rights and may harm our business, prospects and reputation. In addition, we
      have
      no insurance coverage against litigation costs and would have to bear all costs
      arising from such litigation to the extent we are unable to recover them from
      other parties. The occurrence of any of the foregoing could have a material
      adverse effect on our business, results of operations and financial
      considerations.





**We
      may not be able to secure patent for our membrane dispersion technology for
      manufacturing NPCC, which may have an adverse impact on our
      business.** Our new
      NPCC facility in Shaanxi employs the membrane dispersion technology which was
      developed jointly by us and Tsinghua University. The technology enables us
      to
      manufacture NPCC with better quality and lower costs. We have applied to China’s
      State Patent Office for a patent on the technology. Although our application
      was
      published for public comments in May last year, there is no assurance that
      we
      will eventually obtain the patent. If the Chinese state Patent Office denies
      our
      application because our technology is not patentable or someone challenges
      our
      application, our business may be adversely impacted.





**Risks
      Related To Our Industry**




**China’s
      commitments to the World Trade Organization may intensify
      competition.** ** In
      connection with its accession to the World Trade Organization, China made many
      commitments including opening its markets to foreign products, allowing foreign
      companies to conduct distribution business and reducing customs duties. As
      a
      result, foreign manufacturers may ship their NPCC products or establish
      manufacturing facilities in China. Competition from foreign companies may reduce
      profit margins and hence our business results would suffer.





**Our
      failure to comply with ongoing governmental regulations could hurt our
      operations and reduce our market share** ***.*** ** In
      China,
      the chemical industry is undergoing increasing regulations as environmental
      awareness increases in China. The trend is that the Chinese government toughens
      its regulations and penalties for violations of environmental regulations.
      New
      regulatory actions are constantly changing our industry. Although we believe
      we
      have complied with applicable government regulations, there is no assurance
      that
      we will be able to do so in the future.




-18-





**If
      we cannot compete successfully for market share against other NPCC product
      companies, we may not achieve sufficient product revenues, and our business
      could suffer.** ** The
      market for our products is characterized by intense competition and rapid
      technological advances. Our products compete with a multitude of products
      developed, manufactured and marketed by others and we expect competition from
      new market entrants in the future. Existing or future competing products may
      provide better quality, greater utility, lower cost or other benefits from
      their
      intended uses than our products, or may offer comparable performance at lower
      cost. If our products fail to capture and maintain market share, we may not
      achieve sufficient product revenues, and our business would suffer.





**Risks
      Related To Doing Business In China**





**Changes
      in China’s political or economic situation could harm us and our operational
      results.** ** Economic
      reforms adopted by the Chinese government have had a positive effect on the
      economic development of the country, but the government could change these
      economic reforms or any of the legal systems at any time. This could either
      benefit or damage our operations and profitability. Some changes that could
      have
      this effect are:




·
            Level
                of government involvement in the
                economy;




·
            Control
                of foreign exchange;




·
            Methods
                of allocating resources;




·
            Balance
                of payments position;




·
            International
                trade restrictions; and




·
            International
                conflict.




The
      Chinese economy differs from the economies of most countries belonging to the
      Organization for Economic Cooperation and Development, or OECD, in many ways.
      The economic reforms in China have been conducted under a tight control of
      the
      Chinese government. As a result of these differences, we may not develop in
      the
      same way or at the same rate as might be expected if the Chinese economy were
      similar to those of the OECD member countries.




**Our
      business is largely subject to the uncertain legal environment in China and
      your
      legal protection could be limited.** ** The
      Chinese legal system is a civil law system based on written statutes. Unlike
      common law systems, it is a system in which precedents set in earlier legal
      cases are not generally used. The overall effect of legislation enacted over
      the
      past 20 years has been to enhance the protections afforded to foreign invested
      enterprises in China. However, these laws, regulations and legal requirements
      are relatively recent and are evolving rapidly and their interpretation and
      enforcement involves uncertainties. These uncertainties could limit the legal
      protections available to foreign investors, such as the right of foreign
      invested enterprises to hold licenses and permits such as requisite business
      licenses. In addition, all of our executive officers and our directors are
      residents of China, and substantially all the assets of these persons are
      located outside the U.S. As a result, it could be difficult for investors to
      effect service of process in the U.S., or to enforce a judgment obtained in
      the
      U.S. against us or any of these persons.





**The
      Chinese government exerts substantial influence over the manner in which we
      must
      conduct our business activities.** ** China
      only recently has permitted provincial and local economic autonomy and private
      economic activities. Chinese government has exercised and continues to exercise
      substantial control over virtually every sector of the Chinese economy through
      regulation and state ownership. Our ability to operate in China may be harmed
      by
      changes in its laws and regulations, including those relating to taxation,
      import and export tariffs, environmental regulations, land use rights, property
      and other matters. We believe that our operations in China are in material
      compliance with all applicable legal and regulatory requirements. However,
      the
      central or local governments of these jurisdictions may impose new, stricter
      regulations or interpretations of existing regulations that would require
      additional expenditures and efforts on our part to ensure our compliance with
      such regulations or interpretations. Accordingly, government actions in the
      future, including any decision not to continue to support recent economic
      reforms and to return to a more centrally planned economy, or regional or local
      variations in the implementation of economic policies, could have a significant
      effect on economic conditions in China or particular regions thereof, and could
      require us to divest ourselves of any interest we hold in Chinese
      properties.




-19-




**Future
      inflation in China may inhibit our activity to conduct business in
      China.** ** In
      recent
      years, the Chinese economy has experienced periods of rapid expansion and high
      rates of inflation. During the past ten years, the rate of inflation in China
      has been as high as 20.7% and as low as -2.2%. These factors have led to the
      adoption by Chinese government, from time to time, of various corrective
      measures designed to restrict the availability of credit or regulate growth
      and
      contain inflation. While inflation has been more moderate since 1995, high
      inflation may in the future cause Chinese government to impose controls on
      credit and/or prices, or to take other action, which could inhibit economic
      activity in China, and thereby harm the market for our products.




**Restrictions
      on currency exchange may limit our ability to receive and use our revenues
      effectively** ***.*** ** The
      majority of our revenues will be settled in Renminbi and U.S. Dollars, and
      any
      future restrictions on currency exchanges may limit our ability to use revenue
      generated in Renminbi to fund any future business activities outside China
      or to
      make dividend or other payments in U.S. dollars. Although the Chinese government
      introduced regulations in 1996 to allow greater convertibility of the Renminbi
      for current account transactions, significant restrictions still remain,
      including primarily the restriction that foreign-invested enterprises may only
      buy, sell or remit foreign currencies after providing valid commercial documents
      at those banks in China authorized to conduct foreign exchange business. In
      addition, conversion of Renminbi for capital account items, including direct
      investment and loans, is subject to governmental approval in China, and
      companies are required to open and maintain separate foreign exchange accounts
      for capital account items. We cannot be certain that the Chinese regulatory
      authorities will not impose more stringent restrictions on the convertibility
      of
      the Renminbi.




**The
      value of our securities will be affected by the foreign exchange rate between
      U.S. dollars and Renminbi.** ** The
      value
      of our common stock will be affected by the foreign exchange rate between U.S.
      dollars and Renminbi, and between those currencies and other currencies in
      which
      our sales may be denominated. For example, to the extent that we need to convert
      U.S. dollars into Renminbi for our operational needs and should the Renminbi
      appreciate against the U.S. dollar at that time, our financial position, the
      business of the company, and the price of our common stock may be harmed. If
      we
      decide to convert our Renminbi into U.S. dollars for the purpose of declaring
      dividends on our common stock or for other business purposes and the U.S. dollar
      appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
      from our subsidiaries in China would be reduced **.**





**We
      may not be able to distribute our assets upon
      liquidation.** Our
      assets are predominately located inside China. Under the laws governing foreign
      investment enterprises in China, dividend distribution and liquidation are
      allowed but subject to special procedures under the relevant laws and rules.
      Any
      dividend payment will be subject to the decision of the board of directors
      and
      subject to foreign exchange rules governing such repatriation. Any liquidation
      is subject to both the relevant government agency’s approval and supervision as
      well the foreign exchange control. This may generate additional risk for our
      investors in case of liquidation.




**We
      may be treated as a resident enterprise for PRC tax purposes after the
      Enterprise Income Tax Law becomes effective on January 1, 2008, which may
      subject us to PRC income tax for any dividends we receive from our subsidiaries
      and PRC income tax withholding for any dividends we pay to our non-PRC
      shareholders.** The
      Enterprise Income Tax Law provides that enterprises established outside of
      China
      whose “de facto management bodies” are located in China are considered “resident
      enterprises” and will generally be subject to the uniform 25.0% enterprise
      income tax rate as to their global income, including income we receive from
      our
      subsidiaries. The term “de facto management bodies” is not defined under the
      Enterprise Income Tax Law and it is currently unclear in which situations a
      non-PRC enterprise’s “de facto management body” is located in China. All of our
      management is currently based in China, and if a majority of the members of
      our
      management team continue to be located in China after the effective date of
      the
      Enterprise Income Tax Law, we may be considered a PRC resident enterprise and
      therefore subject to PRC enterprise income tax at the rate of 25% on our
      worldwide income, which will include any dividend income we receive from our
      subsidiaries. If we are required under the Enterprise Income Tax Law to pay
      income tax for any dividends we receive from our subsidiaries, our revenues
      could decrease significantly.




-20-




**Our
      subsidiaries in China are subject to restrictions on dividend payments and
      making other payments to us or any other affiliated
      company.** We are
      primarily a holding company and do not conduct any business operations other
      than our holding of the equity interests in China. As a result, we rely on
      dividends, consulting and other fees paid to us by our subsidiaries in China.
      Our ability to pay dividend and meet our obligations is partially dependent
      upon
      receiving such payments from our subsidiaries in China. PRC regulations permit
      payment of dividends only out of accumulated profits as determined in accordance
      with Chinese accounting standards and regulations. Our subsidiaries in China
      are
      also required to set aside at least 10% of their after-tax profits, if any,
      each
      year according to Chinese accounting standards and regulations to fund certain
      reserve funds, unless such reserve funds have reached 50% of their respective
      registered capital. These reserves are not distributable as cash dividends.
      Furthermore, our subsidiaries are required to allocate portions of their
      respective after-tax profits to their enterprise expansion funds and staff
      welfare and bonus funds at the discretion of their boards of directors.




**We
      have limited business insurance coverage in China, which could harm our
      business.** We are
      exposed to many risks, including equipment failures, natural disasters,
      industrial accidents, power outages, and other business interruptions.
      Furthermore, if any of our products are faulty, then we may become subject
      to
      product liability claims or we may have to engage in a product recall. We do
      not
      carry business interruption insurance and as a result, we may be required to
      pay
      for financial and other losses, damages and liabilities, including those caused
      by natural disasters and other events beyond our control, out of our own funds,
      which could have a material adverse effect on our business, financial condition
      and results of operations.




**Any
      future outbreak of severe acute respiratory syndrome or avian influenza in
      China, or similar adverse public health developments, may severely disrupt
      our
      business and operations.** A
      renewed outbreak of severe acute respiratory syndrome, the Avian Flu or another
      widespread public health problem in China, where all of our manufacturing
      facilities are located and where all of our revenues are derived from, could
      have a negative effect on our operations. In addition, there have been confirmed
      human cases of avian influenza in PRC, Vietnam, Iraq, Thailand, Indonesia,
      Turkey, Cambodia and other countries which have proven fatal in some instances.
      If such an outbreak or any other similar epidemic were to spread in China,
      where
      our operations are located, it may adversely affect our business and operating
      results.




Such
      an
      outbreak could have an impact on our operations as a result of:




·
            quarantines
                or closures of our manufacturing facilities or the retail outlets,
                which
                would severely disrupt our
                operations,




·
            the
                sickness or death of our key officers and employees,
                and




·
            a
                general slowdown in the Chinese economy.




**Risks
      Related To The Market For Our Stock**




**The
      trading prices of many companies that have business operations only in China
      have been volatile, which may result in large fluctuations in the price of
      our
      common stock and losses for investors.** ** The
      stock
      market has experienced significant price and volume fluctuations that have
      particularly affected the trading prices of equity securities of many companies
      that have business operations exclusively in China. These fluctuations have
      often been unrelated or disproportionate to the operating performance of many
      of
      these companies. Any negative change in the public’s perception of these
      companies could decrease our stock price regardless of our operating results.
      The market price of our common stock has been and may continue to be volatile.
      We expect our stock price to be subject to fluctuations as a result of a variety
      of factors, including factors beyond our control. These factors
      include:




·
            actual
                or anticipated variations in our quarterly operating
                results;




-21-




·
            announcements
                of technological innovations or new products or services by us or
                our
                competitors;




·
            announcements
                relating to strategic relationships or
                acquisitions;





·
            additions
                or terminations of coverage of our common stock by securities
                analysts;





·
            statements
                by securities analysts regarding us or our
                industry;





·
            conditions
                or trends in the our industry; and





·
            changes
                in the economic performance and/or market valuations of other NPCC
                and
                chemical companies.




The
      prices at which our common stock trades will affect our ability to raise
      capital, which may have an adverse affect on our ability to fund our
      operations.





**Our
      common stock may be considered to be a “penny stock” and, as such, the market
      for our common stock may be further limited by certain SEC rules applicable
      to
      penny stocks.** To the
      extent the price of our common stock remains below $5.00 per share or we have
      net tangible assets of $2,000,000 or less, our common shares will be subject
      to
      certain “penny stock” rules promulgated by the SEC. Those rules impose certain
      sales practice requirements on brokers who sell penny stock to persons other
      than established customers and accredited investors (generally institutions
      with
      assets in excess of $5,000,000 or individuals with net worth in excess of
      $1,000,000). For transactions covered by the penny stock rules, the broker
      must
      make a special suitability determination for the purchaser and receive the
      purchaser’s written consent to the transaction prior to the sale. Furthermore,
      the penny stock rules generally require, among other things, that brokers
      engaged in secondary trading of penny stocks provide customers with written
      disclosure documents, monthly statements of the market value of penny stocks,
      disclosure of the bid and asked prices, disclosure of the compensation to the
      brokerage firm, and disclosure of the sales person working for the brokerage
      firm. These rules and regulations adversely affect the ability of brokers to
      sell our common shares and limit the liquidity of our securities.





**We
      do not intend to pay cash dividends.** **** We
      have
      never declared or paid cash dividends on our capital stock and we do not
      anticipate paying any cash dividends in the foreseeable future. We currently
      intend to retain all available funds and any future earnings for use in the
      operation and expansion of our business. In addition, the terms of any future
      debt or credit facility may preclude us from paying any dividends. As a result,
      capital appreciation, if any, of our common stock will be your sole source
      of
      potential gain in your investment for the foreseeable future.





**We
      will incur increased costs as a result of changes in laws and regulations
      relating to corporate governance matters.** As
      a
      public reporting company, we will need to comply with the Sarbanes-Oxley Act
      of
      2002 and the related rules and regulations adopted by the SEC and by The NASDAQ
      Capital Market, including expanded disclosures, accelerated reporting
      requirements and more complex accounting rules. Compliance with Section 404
      of
      the Sarbanes-Oxley Act of 2002 and other requirements will increase our costs
      and require additional management resources. Additionally, these laws and
      regulations could make it more difficult or more costly for us to obtain certain
      types of insurance, including director and officer liability insurance, and
      we
      may be forced to accept reduced policy limits and coverage or incur
      substantially higher costs to obtain the same or similar coverage. The impact
      of
      these events could also make it more difficult for us to attract and retain
      qualified persons to serve on our board of directors, our board committees
      or as
      executive officers. We are presently evaluating and monitoring developments
      with
      respect to these laws and regulations and cannot predict or estimate the amount
      or timing of additional costs we may incur to respond to their requirements.




-22-





**We
      may not be able to achieve and maintain an effective system of internal control
      over financial reporting, a failure which may prevent us from accurately
      reporting our financial results or detecting and preventing
      fraud.** **** We are
      subject to reporting obligations under the U.S. securities law. Beginning with
      our annual report on Form 10-K for the fiscal year ending December 31, 2007,
      we are required to prepare a management report on our internal control over
      financial reporting containing our management’s assessment of the effectiveness
      of our internal control over financial reporting. In addition, our independent
      registered public accounting firm must attest to and report on the effectiveness
      of our internal control over financial reporting. Our management may conclude
      that our internal control over our financial reporting is not effective.
      Moreover, even if our management concludes that our internal control over
      financial reporting is effective our independent registered public accounting
      firm may still decline to attest to the effectiveness or may issue a report
      that
      is qualified if it is not satisfied with our controls or the level at which
      our
      controls are documented, designed, operated or reviewed, or if it interprets
      the
      relevant requirements differently from us. Our reporting obligations as a public
      company place a significant strain on our management, operational and
      financial resources and systems for the foreseeable future.





**We
      may require additional capital, which may not be available on commercially
      reasonable terms, or at all** . Capital
      raised through the sale of equity securities may result in dilution to our
      shareholders. The incurrence of indebtedness would result in increased debt
      service obligations and could result in operating and financing covenants that
      would restrict our operations. Financing may be unavailable in amounts or on
      terms acceptable to us, or at all. Failure to obtain such additional capital
      could have an adverse impact on our business strategies and growth
      prospects.





**If
      our executive officers, directors and principal stockholders choose to act
      together, they will be able to exert significant influence over us and our
      significant corporate decisions and may act in a manner that advances their
      best
      interests and not necessarily those of other
      stockholders.** **** Our
      executive officers, directors, and beneficial owners of 5% or more of our
      outstanding common stock and their affiliates will beneficially own
      approximately 44.4% of our outstanding common stock. As a result, these persons,
      acting together, will have the ability to influence significantly the outcome
      of
      all matters requiring stockholder approval, including the election and removal
      of directors and any merger, consolidation, or sale of all or substantially
      all
      of our assets and they may act in a manner that advances their best interests
      and not necessarily those of other stockholders, including investors, by, among
      other things:




·
            
            delaying,
                deferring or preventing a change in control of us;




·
            
            entrenching
                our management and/or our board of directors;




·
            
            impeding
                a merger, consolidation, takeover or other business combination involving
                us;




·
            
            discouraging
                a potential acquirer from making a tender offer or otherwise attempting
                to
                obtain control of us; or




·
            
            causing
                us to enter into transactions or agreements that are not in the best
                interests of all stockholders.




**It
      may be difficult for you to enforce any judgment in the United States against
      our company, which may limit the remedies otherwise available to our
      shareholders.** All
      of
      our executive officers and our directors are residents of China, and
      substantially all the assets of these persons are located outside the U.S.
      As a
      result, it could be difficult for investors to effect service of process in
      the
      U.S., or to enforce a judgment obtained in the U.S. against us or any of these
      persons.




-23-




**Item
      1B. Unresolved Staff Comments**





There
      are
      no unresolved comments from the SEC.




**ITEM
      2. Properties**





All
      land
      in China is owned by the State. Individuals and companies are permitted to
      acquire rights to use land or land use rights for specific purposes. In the
      case
      of land used for industrial purposes, the land use rights are granted for a
      period of 50 years. This period may be renewed at the expiration of the initial
      and any subsequent terms. Granted land use rights are transferable and may
      be
      used as security for borrowings and other obligations. We currently lease from
      our affiliate Shandong Shengda Technology, which has land use rights to
      approximately 123,936 square meters of land consisting of manufacturing
      facilities, employee quarters, warehouses and office buildings in Taian City,
      China. We also own approximately 251,285 square meters land in Xianyang,
      Shanxxi, consisting of manufacturing facilities, employee quarters, warehouses,
      kitchen and office buildings. These constitute the basis of our operations
      as a
      manufacturer of NPCC products and coal based chemicals.





In
      August
      2006, Shandong Shengda Technology completed the construction of a new NPCC
      manufacturing facility with approximately 251,285 square meters in Xianyang
      City, Shaanxi Province, China. The designed capacity for this facility is 60,000
      metric tons of NPCC in the first phase. In July 2007, we completed an additional
      40,000 tons of capacity in the second phase. We are currently adding an
      additional 60,000 tons of capacity and expect to complete it in the second
      quarter of 2008.





The
      main
      equipment and machinery of our NPCC business includes ultra gravity reactors,
      membrane dispersion micro-mix reactors, carbonators, limestone kilns, slaking
      equipment, and packaging machines. The main equipment and machinery of our
      coal
      based chemical business include boilers, carbonation towers, desulphurization
      towers and methanol recycling towers.




We
      believe that all our properties and equipment have been adequately maintained,
      are generally in good condition, and are suitable and adequate for our business.
      Nevertheless, we plan to replace some of the old chemical equipment with new
      equipment that consumes less energy and produces less pollution. We believe
      the
      retrofitting will provide us with better efficiency. In addition, we believe
      that the newly completed facility and the expected additional land use rights
      will be sufficient for our expansion efforts.





**Item
      3. Legal Proceedings**





There
      are
      no known pending legal proceedings to which we or our properties are
      subject.





**Item
      4. Submission Of Matters To A Vote Of Shareholders**




No
      matters were submitted to a vote of shareholders in the last
      quarter.




-24-





**PART
      II**





**Item
      5. Market For Registrant’s Common Equity, Related Shareholder Matters, And
      Issuer Purchases Of Equity Securities**





**MARKET
      PRICE INFORMATION**




Our
      common stock has been quoted on The NASDAQ Global Select Market under the symbol
      “SDTH” since January 31, 2008. This was after our common stock had been quoted
      on the NASDAQ Capital Market under the symbol “SDTH” since May 24, 2007. There
      was no public trading activity in our shares during the two fiscal years through
      March 31, 2006. From March 31, 2006 to May 24, 2007 there was some minimal
      trading activity in our shares. The following table provides the high and low
      sales prices for our common stock as reported for the periods indicated.





**Year
                ending December 31, 2008**
            
            **High**
            
            **Low**First
                Quarter (as of March 14)
            
            $
            15.57
            
            $
            8.50





**Year
                ending December 31, 2007**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            6.35
            
            $
            4.00Second
                Quarter
            
            $
            6.25
            
            $
            3.60Third
                Quarter
            
            $
            6.95
            
            $
            3.95Fourth
                Quarter
            
            $
            15.35
            
            $
            6.00





**High**
            
            **Low****Year
                ending December 31, 2006**Second
                Quarter
            
            $
            6.50
            
            $
            5.00Third
                Quarter
            
            $
            8.10
            
            $
            6.00Fourth
                Quarter
            
            $
            7.20
            
            $
            6.00




On
      March
      13, 2008, the last reported sale price of our common stock on The NASDAQ Global
      Select Market was $9.65 per share.





**Shareholders**





As
      of
      March 14, 2007, we had 54,202,036 outstanding shares of common stock held by
      approximately 8,931shareholders of record.





**Dividend
      Policy**





To
      date,
      we have neither declared nor paid any cash dividends on shares of our common
      stock. We presently intend to retain earnings to finance the operation and
      expansion of our business and do not anticipate declaring cash dividends in
      the
      foreseeable future.





**Repurchases
      of Equity Securities**





No
      repurchases of our common stock were made in a month within the fourth quarter
      of the fiscal year covered by this report.




-25-





**Item
      6.   Selected Financial Data**





You
      should read the following selected consolidated financial data in conjunction
      with “Management's Discussion and Analysis of Financial Condition and Results of
      Operations,” the financial statements and related notes, and the other financial
      information included in this report.




**Year
                Ended December 31,****2005**
            
            **2006**
            
            **2007****Consolidated
                Statement of Operations Data:**Sale
                of productsChemical
            
            $
            43,985,596
            
            $
            50,592,217
            
            $
            53,933,120NPCC
            
            
            14,613,733
            
            
            22,007,814
            
            
            46,721,673Total
                sale of products
            
            
            58,599,329
            
            
            72,600,031
            
            
            100,654,793Cost
                of products soldChemical
            
            
            31,752,100
            
            
            37,924,593
            
            
            39,282,251NPCC
            
            
            9,264,339
            
            
            13,297,976
            
            
            26,812,587Total
                cost of products sold
            
            
            41,016,439
            
            
            51,222,569
            
            
            66,094,838Gross
                profit
            
            
            17,582,890
            
            
            21,377,462
            
            
            34,559,955Operating
                expensesSelling
                expense
            
            
            865,338
            
            
            1,260,647
            
            
            1,771,168General
                & administrative expense
            
            
            967,357
            
            
            2,641,474
            
            
            3,232,911Total
                operating expenses
            
            
            1,832,695
            
            
            3,902,121
            
            
            5,004,079Income
                from operations
            
            
            15,750,195
            
            
            17,475,341
            
            
            29,555,876Non-operating
                (expenses) income
            
            
            129,665
            
            
            (89,068
            )
            
            (12,094
            )Interest
                income
            
            
            82,611
            
            
            140,375
            
            
            274,203Income
                before provision for income taxes
            
            
            15,962,471
            
            
            17,526,648
            
            
            29,817,985Provision
                for income taxes
            
            
            —
            
            
            —
            
            
            2,787,640Net
                Income
            
            $
            15,962,471
            
            $
            17,526,648
            
            $
            27,030,345Basic
                and diluted earnings per share
            
            $
            0.25
            
            $
            0.34
            
            $
            .50Basic
                weighted-average shares outstanding
            
            
            64,455,210
            
            
            51,900,641
            
            
            54,107,408Diluted
                weighted-average shares outstanding
            
            
            64,455,210
            
            
            52,022,801
            
            
            54,188,410




-26-





**As
                of December 31,****2005**
            
            **2006**
            
            **2007****Consolidated
                Balance Sheet Data:**Cash
                and cash equivalents
            
            $
            10,749,300
            
            $
            34,684,142
            
            $
            26,366,568Trade
                accounts receivable
            
            
            3,929,082
            
            
            5,588,675
            
            
            7,889,001Advances
                to suppliers
            
            
            262,591
            
            
            872,289
            
            
            19,436,544Inventory
            
            
            1,478,510
            
            
            2,151,613
            
            
            1,955,384Receivable
                from related parties
            
            
            943,308
            
            
            1,601
            
            
            1,712Total
                current assets
            
            
            21,337,652
            
            
            43,455,672
            
            
            55,663,171Property
                and equipment, net
            
            
            8,579,676
            
            
            23,479,725
            
            
            45,156,739Total
                assets
            
            
            29,957,328
            
            
            67,029,351
            
            
            100,943,938Total
                current liabilities
            
            
            5,184,740
            
            
            9,900,088
            
            
            11,940,753Total
                shareholder's equity
            
            
            24,772,588
            
            
            57,129,264
            
            
            89,003,185




**Item
      7. management’s discussion and analysis of financial condition and results of
      operation**




**Overview**




We
      are a
      leading and fast growing Chinese manufacturer of specialty additives and
      coal-based chemical products. Our NPCC products are used as functional additives
      in various products due to their special chemical and physical attributes.
      We
      use advanced processing technology to convert limestone into high quality NPCC
      products, which are sold to our customers in the tire, polyvinyl chloride (PVC)
      building materials, ink, paint, latex, adhesive, paper and polyethylene (PE)
      industries. We also manufacture, market and sell coal-based chemical products,
      namely, ammonium bicarbonate, liquid ammonia, methanol and melamine. We market
      and sell coal-based chemical products mainly as chemical fertilizers and raw
      materials for the production of organic and inorganic chemical products,
      including formaldehyde and pesticides.





***Reorganization***




We
      were
      organized as a Nevada corporation on May 11, 2001 under the name Zeolite
      Exploration Company for the purpose of acquiring, exploring and developing
      mineral properties. We conducted no material operations from the date of our
      organization until March 2006. On March 31, 2006, we consummated a share
      exchange pursuant to a Securities Purchase Agreement and Plan of Reorganization
      with Faith Bloom Limited, a British Virgin Islands company, and its
      stockholders. As a result of the share exchange, we acquired all of the issued
      and outstanding capital stock of Faith Bloom in exchange for a total of
      50,957,603 shares of our common stock. The share exchange is accounted for
      as a
      recapitalization of Zeolite and resulted in a change in our fiscal year end
      from
      July 31 to December 31. Faith Bloom Limited is deemed to be the accounting
      acquiring entity in the share exchange and, accordingly, the financial
      information included in this prospectus reflects the operations of Faith Bloom,
      as if Faith Bloom had acquired us.




Faith
      Bloom was organized on November 15, 2005 for the purpose of acquiring from
      Eastern Nanomaterials Pte. Ltd., a Singapore corporation, all of the capital
      shares of Shandong Haize Nanomaterials Co., Ltd and Shandong Bangsheng Chemical
      Co., Ltd., which are Chinese corporations engaged in the manufacture, marketing
      and sales of a variety of NPCC products and coal -based chemicals for use in
      various applications. On December 31, 2005, Faith Bloom acquired all of the
      capital shares of Shandong Haize Nanomaterials Co., Ltd and Shandong Bangsheng
      Chemical Co., Ltd.





As
      a
      result of the transactions described above, Shandong Haize Nanomaterials Co.,
      Ltd and Shandong Bangsheng Chemical Co., Ltd. are wholly-owned subsidiaries
      of
      Faith Bloom, and Faith Bloom is a wholly-owned subsidiary of Zeolite. On April
      4, 2006, Faith Bloom formed a wholly-owned subsidiary in Shaanxi, China to
      run
      the new NPCC facility in Shaanxi. Effective January 3, 2007, Zeolite changed
      its
      name to ShengdaTech, Inc. Our corporate structure is depicted in the following
      chart:




shengdatech




-27-




***Sale
      of Products***




We
      derive
      our sale of products from two segments: NPCC and coal-based chemicals. The
      most
      significant factors that directly or indirectly affect our sale of products
      are
      as follows:




manufacturing
      capacity of NPCC;


breakthroughs
      of *Research
      and Development* and
      applications of NPCC;


pricing
      of our NPCC products;


industry
      demand; and


exchange
      rate





*Manufacturing
      Capacity of NPCC. We increased our annual manufacturing capacity of NPCC from
      30,000 metric tons as of December 31, 2003 to 90,000 metric tons as of December
      31, 2006, and to 130,000 metric tons as of September 30, 2007 and to current
      190,000 metric tons. Sufficient capacity secures a stable supply of NPCC for
      our
      customers.*




*Breakthroughs
      of Research and Development and applications of NPCC. In conjunction with
      Tsinghua University, we successfully completed the development of the
      membrane-dispersion technology for NPCC production, which was officially granted
      a patent in November 2007. With the membrane-dispersion patent and the
      continuing efforts of our Research and Development department in developing
      new
      NPCC products for applications in different industries, we believe that we
      maintain a leading position in technology for the NPCC market in
      China.*





*Pricing
      of our NPCC products. The pricing of our NPCC products is generally determined
      by manufacturing costs, overall market demand, competition and, increasingly,
      costs associated with technology. In addition, the pricing of some of our NPCC
      products depends on the amount of cost saving that a particular industry or
      customer can achieve. For example, with respect to tire and PVC building
      materials, the pricing of NPCC products is principally affected by the cost
      saving benefit our customers realize by replacing some of the relatively
      expensive carbon black and silicon dioxide with less expensive NPCC. With
      respect to paper, the pricing of NPCC is principally affected by comparable
      imports. In the next few years, we may reduce the selling price in order to
      compete with relatively small competitors.*




*Industry
      demand. Our business and revenue growth depend on the industry demand of NPCC.
      The downstream industries we supply are the tire, PVC and PE building materials,
      paper, rubber, paints and oil ink industries. Given the diverse application
      of
      our NPCC products and the development of our Research and Development pipeline
      to cater to new end markets, we believe that our business has potential for
      continued growth.*




*Exchange
      rate. Our revenue has been affected by the foreign exchange rate between USD
      and
      RMB because the functional currency of our operating subsidiaries in the PRC
      is
      RMB while our financial statements have been expressed in USD. The accompanying
      consolidated statements of income and comprehensive income have been translated
      using the average exchange rates prevailing during the periods of each
      statement.*





*Revenues
      from our coal-based chemical business are derived from sale of ammonia-based
      chemicals, namely, ammonium bicarbonate, liquid ammonia, methanol and melamine,
      to local farmers and chemical plants located in Shandong and other surrounding
      provinces. Our coal-based chemical business has remained relatively stable
      for
      the past few years. Our chemical factory is located in a residential district
      and at the present time, we understand that the future zoning of this area
      will
      be for residential purpose. We believe that it is very likely that the
      government will decide to relocate our coal-based chemical business, although
      we
      have not received any formal notice from the government or other regulatory
      authorities requiring us to relocate. If the government decides to order us
      to
      relocate, we could be required to move and relocate within several months of
      receiving a notice. We are taking steps to identify alternatives to redeploy
      the
      business ahead of the government’s action which include either (i) an
      acquisition of a chemical plant or (ii) a strategic location in one of the
      industrial parks near our current coal-based chemical plant. We would expect
      that either of these options will accommodate the existing coal-based chemical
      production capacity although the move to a new facility will require
      approximately two months which will impact our coal based chemical business.
      We
      also believe that the local government of the Tai'an City, where our coal-based
      chemical plant is currently located, will offer us some financial assistance
      or
      compensation if and when they require us to relocate the plant.*




-28-




Our
      ammonia-based chemicals supply local farmers and chemical plants located in
      Shandong and other surrounding provinces. We have a good relationship with
      our
      customers and our products have a good reputation in their markets. We believe
      the demand for our coal-based chemicals will remain stable in the next few
      years, but our chemical factory is located in the residential district. With
      the
      increase of Chinese citizens’ environmental awareness, the Chinese government
      has strengthened its laws and regulations on environment-protection. In
      addition, recently a series of significant environment disasters have called
      for
      better enforcement of such laws and regulations. As our chemical factory is
      located in a residential and commercial area, we believe, under such political
      climate, it is likely that the government will ask us to relocate our chemical
      business, although we have not received any formal notice. The Company is taking
      active steps to mitigate the risk by either redeploying its business before
      the
      government’s action or identifying replacements for acquisitions.




*Our
      coal-based chemical business generally experiences a seasonal peak between
      March
      and November of each year, when our ammonium bicarbonate is in high demand
      due
      to the farming season in northern China.* For
      example, our *revenue from coal-based chemical segment during this period of time during
      2007
      accounted for 78% of the total coal-based chemical production revenue* for
      the
      year ended December 31, 2007 *.
      December to February is typically the low season for our coal-based chemicals
      business, during which the price of our ammonium bicarbonate may drop
      approximately 6 to 8%.*







***Cost
      of Products Sold***




Cost
      of
      products sold for both NPCC and coal-based chemicals consists primarily of
      (a)
      consumption of raw materials and auxiliary raw materials (b) use of water and
      electricity (c) machinery’s depreciation and (d) workers’ salaries.





The
      most
      significant factors that directly or indirectly affect our cost of revenues
      are
      as follows:


processing
        technologies for NPCC;
 supply
        and price of limestone;
 availability
        and price of coal;
 supply
        and price of electricity; and foreign
        exchange rates
  -29-




*Process
      technologies for NPCC. The advancement of NPCC processing technologies is
      crucial in order to deliver value to our clients. In conjunction with Tsinghua
      University, we successfully completed the development of a more advanced
      membrane-dispersion technology, which was officially granted a patent in
      November 2007. We and Tsinghua University each have a 50% ownership share of
      the
      technology; we have the exclusive (100%) right to use the technology. The new
      membrane-dispersion technology will enable us to produce NPCC in a more
      efficient and cost effective way.*





*Supply
      and price of limestone. Limestone is an important raw material for NPCC. Our
      Shaanxi facility is in proximity to a high quality limestone quarry, which
      enables us to minimize transportation cost of limestone. We maintain a strong
      relationship with our mining contractor which conducts extracting activities
      for
      us.*





*Availability
      and price of coal. Coal is the key raw material used to produce our coal-based
      chemicals and is also used in the production of our NPCC products as a key
      fuel
      for the calcination of limestone. We have long-term relationships with our
      coal
      suppliers. We have also developed a network of alternative suppliers for backup
      purposes. Coal prices have fluctuated in the past few years. The average price
      of coal was approximately $70 per metric ton in 2004 and increased to
      approximately $80 per metric ton in 2005 and $90 in 2006. In 2007, it was
      approximately $98 per metric ton.*





*Supply
      and price of electricity. Electricity from the grid is the primary power source
      for the production of NPCC and coal-based chemicals, and, it is currently
      supplied by the local government. In the past few years, as the government
      supports supplies to the farming industry, for our coal-based chemicals, we
      have
      enjoyed a price discount on electricity of up to a 50% of the price of
      electricity for industrial users. From the second half of 2006, as demand for
      coal-based chemical products increased, the Chinese government increased the
      price of electricity for the coal-based chemical industry from $0.044/kwh to
      $0.486/kwh, while the price of electricity for the NPCC industry remained
      unchanged.*





Exchange
      rate. Our cost of revenue has been affected by the foreign exchange rate between
      USD and RMB because the functional currency of our operating subsidiaries in
      the
      PRC is RMB while our financial statements have been expressed in USD. The
      accompanying consolidated statements of income and comprehensive income have
      been translated using the average exchange rates prevailing during the periods
      of each statement.




***Gross
      Profit***




Our
      gross
      profit has been, and will be, affected by many factors, including (a) the demand
      for our products, (b) the average selling price of our products, which in turn
      depends in part on the mix of products sold, (c) new product introductions,
      and
      (d) the volume and costs of manufacturing of our products.




-30-




***Operating
      Expenses***




Operating
      expenses consist of sales and marketing and general and administrative expenses.
      Sales and marketing expense consists primarily of (a) salaries of sales
      personnel, (b) sales commissions, (c) travel, lodging and other out-of-pocket
      expenses, and (d) other related overhead. We expect our sales and marketing
      expenses to increase in the future as we further increase our sales. In the
      second quarter of 2007, we lowered the commissions to sales staff from 5% to
      3%,
      as the volume of sales of our NPCC business increased. As a result, we plan
      to
      employ more sales staff and pay more commission based on growing sales.





General
      and administrative expense consists primarily of (a) salaries of administrative
      and R& D personnel, (b) labor union fees, (c) insurance fees, (d) lease
      payments for housing and property, (e) expenses related to being a public
      company and (f) other related overhead. We expect general and administrative
      expense to continue to increase. Being a publicly traded company, we will incur
      additional expenses related to costs of compliance with securities and other
      regulations, including increased audit and legal fees and investor relations
      expenses.





**Critical
      Accounting Policies and Estimates**





The
      selection of critical accounting policies, the judgments and other uncertainties
      affecting application of those policies and the sensitivity of reported results
      to changes in conditions and assumptions are factors to be considered when
      reviewing our financial statements. Our principal accounting policies are set
      forth in detail in Note 2 to our condensed consolidated financial statements
      included elsewhere in this offering memorandum. We believe the following
      critical accounting policies involve the most significant judgments and
      estimates used in the preparation of our financial statements





***Basis
      of Presentation and Translating Financial Statements -*** The
      consolidated financial statements included elsewhere in this offering memorandum
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America. The functional currency of the operating
      subsidiaries in the PRC is the Chinese Yuan Renminbi (RMB); however, the
      accompanying financial statements have been expressed in United States Dollars
      (USD). The accompanying consolidated balance sheets have been translated into
      USD at the exchange rates prevailing at each balance sheet date. The
      accompanying consolidated statements of income and comprehensive income have
      been translated using the average exchange rates prevailing during the periods
      of each statement.





***Accounting
      Estimates*** - The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the 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
      estimates.




-31-




**** ***Revenue
      Recognition*** - We
      recognize revenues from the sale of products when they are realized and earned.
      We consider revenue realized or realizable and earned when (1) it has persuasive
      evidence of an arrangement, (2) delivery has occurred, (3) the sales price
      is
      fixed or determinable, and (4) collectibility is reasonably assured. Revenues
      are not recognized until products have been shipped to the client, risk of
      loss
      has transferred to the client and client acceptance has been obtained, client
      acceptance provisions have lapsed, or we have objective evidence that the
      criteria specified in client acceptance provisions have been satisfied. We
      sell
      all products to end-users and recognize revenues when the products are shipped.
      We have no post-delivery obligations on our products sold.





***Fair
      Values of Financial Instruments -*** The
      carrying amounts reported in the consolidated balance sheets for trade accounts
      receivable, other non-trade receivables, advances to suppliers, receivables
      from
      related parties, trade accounts payable, other payables and accrued expenses,
      advances from customers, and payable to related parties approximate fair value
      because of the immediate or short-term maturity of these financial
      instruments.





***Valuation
      of Long-lived Assets*** - The carrying values of our long-lived
      assets are reviewed for impairment annually or whenever events or changes in
      circumstances indicate that they may not be recoverable. When such an event
      occurs, we project the undiscounted cash flows to be generated from the use
      of
      the asset and its eventual disposition over the remaining life of the asset.
      If
      projections were to indicate that the carrying value of the long-lived asset
      will not be recovered, the carrying value of the long-lived asset is reduced
      by
      the estimated excess of the carrying value over the projected discounted cash
      flows.





***Advances
      to Suppliers -*** As is
      the common practice in the PRC, we will often pay advance payments to suppliers
      for materials. Advances to suppliers were $2,249,867 and $872,289 as of December
      31, 2007 and 2006, respectively. Advances to suppliers as of December 31, 2007
      was restated by $17,186,677 and reclassified as property and equipment. As
      a
      result of the Company historically having no write-offs and all advances to
      suppliers being current, there was no bad debt allowance recorded against these
      advances as of December 31, 2007 and 2006, respectively.




-32-




***Credit
      Risk -*** Financial
      instruments that potentially subject us to significant concentrations of credit
      risk primarily consist of cash and cash equivalents, trade accounts receivable
      and other non-trade receivables included in the consolidated balance
      sheets.




We
      have
      cash in bank deposits and money market funds primarily in the PRC. Historically,
      deposits in Chinese banks have been secure due to the state policy on protecting
      depositors’ interests. China promulgated a new Bankruptcy Law in August 2006,
      which came into effect on June 1, 2007, which contains provisions for the
      implementation of measures for the bankruptcy of Chinese banks. In the event
      that bankruptcy laws are enacted for banks in the PRC, our deposits may be
      at a
      higher risk of loss.




The
      carrying amounts of trade accounts receivable and other non-trade receivables
      included in the consolidated balance sheets represent our exposure to credit
      risk in relation to its financial assets. No other financial assets carry a
      significant exposure to credit risk. We perform ongoing credit evaluations
      of
      each customer’s financial condition.




***Recently
      Enacted Accounting Standards*** - In
      September 2006, the Financial Accounting Standards Board (FASB) issued
      SFAS No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles and expands disclosures about fair
      value measurements. SFAS No. 157 is effective for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years. In
      February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
      extended the effective date for certain nonfinancial assets and nonfinancial
      liabilities to fiscal years beginning after November 15, 2008. The Company
      does
      not expect the adoption of SFAS No. 157 to have a material impact on our
      consolidated financial statements.




-33-




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 permits companies to choose to measure many financial instruments
      and certain other items at fair value. SFAS No. 159 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007. The Company does not expect the adoption of SFAS No. 159 to have a
      material impact on our consolidated financial statements.





In
      June
      2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3,
      “Accounting for Nonrefundable Advance Payments for Goods or Services to be Used
      in Future Research and Development Activities”, (“EITF 07-3”) which is effective
      for fiscal years beginning after December 15, 2007. EITF 07-3 requires that
      nonrefundable advance payments for future research and development activities
      be
      deferred and capitalized. Such amounts will be recognized as an expense as
      the
      goods are delivered or the related services are performed. EITF 07-3 is not
      expected to
      have a
      material impact on our results of operations or financial position.





In
      December 2007, the FASB issued SFAS No. 141(R), *Business
      Combinations* ,
      and
      SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements.* SFAS
      No. 141(R) requires an acquirer to measure the identifiable assets
      acquired, the liabilities assumed and any non-controlling interest in the
      acquiree at their fair values on the acquisition date, with goodwill being
      the
      excess value over the net identifiable assets acquired. SFAS No. 160
      clarifies that a non-controlling interest in a subsidiary should be reported
      as
      equity in the consolidated financial statements, consolidated net income shall
      be adjusted to include the net income attributed to the non-controlling interest
      and consolidated comprehensive income shall be adjusted to include the
      comprehensive income attributed to the non-controlling interest. The calculation
      of earnings per share will continue to be based on income amounts attributable
      to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for
      financial statements issued for fiscal years beginning after December 15,
      2008. Early adoption is prohibited. The Company has not yet determined the
      effect on our consolidated financial statements, if any, upon adoption of SFAS
      No. 141(R) or SFAS No. 160. SFAS No. 141(R) and SFAS No. 160 are
      not expected to
      have a
      material impact on our results of operations or financial position.




**Results
      of Operations**





***Comparison
      for the Years ended December 31, 2006 and 2007***





***Sale
      of Products***





**For
                the Year Ended December 31,****2006**
            
            **2007**
            
            **Period
                to Period Change****Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%**Sale
                of productsChemical
            
            
            50,592,217
            
            
            69.69
            
            
            53,933,120
            
            
            53.58
            
            
            3,340,903
            
            
            6.60NPCC
            
            
            22,007,814
            
            
            30.31
            
            
            46,721,673
            
            
            46.42
            
            
            24,713,859
            
            
            112.30**Total
                sale of products**
            
            
            72,600,031
            
            
            100.00
            
            
            100,654,793
            
            
            100.00
            
            
            28,054,762
            
            
            38.64





The
      sale
      of products of our coal-based chemical business increased by $3,340,903 or
      6.60%
      for the year ended December 31, 2007 compared to the prior year. The
      increase was mainly due to (i) additional $5,204,542 from an increase in sales
      of liquid ammonia and melamine by 12,802 tons and 625 tons, respectively, and
      an
      increase in average sales price per ton of $12.77 and $49.51, respectively,
      which was offset by $1,772,508 from the decrease in sales of ammonium carbonate
      by 49,625 tons; (ii) a decrease of $74,558 from the sale of surplus heat from
      our production process to the heat supply department of the local government.
      The increase of sales for some coal-based chemical products and the decrease
      of
      sales for other coal-based chemical products were caused by the adjustment
      of
      our product mix due to market conditions. For example, from December to
      February, the demand for our ammonium bicarbonate may be weaker than during
      other periods while the demand for methanol might be stronger than during other
      periods.





The
      increase of total revenue from our NPCC business (nano material) was $24,713,859
      or 112.30% for the year ended December 31, 2007 compared to the prior year.
      The
      increase was mainly due to (i) $22,579,161 additional revenue from an increase
      in sales of 65,845 tons as a result of our capacity expansion (ii) additional
      $2,134,698 due to the change in the exchange rate between RMB and USD as the
      appreciation of RMB to USD increased the translated revenue in USD.




-34-





***Cost
      of Products Sold and Gross Profit***




**For
                the Year Ended December 31,****2006**
            
            **2007**
            
            **Period
                to Period Change****Amount
                ($)**
            
            **%
                of**
              **Segment**
              **Revenue**
            
            **Amount
                ($)**
            
            **%
                of**
              **Segment**
              **Revenue**
            
            **Amount
                ($)**
            
            **(%)****Cost
                of products sold**Chemical
            
            
            37,924,593
            
            
            74.96
            
            
            39,282,251
            
            
            72.84
            
            
            1,357,658
            
            
            3.58NPCC
            
            
            13,297,976
            
            
            60.42
            
            
            26,812,587
            
            
            57.39
            
            
            13,514,611
            
            
            101.63Total
                Cost of Revenue
            
            
            51,222,569
            
            
            70.55
            
            
            66,094,838
            
            
            65.66
            
            
            14,872,269
            
            
            29.03**Gross
                Profit**Chemical
            
            
            12,667,624
            
            
            25.04
            
            
            14,650,869
            
            
            27.16
            
            
            1,983,245
            
            
            15.66NPCC
            
            
            8,709,838
            
            
            39.58
            
            
            19,909,086
            
            
            42.61
            
            
            11,199,248
            
            
            128.58**Total
                Gross Profit**
            
            
            21,377,462
            
            
            29.45
            
            
            34,
                559,955
            
            
            34.34
            
            
            13,182,493
            
            
            61.67





The
      cost
      of products sold for our coal-based chemical business increased by $1,357,658
      or
      3.58% for the year ended December 31, 2007 compared to the prior year. The
      increase was mainly due to reduction of $1,006,450 from a sales volume decrease
      of methanol and ammonium bicarbonate as a result of products mix adjustments;
      and an increase of $2,568,195 due from a sales volume increase of liquid
      ammonia of 12,802 tons.





The
      cost
      of products sold of our NPCC business increased by $13,514,611 or 101.63% for
      the year ended December 31, 2007 compared to the prior year. This was mainly
      due
      to additional $13,985,596 because of increased production volume as a result
      of
      NPCC capacity expansion in Shaanxi.





Our
      gross
      margin of NPCC increased from 39.58% to 42.61%. This was mainly due to the
      gross
      profit margin increase of $11,199,248 or 128.58% because of the introduction
      of
      new technology and the expansion of capacity with lower cost of raw materials
      at
      our new factory in Shaanxi.





***Operating
      Expenses***




**For
                the Year Ended December 31,****2006**
            
            **2007**
            
            **Period
                to Period Change****Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **(%)****Operating
                Expenses**Selling
                Expense
            
            
            1,260,647
            
            
            1.74
            
            
            1,771,168
            
            
            1.76
            
            
            510,521
            
            
            40.50General
                and Administration Expense
            
            
            2,641,474
            
            
            3.64
            
            
            3,232,911
            
            
            3.21
            
            
            591,437
            
            
            22.39**Total
                Operating Expenses**
            
            
            **3,902,121**
            
            
            **5.38**
            
            
            **5,004,079**
            
            
            **4.97**
            
            
            **1,101,958**
            
            
            **28.24**




-35-




Selling
      expenses increased by $510,521or 40.50% for the year ended December 31, 2007
      compared to the prior year. The main reasons were sales commission increased
      $451,950 as a result of the increase of sales; and increased salary and
      insurance expense of $57.841.





The
      general and administrative expenses increased by $591,437 or 22.39% for the
      year
      ended December 31, 2007 compared to the prior year. The main reasons were:
      (i)
      an increase of $630,939 in expenses related to consulting fees for compliance
      with Sarbanes-Oxley Regulations (SOX 404) and other consulting fees; (ii) an
      increase of $138,201 in *Research
      and Development* Center
      depreciation; and (iii) an increase of $26,547 in salary as a result of staff
      increase; which were offset by a decrease of $265,535 in technology testing
      and *Research
      and Development* fee as
      well as office, business and entertainment fee. The decrease of technology
      testing and *Research
      and Development* fee was
      due primarily to that our Shaanxi NPCC facility employs the membrane-dispersion
      technology co-owned by us the Tsinghua University and ceased to pay ultra
      gravity technology license fees to the licensor.





***Income from
      Operations and Other Income***




**For
                the Year Ended December 31,****2006**
            
            **2007**
            
            **Period
                to Period Change****Amount
                ($)**
            
            **%
                of Total**
              **Revenue**
            
            **Amount
                ($)**
            
            **%
                of****Total**
              **Revenue**
            
            **Amount
                ($)**
            
            **(%)****Income
                from Operations**
            
            
            17,475,341
            
            
            24.07
            
            
            29,555,876
            
            
            29.36
            
            
            12,080,535
            
            
            69.13Interest
                Income
            
            
            140,375
            
            
            0.19
            
            
            274,203
            
            
            0.27
            
            
            133,828
            
            
            95.34Non-operating
                Expense
            
            
            (89,068
            )
            
            (0.12
            )
            
            (12,094
            )
            
            (0.01
            )
            
            76,974
            
            
            (86.42
            )**Income
                Before Income Taxes**
            
            
            **17,526,648**
            
            
            **24.14**
            
            
            **29,817,985**
            
            
            **29.62**
            
            
            **12,291,337**
            
            
            **70.13**





Operating
      income increased by $12,080,535 or 69.13% for the year ended December 31, 2007
      compared to the prior year. This was mainly due to the increased revenues of
      $28,054,762 which was offset by an increase of cost of revenue of
      $14,872,269 and an increase in operating expenses of $1,101,958.





Interest
      income for the year ended December 31, 2007 increased by $133,828 or 95.34%.
      This increase resulted from more cash being on deposit at our banks.





Non-operating
      expenses for the year ended December 31, 2007 decreased by $76,974, mainly
      because of less finance fees paid to banks and no loss from disposition of
      damaged and outdated equipment being incurred in 2007.





***Comparison
      for the Years ended December 31, 2005 and 2006***




***Sale
      of Products***




For
                the Year Ended December 31,2005
            
            2006
            
            Period
                to Period ChangeAmount
                ($)
            
            %
                of Total
              Revenue
            
            Amount
                ($)
            
            %
                of Total
              Revenue
            
            Amount
                ($)
            
            %Sale
                of productsChemical
            
            
            43,985,596
            
            
            75.06
            
            
            50,592,217
            
            
            69.69
            
            
            6,606,621
            
            
            15.02Nano
            
            
            14,613,733
            
            
            24.94
            
            
            22,007,814
            
            
            30.31
            
            
            7,394,081
            
            
            50.60**Total****Sale of products**
            
            
            58,599,329
            
            
            100.00
            
            
            72,600,031
            
            
            100.00
            
            
            14,000,702
            
            
            23.89




-36-




**Total** **Sale
      of products** ****




The
      total
      sale of products of our coal-based chemical business increased by $6,606,621
      or
      15.02% in 2006 compared to the prior year. The increase was mainly due to :
      (i)
      additional revenue of $1,283,214 from increased sales of methanol of 2,782
      tons
      and the increased sale price of $13.56 per ton; (ii) $3,586,746 from increased
      sales of liquid ammonia of 14,233 tons and the increase sale price of $4.08
      per
      ton; and (iii) $4,074,239 from the increased sales of melamine by 4,169 tons
      and
      the increased sale price of $24.36 per ton, respectively, which is offset by
      the
      decreased sales of ammonium bicarbonate of 10,242 tons and the decreased price
      of $5.36 per ton resulting in decreased revenue of $2,196,576. The difference
      in
      sales was caused by the adjustment of our product mix due to market conditions.




The
      increase of total sale of products from our NPCC business was $7,394,081 or
      50.60% in 2006 compared to the prior year. The increase was mainly due to
      additional revenue of $7,398,551 from increased sales of 18,626 tons of NPCC,
      which was primarily a result of our capacity expansion in Shaanxi, which was
      offset by the decreased average price of $0.24 per ton which resulted in a
      decrease of $4,470. The decreased price of these products resulted from the
      company’s decision to partially pass thru to customers’ savings in manufacturing
      costs from the combination of the introduction of new technology and lower
      cost
      of raw material in our new factory.




*Cost
      of Products Sold and Gross Profit*




**For
                the Year Ended December 31,****2005**
            
            **2006**
            
            **Period
                to Period Change****Amount($)**
            
            **%
                of Segment Revenue**
            
            **Amount($)**
            
            **%
                of Segment Revenue**
            
            **Amount
                ($)**
            
            **%****Cost
                of Products Sold**Chemical
            
            
            31,752,100
            
            
            72.19
            
            
            37,924,593
            
            
            74.96
            
            
            6,172,493
            
            
            19.44NPCC
            
            
            9,264,339
            
            
            63.39
            
            
            13,297,976
            
            
            60.42
            
            
            4,033,637
            
            
            43.54**Total
                Cost of Products Sold**
            
            
            41,016,439
            
            
            69.99
            
            
            51,222,569
            
            
            70.55
            
            
            10,206,130
            
            
            24.88**Gross
                Profit**Chemical
            
            
            12,233,496
            
            
            27.81
            
            
            12,667,624
            
            
            25.04
            
            
            434,128
            
            
            3.55NPCC
            
            
            5,349,394
            
            
            36.61
            
            
            8,709,838
            
            
            39.58
            
            
            3,360,444
            
            
            62.82**Total
                Gross Profit**
            
            
            17,582,890
            
            
            30.01
            
            
            21,377,462
            
            
            29.45
            
            
            3,794,572
            
            
            21.58




The
      cost
      of products sold of our chemical business increased by $6,172,493 or 19.44%
      in
      2006 compared to the prior year. The increase was mainly due to: the adjustment
      of product mix resulting in an increase in cost of revenue of $3,062,669 and
      an
      increase in sales of melamine of 4,169 tons which resulted in an increase of
      $3,111,177. Included in these increases are an increase in the unit cost of
      coal, by $1.90 per ton, which resulted in an increase in the amount of
      $1,176,057, and the increase in electricity cost of $0.004 per kwh, which
      resulted in an increase in the amount of $967,391.




-37-




The
      gross
      margin of our coal-based chemical business declined from 27.81% to 25.04% and
      gross profit increased by $434,128 or 3.55%.




The
      cost
      of products sold of our NPCC business increased by $4,033,637 or 43.54% in
      2006
      compared to the prior year. This was mainly due to: (i) the cost of products
      sold increased by $3,929,430 from capacity expansion; (ii) the remaining
      increase was primarily due to the increase in the price of electricity and
      raw
      material.




Our
      gross
      margin of our NPCC business increased from 36.61% to 39.58%. This was mainly
      due
      to the unit cost of our products decreasing as a result of the introduction
      of
      new technology and the expanding of capacity and lower cost of raw materials
      at
      our new factory. As a result, the gross profit increased by $3,360,444 or 62.82%
      compared to the prior year.




*Operating
      Expenses*




**For
                the Year Ended December 31,****2005**
            
            **2006**
            
            **Period
                to Period Change****Amount($)**
            
            **%
                of Total**
              **Revenue**
            
            **Amount($)**
            
            **%
                of Total**
              **Revenue**
            
            **Amount($)**
            
            **%****Operating
                Expenses**Selling
                Expense
            
            
            865,338
            
            
            1.48
            
            
            1,260,647
            
            
            1.74
            
            
            395,309
            
            
            45.68General
                and Administrative Expense
            
            
            967,357
            
            
            1.65
            
            
            2,641,474
            
            
            3.64
            
            
            1,674,117
            
            
            173.06**Total
                Operating Expenses**
            
            
            1,832,695
            
            
            3.13
            
            
            3,902,121
            
            
            5.38
            
            
            2,069,426
            
            
            112.92





Selling
      expenses in 2006 increased by $395,309 or 45.68% compared to the prior year,
      primarily caused by an increase in sales commissions of $402,389, which
      is
      off set by the decrease of employees’ salary and social insurance expenses of
      $7,080.




The
      general and administrative expenses increased by $1,674,117 or 173.06% in 2006
      compared to the prior year. The main reasons were: (i) the $236,795 increase
      as *Research
      and Development* fee;
      (ii) salary of the employees increased by $90,304 due to the expansion of the
      production capacity; (iii) expenses of $1,049,982 from being a public company;
      and (iv) value of warrant granted as the service compensation was $153,619;
      (v)
social
      insurance expenses increase of $63,778 from increase of employee numbers and
      other expenses increase of $79,639, such as office expenses and entertainment
      expenses.




-38-




***Income from
      Operations and Other Income***




**For
                the Year Ended December 31,****2005**
            
            **2006**
            
            **Period
                to Period Change****Amount($)**
            
            **%
                of Total**
              **Revenue**
            
            **Amount($)**
            
            **%
                of Total**
              **Revenue**
            
            **Amount($)**
            
            **%****Income
                from Operations**
            
            
            15,750,195
            
            
            26.88
            
            
            17,475,341
            
            
            24.07
            
            
            1,725,146
            
            
            10.95**Interest
                Income**
            
            
            82,611
            
            
            0.14
            
            
            140,375
            
            
            0.19
            
            
            57,764
            
            
            69.92**Non-Operating****(Expenses)
                Income**
            
            
            129,665
            
            
            0.22
            
            
            (89,068
            )
            
            (0.12
            )
            
            (218,733
            )
            
            (168.69
            )**Income
                Before Income Taxes**
            
            
            15,962,471
            
            
            27.24
            
            
            17,526,648
            
            
            24.14
            
            
            1,564,177
            
            
            9.80





Income from
      operations increased by $1,725,146 or 10.95% in 2006 compared to the prior
      year.
      This was mainly due to increased revenues of $14,000,702 which was offset by
      an
      increase of cost of revenue in the amount of $10,206,130 and an increase in
      operating expenses in the amount of $2,069,426.




Interest
      income in 2006 increased by $57,764 or 69.92%. Such increase was due to the
      fact
      that more cash was on deposit at our banks.




In
      2006,
      there was $197,635 of income from the sale of surplus heat from our production
      process to the heat supply department of the local government which was included
      in revenue in 2006 and recorded in the other income in 2005.




Non-operating expenses totaled
      $89,068 in 2006 and primarily consisted of exchange loss in the amount of
      $72,909 and an additional expenditure for the disposition of damaged and
      outdated equipment in the amount of $16,159.




**Liquidity
      and Capital Resources**





**As
                of and for the Years ended December 31,****2006**
            
            **2007****Amount
                ($)**Cash
                and Cash Equivalents
            
            
            34,684,142
            
            
            26,366,568Trade
                Accounts Receivable
            
            
            5,588,676
            
            
            7,889,001Working
                Capital
            
            
            33,555,584
            
            
            26,535,741Cash
                Provided by Operating Activities
            
            
            21,663,512
            
            
            30,946,867Cash
                Used in Investing Activities
            
            
            (15,457,918
            )
            
            (38,602,911
            )Cash
                Provided by (used in) Financing Activities
            
            
            16,880,395
            
            
            (2,623,555





We
      believe, based on our current cash levels as well as the operating cash flows
      expected in 2008, that we will have sufficient funds to finance our current
      operations for at least the next 12 months. However, we have also planned
      additional capital expenditures in the next 12 months for potential acquisitions
      and new projects. We anticipate that these expenditures will be funded from
      working capital and financing activities. Our Board of Directors is in the
      process of completing the 2008 capital budget and the capital expenditures
      are
      subject to change. There is no assurance that we will be able to obtain the
      necessary funds for such capital expenditures.




-39-





***Cash
      and cash equivalents.*** **** Our
      cash
      and cash equivalents were held for working capital purposes. We did not enter
      into investments for trading or speculative purposes.





***Trade
      accounts receivable.*** **** Our
      trade
      accounts receivable balance fluctuates from period to period, which affects
      our
      cash flow from operating activities. The fluctuations vary depending on the
      timing of our shipping and billing activity and cash collections. Accounts
      receivables turnover in days were 24 days in 2007, 2006 and 2005. We established
      credit policy of 90 days in 2007 to qualified NPCC customers and, for coal-based
      chemicals, our customers made the payments either upon delivery or via wire
      transfer within 20 days. As of December 31, 2007, there was no overdue
      receivable.





***Working
      capital.*** Our
      working capital balance fluctuates from period to period, which is affected
      by
      our cash flow from operating activities. Working capital increased significantly
      over 2005 to 2006; there was a decrease of the working capital balance over
      2006
      to 2007 due to the rapid expansion of our business.





***Cash
      flows from operating activities.*** Cash
      provided by operating activities primarily consists of net income (loss)
      adjusted for certain non-cash items including depreciation and amortization,
      impairment of property and plant and the effect of changes in working capital
      and other activities. Cash provided by operating activities for the year ended
      December 31, 2007 was $30,946,847, consisting of $27,030,345 of net income,
      $2,128,980 of depreciation and amortization, $1,845 from disposal of fixed
      assets, $(2,276,183) from increase of receivables, $330,614 from decrease of
      inventories, and $3,371,266 from increase of payables.





Cash
      provided by operating activities for the year ended December 31, 2006 was
      $21,663,512 and consisted of $17,526,648 of net income and $1,031,387 of
      depreciation, $16,377 from disposal of fixed assets, $153,619 from warrants
      payment, $1,815,785 from decrease of receivables; $(611,842) from increase
      of
      inventories; and $1,731,538 from increase of payables.





Cash
      provided by operating activities for the year ended December 31, 2005
      was $17,293,288 and consisted of $15,962,471 of net income, $1,009,577 of
      depreciation and $69,249 of amortization,$(329,974) from increase of
      receivables; $(179,322) from increase of inventories; and $761,287 from increase
      of payables.




***Cash
      flows from investing activities.*** Net
      cash
      used in investing activities ended December 31, 2007 was $38,602,911 of which
      $120,083 was for purchasing of land use right, $19,090,018 for purchasing of
      new
      equipment, and $19,392,810 for construction in our Shaanxi Province Plant NPCC
      capacity expansion.




Net
      cash
      used in investing activities ended December 31, 2006 was $15,457,918, of which
      $15,365,898 was for the new equipment purchase and $92,020 for construction
      in
      our Shaanxi Province Plant NPCC capacity expansion.




Net
      cash
      used in investing activities ended December 31, 2005 was $2,517,152, mainly
      for
      new machinery and equipment purchased for our chemical Plant.




***Cash
      flows from financing activities.*** Net cash
      used in financing activities ended December 31, 2007 was $2,623,555, consisting
      of $207,651 in payments to ex-stockholders for our restructuring (there will
      be
      no such payment in the future), and $2,415,904 in payments to related parties
      described in the notes to the consolidated financial statements included
      elsewhere in this offering memorandum.




Net
      cash
      provided by financing activities ended December 31, 2006 was $16,880,395,
      consisting of an increase of $13,969,714 from a private offering, an increase
      of
      $3,882,177 from a loan offered by related parties, and a decrease of $971,496
      for payment to ex-stockholders for the restructure.




Net
      cash
      used in financing activities ended December 31, 2005 was $14,574,841; consisting
      of $7,822,477 payment to ex-shareholders for restructuring purpose, $1,570,946
      loan to related parties, and $5,181,418 in payments of principal and interest
      for short term loan.





**Contractual
      Obligations And Contingent Liabilities**


**As
                  of**
                **December
                  31,**
                **2007**
              
              **Less than one**
                **Year**
              
              **1-3**
                **Years**
              
              **3-5**
                **Years**
              
              **More**
                **than
                  5**
                **Years**Capital
                  Lease for Equipments, Building and Lands Obligations
              
              $
              —
              
              $
              —
              
              $
              
              
              $
              —
              
              $
              —Trade
                  Account Payable
              
              
              5,296,530
              
              
              5,296,530
              
              
              —
              
              
              —
              
              
              —Other
                  Payable
              
              
              3,276,473
              
              
              3,276,473
              
              
              —
              
              
              —
              
              
              —Income
                  and Other Taxes Payable
              
              
              2,303,402
              
              
              2,303,402
              
              
              —
              
              
              —
              
              
              —Payable
                  to Related Parties
              
              
              1,064,348
              
              
              1,064,348
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              11,940,753
              
              $
              11,940,753
              
              $
              —
              
              $
              —
              
              $
              —





**Off-Balance
      Sheet Arrangements**





We
      do not
      have into any off-balance sheet arrangements.





-40-


**Recently
      Issued Accounting Standards**




**Recently
      Enacted Accounting Standards** - In
      September 2006, the Financial Accounting Standards Board (FASB) issued
      SFAS No. 157, Fair Value Measurements, which defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands disclosures about fair value measurements.
      SFAS No. 157 is effective for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. In
      February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
      extended the effective date for certain nonfinancial assets and nonfinancial
      liabilities to fiscal years beginning after November 15, 2008. The Company
      does
      not expect the adoption of SFAS No. 157 to have a material impact on our
      consolidated financial statements.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 permits companies to choose to measure many financial instruments
      and certain other items at fair value. SFAS No. 159 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007. The Company does not expect the adoption of SFAS No. 159 to have a
      material impact on our consolidated financial statements.




In
      June
      2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3,
      “Accounting for Nonrefundable Advance Payments for Goods or Services to be Used
      in Future Research and Development Activities”, (“EITF 07-3”) which is effective
      for fiscal years beginning after December 15, 2007. EITF 07-3 requires that
      nonrefundable advance payments for future research and development activities
      be
      deferred and capitalized. Such amounts will be recognized as an expense as
      the
      goods are delivered or the related services are performed. EITF 07-3 is not
      expected to have a material impact on our results of operations or financial
      position.




In
      December 2007, the FASB issued SFAS No. 141(R), *Business
      Combinations* ,
      and
      SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements* .
      SFAS
      No. 141(R) requires an acquirer to measure the identifiable assets
      acquired, the liabilities assumed and any non-controlling interest in the
      acquiree at their fair values on the acquisition date, with goodwill being
      the
      excess value over the net identifiable assets acquired. SFAS No. 160
      clarifies that a non-controlling interest in a subsidiary should be reported
      as
      equity in the consolidated financial statements, consolidated net income shall
      be adjusted to include the net income attributed to the non-controlling interest
      and consolidated comprehensive income shall be adjusted to include the
      comprehensive income attributed to the non-controlling interest. The calculation
      of earnings per share will continue to be based on income amounts attributable
      to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for
      financial statements issued for fiscal years beginning after December 15,
      2008. Early adoption is prohibited. The Company has not yet determined the
      effect on our consolidated financial statements, if any, upon adoption of SFAS
      No. 141(R) or SFAS No. 160. SFAS No. 141(R) and SFAS No. 160 are
      not expected to have a material impact on our results of operations or financial
      position.




-41-




**Item
      7A. Quantitative And Qualitative Disclosures About Market
      Risk**




Market
      risk is the risk of loss to future earnings, to fair values or to future cash
      flows that may result from changes in the price of a financial instrument.
      The
      value of a financial instrument may change as a result of changes in interest
      rates, exchange rates, commodity prices, equity prices and other market changes.
      Our cash and cash equivalents are held for working capital purposes and consist
      primarily of bank deposits. We do not enter into investments for trading or
      speculative purposes.





*Interest
      Rate Risk*





We
      currently do not have any long-term debt. Our exposure to interest rate risk
      primarily relates to the interest income generated by excess cash invested
      in
      demand deposits. We have not used derivative financial instruments in our
      investment portfolio in order to reduce interest rate risk. Interest earning
      instruments carry a degree of interest rate risk and our future interest income
      may change, depending on market interest rate movement.





*Foreign
      Currency Risk*





Our
      business is operated in the PRC, and its value is effectively denominated in
      Renminbi. The fluctuation of foreign exchange rate between U.S. dollars and
      Renminbi could affect the value of our common stock. Our revenues and expenses
      are primarily denominated in Renminbi, and so our exposure to foreign exchange
      risks should generally be limited. We do not have material monetary assets
      and
      liabilities denominated in U.S. dollars, although to the extent that we do
      in
      the future, the fluctuation of foreign exchange rate would affect the value
      of
      these monetary assets and liabilities denominated in U.S. dollars. Generally,
      appreciation of Renminbi against U.S. dollars will devaluate the assets and
      liabilities denominated in U.S. dollar, while devaluation of Renminbi again
      U.S.
      dollars will appreciate the assets and liabilities denominated in U.S. dollar.
      In China, very limited hedging transactions are available to reduce our exposure
      to exchange rate fluctuations. To date, we have not entered into any hedging
      transactions in an effort to reduce our exposure to foreign currency exchange
      risk. While we may decide to enter into hedging transactions in the future,
      the
      availability and effectiveness of these hedges may be limited and we may not
      be
      able to successfully hedge our exposure at all.





**Item
      8. Financial Statements And Supplementary Data**





Our
      consolidated financial statements and related notes are contained on
      pages F-1 to F-24 of this report.




-42-





**Item
      9.  Changes In and Disagreements With Accountants On Accounting and
      Financial Disclosure**





Not
      applicable.




**Item
      9a. Controls And Procedures**




Under
      the
      supervision and with the participation of our management, including the Chief
      Executive Officer and Chief Financial Officer, we have evaluated the
      effectiveness of our disclosure controls and procedures as required by Exchange
      Act Rule 13a-15(b) as of the end of the period covered by this report. Based
      on
      that evaluation, the Chief Executive Officer and Chief Financial Officer have
      concluded that these disclosure controls and procedures are effective.





(a)  Management’s
      annual report on internal control over financial reporting.




Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting. The Company's internal control over financial reporting
      is
      a process that is designed to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external purposes in accordance with generally accepted accounting
      principles, and includes those policies and procedures that:




·
            Pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of assets of the
                Company,




·
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that receipts and expenditures are being
                made
                only in accordance with authorizations of management and the board
                of
                directors of the Company, and




·
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use, or disposition of the Company's assets
                that
                could have a material effect on the financial
                statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies and procedures may deteriorate.




Management
      performed an assessment of the effectiveness of the Company's internal control
      over financial reporting as of December 31, 2007. The objective of this
      assessment was to determine whether the Company's internal control over
      financial reporting was effective as of December 31, 2007. Based on that
      assessment the Company believes that, at December 31, 2007, its internal control
      over financial reporting was effective.




(b)  Changes
      in internal control over financial reporting.





There
      was
      no change in our internal control over financial reporting that occurred in
      the
      fourth quarter of 2007 that has materially affected, or is reasonably likely
      to
      materially affect, our internal control over financial reporting.





(c)  Hansen
      Barnett Maxwell, P.C., the registered public accounting firm that audited the
      financial statements included in our annual report on this Form 10-K containing
      the disclosure required by Item 308 of Regulation S-K has issued an attestation
      report on management’s assessment of the registrant’s internal control over
      financial reporting which is included in the “Exhibits and Financial Statements”
of this Form 10-K.





**Item
      9b. Other Information**




None.




-43-





**FART
      III**





**Item
      10. Directors, Executive Officers and Corporate Governance**





We
      have
      provided below certain information about our executive officers and directors.
      Our directors serve for a term of one year or until their successors are duly
      elected and qualify. Our executive officers serve at the pleasure of our board
      of directors and have no fixed term of office.





**Name**
            
            **Age**
            
            **Position**Xiangzhi
                Chen
            
            46
            
            President,
                Chief Executive Officer and DirectorAnhui
                Guo
            
            38
            
            Director
                and Chief Financial OfficerDongquan
                Zhang
            
            67
            
            DirectorA.Carl
                Mudd
            
            64
            
            DirectorSheldon
                Saidman
            
            65
            
            DirectorXueyi
                Zhang
            
            36
            
            Vice
                PresidentXukui
                Chen
            
            35
            
            President
                of Shandong Bangsheng Chemical Co., Ltd.Zhaowei
                Ma
            
            43
            
            President
                of Shandong Haize Nano-Materials Co., LtdYong
                Zhao
            
            35
            
            President
                of Shaanxi Haize Nano-Materials Co., Ltd.Xiqing
                Xu
            
            49
            
            Vice
                President, Technology





**Mr.
      Xiangzhi Chen** has
      served as our chief executive officer, president and director since March 31,
      2006. Mr. Chen is the founder of Faith Bloom and its subsidiaries and has served
      as their chairman and chief executive officer since the subsidiaries’ formation
      in 2001. He has served as president of Shandong Shengda Technology Co., Ltd
      since January 2003. He was president of Shandong Shengda Construction Co.,
      Ltd
      from January 1997 to January 2003.





**Ms.
      Anhui Guo** has
      served as our chief financial officer, vice president and treasurer since March
      31, 2006 and as director since February 23, 2007. Ms. Guo has served as chief
      financial officer of Faith Bloom and its subsidiaries since 2001. Ms Guo was
      manager of finance of Shandong Shengda Construction Co., Ltd. from January
      2001
      to January 2003. She has served as manager of finance of Shandong Shengda
      Technology Co., Ltd. since January 2003. Ms. Guo was licensed as an accountant
      in 1996.





**Mr.
      Dongquan Zhang** has
      served as our director since February 23, 2007. Mr. Zhang has extensive
      experience in the chemical industry especially in research and development
      and
      regulatory areas. Currently he is a member of the board of directors of All
      China Association of Petro-Chemical Industry, vice president of Shandong
      Chemistry and Chemical Engineering Association, and vice president of Shandong
      Environmental Industry Association, and president of Shandong Chemical
      Industrial Pollution Prevention Association. From February 1994 to December
      2000, he served as director general and senior engineer of the Petro-Chemical
      Industry of Shandong Province.





**Mr.
      A. Carl Mudd** has
      served as our director since February 23, 2007. Mr. Mudd has extensive
      management experience especially in the financial area. He has spent the past
      14
      years consulting with and mentoring CEOs and Boards of Directors of major
      companies on global strategy, business processes and international
      operations and 27 years as CFO, COO and President of international
      companies. From 2003 to 2006, he was an advisory director at CIMIC Holdings,
      Ltd. From 1993 to 1996, he served as director and chairman of the Audit
      Committee at AM International, Inc. Mr. Mudd also serves as an independent
      director and chairman of the Audit Committee for Sutor Technologies Group,
      LTD
      (SUTR) a NASDAQ listed company. He is a Certified Public Accountant and holds
      a
      business degree from St. Edward's University.




-44-





**Mr.
      Sheldon Saidman** has
      served as our director since February 23, 2007. Mr. Saidman has extensive senior
      executive experience, especially in marketing and general management. He has
      held positions as President or Chief Operating Officer in several companies,
      both pubic and private. From May 2001 to October 2005, he served as President
      of
      Liberty Wire & Cable, Inc. He currently has his own business management
      consulting business and serves on two other boards of directors. He holds a
      bachelor’s degree in journalism and public relations from The University of
      Maryland.





**Mr.
      Xueyi Zhang** has
      served as vice president since March 31, 2006. Mr. Zhang has served as vice
      president of Shandong Shengda Technology since January 2003. He also served
      as
      vice president of Shandong Shengda Construction Co., Ltd from January 2001
      to
      January 2003.





**Mr.
      Xukui Chen** has
      served as president Shandong Bangsheng Chemical Co., Ltd. since October 2006.
      Mr. Chen is responsible for the management of our chemical business. From
      October 2005 to October 2006, he served as director of research and
      development of Shandong Shengda Chemicals Co., Ltd. He was president of Shandong
      Haize Nano-Materials Co. from October 2004 to October 2004. From October 2003
      to
      September 2004, he was president of the alcohol division of Shengda Group Co.,
      Ltd. He served as vice president of the alcohol division of Shengda Group Co.,
      Ltd. from September 2000 to September 2003.





**Mr.
      Zhaowei Ma** has
      been
      our president of Shandong Haize Nano-Materials Co., Ltd. since August 2005.
      Mr.
      Ma is responsible for the overall management of our nano-materials business.
      From January 2001 to August 2005, he served as director of sales of Shandong
      Shengda Nanomaterials Co., Ltd.





**Mr.
      Yong Zhao** has been
      our president of Shaanxi Haize Nano-Materials Co., Ltd since October 2006 and
      responsible for the overall management of our nano-materials business in
      Shannxi. From August 2002 to October 2006, he was the vice general manager
      of
      Shandong Haize Nano-Materials Co., Ltd.





**Mr.
      Xiqing Xu** has been
      Vice President, Technology since March 2007. Mr. Xu is responsible for the
      management of the *Research
      and Development* Center.
      From 2004 to October 2006, he was the general manager of Shandong Bangsheng
      Chemical Co. Ltd. From 2002 to June 2004, he was the general manager of Shandong
      Haize Nano-Materials Co. Ltd.





**Board
      Composition and Committees**





Our
      Board
      has five (5) members, of which three (3) are independent directors. We have
      an
      Audit Committee, a Compensation Committee and a Nominating and Corporate
      Governance Committee. The Audit Committee has been established as a
      separately-designated standing committee in accordance with section 3(a)(58)(A)
      of the Exchange Act. The Audit Committee has at least one member, Mr. Carl
      Mudd,
      who meets the definition of an “audit committee financial expert” under SEC
      rules and whom the Board has determined to be “independent”.





Audit
      Committee .
      The
      Audit Committee is currently comprised of Carl Mudd, Dongquan Zhang and Sheldon
      Saidman, with Carl Mudd as the chairman, each of whom are “independent” as that
      term is defined by SEC rules and under the NASDAQ listing standards. The Audit
      Committee is directly responsible for the appointment, retention, compensation
      and oversight of the work of any registered public accounting firm employed
      by
      the Company (including resolution of disagreements between management and the
      accounting firm regarding financial reporting) for the purpose of preparing
      or
      issuing an audit report or related work or performing other audit, review or
      other services. Any such registered public accounting firm must report directly
      to the Audit Committee. The Audit Committee has the ultimate authority and
      responsibility to evaluate and, where appropriate, replace the registered public
      accounting firm.





Compensation
      Committee. The
      Compensation Committee is responsible for the administration of all salary,
      bonus and incentive compensation plans for our officers and key employees.
      The
      members of the Compensation Committee are Dongquan Zhang, Carl Mudd and Sheldon
      Saidman as the chairman, all of whom are “independent” directors.




-45-





Nominating
      and Corporate Governance Committee. The
      Nominating and Corporate Governance Committee is responsible for preparing
      a
      list of candidates to fill the expiring terms of directors on our Board of
      Directors. The committee submits the list of candidates to the Board of
      Directors who determines which candidates will be nominated to serve on the
      Board of Directors. The nominees are then submitted for election at the annual
      meeting of stockholders. The committee also submits to the entire Board of
      Directors, a list of candidates to fill any interim vacancies on the Board
      of
      Directors resulting from the departure of a member of the Board of Directors
      for
      any reason prior to the expiration of his term. In recommending candidates
      for
      the Board of Directors, the committee keeps in mind the functions of this
      body.





The
      committee considers various criteria, including the ability of the individual
      to
      meet SEC and NASDAQ “independence” requirements, general business experience,
      general financial experience, knowledge of the company’s industry
      (including past industry experience), education, and demonstrated character
      and
      judgment. The committee will consider director candidates recommended by a
      stockholder if the stockholder mails timely notice to the secretary of the
      Company at its principal offices, which notice includes (i) the name, age and
      business address of such nominee, (ii) the principal occupation of such nominee,
      (iii) a brief statement as to such nominee’s qualifications, (iv) a statement
      that such nominee consents to his or her nomination and will serve as a director
      if elected, (v) whether such nominee meets the definition of an “independent”
director under the SEC rules and under NASDAQ listing standards and (vi) the
      name, address, class and number of shares of company stock held by the
      nominating stockholder.





Any
      person nominated by a stockholder for election to the Board of Directors will
      be
      evaluated based on the same criteria as all other nominees. The committee also
      oversees our adherence to our corporate governance standards. The members
      of the committee are Sheldon Saidman, Carl Mudd, and Dongquan Zhang, with
      Dongquan Zhang as the chairman.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Exchange Act requires our executive officers, directors and
      beneficial owners of more than ten percent (10%) to report their beneficial
      ownership of equity interests in the company to the SEC. Their initial reports
      are required to be filed using the SEC's Form 3, and they are required to report
      subsequent purchases, sales, and other changes using the SEC's Form 4, which
      must be filed within two business days of most transactions. Officers,
      directors, and persons owning more than 10% of our capital shares are required
      by SEC regulations to furnish us with copies of all of reports they file
      pursuant to Section 16(a).




We
      have
      complied with all the filing requirements under Section 16(a) for the year
      2007.





**Code
      of Ethics**





We
      have
      adopted a Code of Ethics (as defined in Item 406 of Regulation S-K) that applies
      to our principal executive, financial and accounting officers. ShengdaTech,
      Inc.
      will provide a copy of its code of ethics, without charge, to any person that
      requests it. Requests should be addressed in writing to Ms. Anhui Guo, CFO,
      ShengdaTech, Inc., Youth Pioneer Park, Tai'an Economic and Technological
      Development Zone, Tai'an City, Shandong Province 271000, People's Republic
      of
      China.




**Item
      11. Executive Compensation**




**Compensation
      Discussion and Analysis**





The
      Company’s executive compensation program is designed to pay key management
      personnel competitive remuneration based on the authority, responsibility and
      accountability of the position held by the individual. In addition, the Company
      considers the competitive environment relative to compensation paid to senior
      management with comparable job scope in companies in related industries and
      of
      approximate size. The plan consists of several components, base salary, bonus,
      “subsidy,” a non-taxable income provided to offset housing and transportation
      expenses, and a supplemental amount referred to as “proceeds.” The determination
      of subsidy and proceeds is a calculation made on total compensation and amounts
      to a combined 35%, with 14% allocated to subsidy and 21% to proceeds. The
      Company believes that such an approach to their executive compensation packages
      is both equitable and competitive, while providing a positive motivational
      element to the overall performance of the senior management of the Company.




-46-




Bonuses
      earned range from 10% to 20%, and are based on accomplishments in executing
      job
      tasks, and the general performance of the Company, measured against the
      financial plan for the bonus year. The bonus amount is determined by the CEO.
      Mr. Chen’s bonus is determined by the Board of Directors on recommendation of
      the Compensation Committee. This bonus will be based on meeting all financial
      objectives set in the budget year, including revenue, net income and return
      on
      capital employed. The Company’s bonus plan promotes individual performance as
      well as contributions to the overall operation. Bonus dollars earned will be
      paid following audited results of Company financial statements reported in
      the
      year following the bonus year. The receiving executive must be employed by
      the
      Company at the time of bonus payments.





**Compensation
      Table**




**Name
                & Principal Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Non-Equity
                Incentive Plan Compensation**
            
            **All
                other Compensation**
            
            **Total**(a)
            
            (b)
            
            (c)
            
            (d)
            
            (g)
            
            (i)
            
            (j)Xiangzhi
                Chen, CEO
            
            
            2007
            
            $
            195,000
            
            
            —
            
            $
            105,000
            
            
            —
            
            $
            300,000Anhui
                Guo, CFO
            
            
            2007
            
            $
            65,000
            
            
            —
            
            $
            35,000
            
            
            —
            
            $
            100,000Zhaowei
                Ma, COO Shandong Haize
            
            
            2007
            
            
            65,000
            
            
            
            
            
            35,000
            
            
            
            
            
            100,000Yong
                Zhao COO Shaan’xi Haize
            
            
            2007
            
            
            65,000
            
            
            
            
            
            35,000
            
            
            
            
            
            100,000Xukui
                ChenCOO Shandong Bangsheng
            
            
            2007
            
            
            52,000
            
            
            
            
            
            28,000
            
            
            
            
            
            80,000





The
      Compensation Committee reviewed and approved the compensation paid to the top
      five executives of the corporation as listed in the Compensation Table above.
      Recommendations for annual increases in compensation to named executives are
      to
      be presented to the Compensation Committee and are subject to their approval.
      Pay increases for non-named employees will be at the discretion of the
      employee’s supervisor, subject to senior management approval.


The
      regulations regarding employee pension and retirement plans governed by the
      Peoples Republic of China is the only program administered by the Company.
      No
      other supplemental plan exists.




The
      Company has never had an employee stock option (ESO) plan. Since the proven
      benefits of such a program are well recognized by management, Mr. Chen has
      directed the Compensation Committee to develop an ESO plan as part of the
      Company’s 2008 compensation program.





**Grants
      of Plan-Based Awards**





The
      Company currently does not have any award plans. No options were granted to
      any
      officer in 2007.





**Outstanding
      Equity Awards at Fiscal Year End**





The
      Company currently does not have an equity compensation plan. No options or
      shares of stock were granted to any officer in 2007.




-47-





**Option
      Exercises and Stock Vested**





No
      options were exercised and no shares of stock were vested in 2007.





**Pension
      Benefits**





The
      Company does not have any pension plans for its officers.





**Nonqualified
      Deferred Compensation**




There
      was
      no nonqualified deferred compensation for the officers in 2007.





**Potential
      Payment Upon Termination or Change in Control**





The
      Company currently does not have payment arrangements for its officers upon
      termination or change in control.





**Director
      Compensation**





Non-employee
      directors will receive compensation for their service on the board and board
      committees consisting of (i) an annual retainer of $35,000 (ii) $1,000 for
      each
      telephone conference call meeting and (iii) $5,000 for each in-person meeting.
      The chairperson of the audit committee will receive an additional $10,000
      annually. We will also reimburse directors for travel and other out-of-pocket
      expenses incurred in connection with their board service.





**Compensation
      Committee Report**





The
      Compensation Committee has reviewed and discussed the Compensation Analysis
      and
      Discussion with the management of the Company. Based on the review and the
      discussions, the Compensation Committee recommended to Board of Directors that
      the Compensation Analysis and Discussions be included in the
      Company’s annual report on Form 10-K. The members of the Compensation
      Committee are Dongquan Zhang, Carl Mudd and Sheldon Saidman,
      chairman.





**Item
      12. Security Ownership Of Certain Beneficial Owners And Management And Related
      Shareholders Matters**





The
      following table sets forth information as of December 31, 2007, regarding the
      beneficial ownership of our common stock by each person known by us to own
      5% or
      more of the outstanding shares of common stock, each of our directors, each
      of
      our named executive officers, and our directors and executive officers as a
      group. The percentage of beneficial ownership is calculated based on 54,202,036
      shares of common stock outstanding as of December 31, 2007.




**Name
                and Address**
            
            **Number of Shares**
            
            **Percentage Owned**Xiangzhi
                Chen
            
            
            22,902,912
            
            
            42.25
            %Anhui
                Guo
            
            
            —
            
            
            —Xueyi
                Zhang
            
            
            —
            
            
            —Dongquan
                Zhang
            
            
            —
            
            
            —Carl
                Mudd
            
            
            5,000
            
            
            —Sheldon
                Saidman
            
            
            —
            
            
            —Xiqing
                Xu
            
            
            1,154,584
            
            
            2.13
            %Zhaowei
                Ma
            
            
            —
            
            
            —Directors
                and executive officers as a group (8 persons)
            
            
            24,062,496
            
            
            44.38
            %





The
      address for all these officers and internal directors is Youth Pioneer Park,
      Tai'an Economic and Technological Development Zone, Tai'an City, Shandong
      Province 271000, People's Republic of China.





**Item
      13. Certain Relationships And Related Transactions and Director
      Independence**





In
      December 2007, the Company entered three-year lease agreements with Shandong
      Shengda Technology Co. Ltd. for land, land use rights, buildings and certain
      equipment for the total amount of $1,918,500. Mr. Xiangzhi Chen, Chairman and
      CEO of the Company, is the controlling shareholder and an executive officer
      of
      Shandong Shengda Technology Co., Ltd.





On
      November 20, 2007 the Company purchased a research and development center from
      Shandong Shengda Technology Co. Ltd. for the purchase price of $1,637,199.
      Mr.
      Xiangzhi Chen, Chairman and CEO of the Company, is the controlling shareholder
      and an executive officer of Shandong Shengda Technology Co., Ltd.





On
      June
      30, 2007 the Company purchased certain buildings and land use rights from
      Shandong Shengda Technology Co. Ltd. for the purchase price of $5,972,912.
      Mr.
      Xiangzhi Chen, Chairman and CEO of the Company, is the controlling shareholder
      and an executive officer of Shandong Shengda Technology Co., Ltd.




On
      December 31, 2006, for the price of $3,349,814, the Company purchased property
      and equipment from Shandong Shengda Technology Co. Ltd. and Shandong Shengda
      Chemical Machinery Co. Ltd. Mr. Xiangzhi Chen, Chairman and CEO of the Company,
      is the controlling shareholder and an executive officer of Shandong Shengda
      Chemical Machinery Co. Ltd.





**Item
      14. Principal Accounting Fees And Services**





Hansen,
      Barnett & Maxwell, P.C., has audited our financial statements since the 2005
      fiscal year. All of the services described below were approved by our board
      prior to performance. Our board has determined that the payments made to its
      independent accountant for these services are compatible with maintaining such
      auditor's independence.





**Audit
      Fees.** The
      aggregate fees billed by Hansen, Barnett & Maxwell, P.C., for professional
      services rendered for the audit of the Company’s financial statements for the
      fiscal year ended December 31, 2006 are $164,750 and the fees billed for the
      fiscal year ended December 31, 2007 are $295,375.




**Audit-Related
      Fees.** There
      were no fees for assurance and related services by Hansen, Barnett &
Maxwell, P.C., for the fiscal years ended December 31, 2006 and December 31,
      2007.




**Tax
      Fees.** We
      engage Hansen, Barnett & Maxwell, P.C. to provide service for the income tax
      returns in US for the fiscal years ended December 31, 2006 and December 31,
      2007, which are estimated to be $1,000 each for the two fiscal years.




**All
      Other Fees** .
      The
      other fees for either audit-related or non-audit services billed by Hansen,
      Barnett & Maxwell, P.C., for the fiscal years ended December 31, 2006 and
      December 31, 2007 are $0 and $2,911 respectively. The fees for fiscal year
      2007
      were billed for budget planning for the year.




-48-





**PART
      IV**




**Item
      15. Exhibits And Financial Statement Schedules**





(a)
      (1) Financial Statements




The
      following financial statements are included in this Annual Report on
      Form 10-K commencing on the page numbers specified below:




PageReports
                of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            
            F-4Consolidated
                Statements of Income and Comprehensive Income for the Years Ended
                December
                31, 2007, 2006 and 2005
            
            F-5Consolidated
                Statements of Shareholders’ Equity for the Years Ended December 31, 2005,
                2006, and 2007
            
            F-6Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007, 2006,
                and
                2005
            
            F-7Notes
                to Consolidated Financial Statements
            
            F-8




(2) Financial
      Statement Schedules




None




(3) Exhibits




The
      exhibits listed on the Exhibit Index (following the signatures section of
      this report) are included, or incorporated by reference, in this annual
      report.




-49-





**SHENGDATECH,
      INC. AND SUBSIDIARIES**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**SHENGDATECH,
      INC. AND SUBSIDIARIES**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-4Consolidated
                Statements of Income and Comprehensive Incomefor
                the Years Ended December 31, 2007, 2006 and 2005
            F-5Consolidated
                Statements of Shareholders’ Equityfor
                the Years Ended December 31, 2005, 2006, and 2007
            F-6Consolidated
                Statements of Cash Flows for theYears
                Ended December 31, 2007, 2006, and 2005
            F-7Notes
                to Consolidated Financial Statements
            F-8







**HANSEN,
                BARNETT &
                MAXWELL, P.C.**A
                  Professional Corporation
              CERTIFIED
                PUBLIC ACCOUNTANTS
              5
                  Triad Center, Suite 750
                Salt
                    Lake City, UT 84180-1128
                  Phone:
                      (801) 532-2200
              Fax:
                  (801) 532-7944
                www.hbmcpas.com
            **Registered
                with the Public Company**
              **Accounting
                Oversight Board**
              
              shengdatech




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and the


Shareholders
      of Shengdatech, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Shengdatech Inc. and
      subsidiaries (the Company) as of December 31, 2007 and 2006, and the related
      consolidated statements of income and comprehensive income, shareholders’
equity, and cash flows for each of the three years in the period ended December
      31, 2007. We also have audited the Company’s internal control over financial
      reporting as of December 31, 2007 based on criteria established in *Internal*  *Control-Integrated
      Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      The Company’s management is responsible for these financial statements, for
      maintaining effective internal control over financial reporting, included in
      “Management’s Report on Internal Control Over Financial Reporting”. Our
      responsibility is to express an opinion on these financial statements and an
      opinion on the Company’s internal control over financial reporting based on our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement and whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audits of the financial statements included examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, and evaluating the overall financial statement presentation.
      Our audit of internal control over financial reporting included obtaining an
      understanding of internal control over financial reporting, assessing the risk
      that a material weakness exists, and testing and evaluating the design and
      operating effectiveness of internal control based on the assessed risk. Our
      audits also included performing such other procedures as we considered necessary
      in the circumstances. We believe that our audits provide a reasonable basis
      for
      our opinions.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of the financial statements in accordance with generally
      accepted accounting principles, and that receipts and expenditures of the
      company are being made only in accordance with authorizations of management
      and
      directors of the company; and (3) provide reasonable assurance regarding
      prevention or timely detection of unauthorized acquisition, use or disposition
      of the company’s assets that could have a material effect on the financial
      statements.




F-2




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Shengdatech Inc. and
      subsidiaries as of December 31, 2007 and 2006, and the results of their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2007 in conformity with accounting principles generally accepted
      in
      the United States of America. Also, in our opinion, Shengdatech Inc. and
      subsidiaries maintained, in all material respects, effective internal control
      over financial reporting as of December 31, 2007, based on criteria established
      in *Internal
      Control-Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO).





As
      discussed in Note 1, the accompanying consolidated financial statements have
      been restated for the effects of correcting the classification of property
      and
      equipment acquisition costs as of December 31, 2007.





**HANSEN,
      BARNETT & MAXWELL,
      P.C.**





Salt
      Lake
      City, Utah


March
      14,
      2008, except
      for Note 1 regarding the restatement of financial statements,


as
      to
      which the date is April 11, 2008




F-3




**SHENGDATECH,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**December
                31,**
            
            **December
                31,****2007**
            
            **2006****(Restated)****ASSETS****Current
                Assets**Cash
                and cash equivalents
            
            $
            26,366,568
            
            $
            34,684,142Trade
                accounts receivable, less allowance for doubtful accounts of
                $0
            
            
            7,889,001
            
            
            5,588,676Other
                receivables
            
            
            13,962
            
            
            157,352Advances
                to suppliers
            
            
            2,249,867
            
            
            872,289Inventory
            
            
            1,955,384
            
            
            2,151,612Receivable
                from related parties
            
            
            1,712
            
            
            1,601**Total
                Current Assets**
            
            
            38,476,494
            
            
            43,455,672**Property
                and Equipment,**net of accumulated
                depreciation****of $6,126,393 and 3,674,605,
                respectively
            
            
            62,343,416
            
            
            23,573,680**Land
                use rights,** net of accumulated amortization of $1,031 and $0,
                respectively
            
            
            124,028
            
            
            -**TOTAL
                ASSETS**
            
            $
            100,943,938
            
            $
            67,029,352**LIABILITIES
                AND SHAREHOLDERS' EQUITY****Current
                Liabilities**Trade
                accounts payable
            
            $
            5,296,530
            
            $
            2,957,413Other
                payables and accrued expenses
            
            
            3,276,473
            
            
            2,235,758Income
                and other taxes payable
            
            
            2,303,402
            
            
            1,237,180Advances
                from customers
            
            
            -
            
            
            119,923Payable
                to related parties
            
            
            1,064,348
            
            
            3,349,814**Total
                Current Liabilities**
            
            
            11,940,753
            
            
            9,900,088**Shareholders'
                Equity**Preferred
                stock - $0.00001 par value; 10,000,000 shares authorized; no shares
                outstanding
            
            
            -
            
            
            -Common
                stock - $0.00001 par value; 100,000,000 shares authorized; 54,202,036
                and
                54,095,103 shares outstanding, respectively
            
            
            541
            
            
            540Additional
                paid-in capital
            
            
            21,616,469
            
            
            21,824,121Statutory
                reserves
            
            
            5,642,419
            
            
            3,301,379Retained
                earnings
            
            
            54,877,045
            
            
            30,187,740Accumulated
                other comprehensive income
            
            
            6,866,711
            
            
            1,815,484**Total
                Shareholders' Equity**
            
            
            89,003,185
            
            
            57,129,264**TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            $
            100,943,938
            
            $
            67,029,352





See
      the
      Accompanying Notes to the Consolidated Financial Statements




F-4





**SHENGDATECH,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**AND
      COMPREHENSIVE INCOME**




**For
                the Years Ended****December
                31,****2007**
            
            **2006**
            
            **2005****Sale
                of Products**
            
            $
            100,654,793
            
            $
            72,600,031
            
            $
            58,599,329**Cost
                of Products Sold**
            
            
            66,094,838
            
            
            51,222,569
            
            
            41,016,439**Gross
                Profit**
            
            
            34,559,955
            
            
            21,377,462
            
            
            17,582,890**Operating
                Expenses:**Selling
                expense
            
            
            1,771,168
            
            
            1,260,647
            
            
            865,338General
                and administrative expense
            
            
            3,232,911
            
            
            2,641,474
            
            
            967,357**Total
                Operating Expenses**
            
            
            5,004,079
            
            
            3,902,121
            
            
            1,832,695**Income
                from Operations**
            
            
            29,555,876
            
            
            17,475,341
            
            
            15,750,195**Other
                Income (Expense):**Interest
                income
            
            
            274,203
            
            
            140,375
            
            
            82,611Non-operating
                (expense) income
            
            
            (12,094
            )
            
            (89,068
            )
            
            129,665**Net
                Other Income**
            
            
            262,109
            
            
            51,307
            
            
            212,276**Income
                Before Income Taxes**
            
            
            29,817,985
            
            
            17,526,648
            
            
            15,962,471Provision
                for income taxes
            
            
            2,787,640
            
            
            -
            
            
            -**Net
                Income**
            
            $
            27,030,345
            
            $
            17,526,648
            
            $
            15,962,471Other
                comprehensive income: foreign currency translation
                adjustments
            
            
            5,051,227
            
            
            1,614,682
            
            
            200,271**Comprehensive
                income**
            
            $
            32,081,572
            
            $
            19,141,330
            
            $
            16,162,742**Earnings
                Per Share:****Basic**
            
            $
            0.50
            
            $
            0.34
            
            $
            0.25**Diluted**
            
            $
            0.50
            
            $
            0.34
            
            $
            0.25**Weighted
                Average Shares Outstanding:****Basic**
            
            
            54,107,408
            
            
            51,900,641
            
            
            64,455,210**Diluted**
            
            
            54,188,410
            
            
            52,022,801
            
            
            64,455,210





See
      the
      Accompanying Notes to the Consolidated Financial Statements




F-5





**SHENGDATECH,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007**





**Accumulated****Additional**
            
            **Receivable**
            
            
            
            
            
            **Other**
            
            **Total****Common
                Stock**
            
            **Paid-in**
            
            **From**
            
            **Statutory**
            
            **Retained**
            
            **Comprehensive**
            
            **Shareholders'****Shares**
            
            **Amount**
            
            **Capital**
            
            **Shareholder**
            
            **Reserves**
            
            **Earnings**
            
            **Income**
            
            **Equity****Balance,
                December 31, 2004**
            
            
            87,305,912
            
            $
            873
            
            $
            16,657,514
            
            $
            -
            
            $
            1,191,078
            
            $
            10,399,007
            
            $
            531
            
            $
            28,249,003Noncash
                capital contribution
            
            
            45,124,979
            
            
            451
            
            
            8,609,395
            
            
            (3,444,924
            )
            
            -
            
            
            -
            
            
            -
            
            
            5,164,922Distribution
                to shareholders
            
            
            (87,310,891
            )
            
            (873
            )
            
            (16,658,045
            )
            
            -
            
            
            -
            
            
            (11,590,085
            )
            
            -
            
            
            (28,249,003
            )Collection
                of receivable from shareholder
            
            
            -
            
            
            -
            
            
            -
            
            
            3,444,924
            
            
            -
            
            
            -
            
            
            -
            
            
            3,444,924Net
                income for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,203,293
            
            
            14,759,178
            
            
            -
            
            
            15,962,471Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            200,271
            
            
            200,271**Balance,
                December 31, 2005**
            
            
            45,120,000
            
            
            451
            
            
            8,608,864
            
            
            -
            
            
            2,394,371
            
            
            13,568,100
            
            
            200,802
            
            
            24,772,588Shares
                issued for cash, $2.39 per share
            
            
            5,837,603
            
            
            58
            
            
            13,969,656
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            13,969,714Shares
                issued to acquire Shengdatech, Inc. recorded as a purchase
            
            
            3,137,500
            
            
            31
            
            
            63,478
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            63,509Distribution
                of cash in purchase of equipment from select shareholders
            
            
            -
            
            
            -
            
            
            (971,496
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (971,496
            )Warrants
                issued for consulting services
            
            
            -
            
            
            -
            
            
            153,619
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            153,619Net
                income for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            907,008
            
            
            16,619,640
            
            
            -
            
            
            17,526,648Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,614,682
            
            
            1,614,682**Balance,
                December 31, 2006**
            
            
            54,095,103
            
            
            540
            
            
            21,824,121
            
            
            -
            
            
            3,301,379
            
            
            30,187,740
            
            
            1,815,484
            
            
            57,129,264Warrants
                exercised using cashless exercise provision
            
            
            106,933
            
            
            1
            
            
            (1
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Distribution
                of cash in purchase of equipment from select shareholders
            
            
            -
            
            
            -
            
            
            (207,651
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (207,651
            )Net
                income for the year
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,341,040
            
            
            24,689,305
            
            
            -
            
            
            27,030,345Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,051,227
            
            
            5,051,227**Balance,
                December 31, 2007**
            
            
            54,202,036
            
            $
            541
            
            $
            21,616,469
            
            $
            -
            
            $
            5,642,419
            
            $
            54,877,045
            
            $
            6,866,711
            
            $
            89,003,185





See
      the
      Accompanying Notes to the Consolidated Financial Statements




F-6




**SHENGDATECH,
          INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**





**For
                the Years Ended December 31,****2007**
            
            **2006**
            
            **2005****Cash
                Flows from Operating Activities:**Net
                income
            
            $
            27,030,345
            
            $
            17,526,648
            
            $
            15,962,471Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            2,128,980
            
            
            1,031,387
            
            
            1,078,826Loss
                on disposal of property, plant and equipment
            
            
            1,845
            
            
            16,377
            
            
            -Compensation
                paid with warrants
            
            
            -
            
            
            153,619
            
            
            -Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (1,839,452
            )
            
            (1,635,713
            )
            
            (71,541
            )Other
                receivables
            
            
            144,500
            
            
            4,040,220
            
            
            -Advances
                to suppliers
            
            
            (581,231
            )
            
            (588,722
            )
            
            (258,433
            )Inventory
            
            
            330,614
            
            
            (611,842
            )
            
            (179,322
            )Trade
                accounts payable
            
            
            2,306,124
            
            
            1,468,602
            
            
            (662,437
            )Other
                payables and accrued expenses
            
            
            606,185
            
            
            230,538
            
            
            238,137Income
                and other taxes payable
            
            
            942,034
            
            
            (85,055
            )
            
            1,261,756Advances
                from customers
            
            
            (123,077
            )
            
            117,453
            
            
            (76,169
            )**Net
                Cash provided by Operating Activities**
            
            
            30,946,867
            
            
            21,663,512
            
            
            17,293,288**Cash
                Flows from Investing Activities:**Purchase
                of property and equipment
            
            
            (19,090,018
            )
            
            (15,365,898
            )
            
            (2,517,152
            )Construction
                in progress
            
            
            (19,392,810
            )
            
            (92,020
            )
            
            -Purchase
                of land use rights
            
            
            (120,083
            )
            
            -
            
            
            -**Net
                Cash used in Investing Activities**
            
            
            (38,602,911
            )
            
            (15,457,918
            )
            
            (2,517,152
            )**Cash
                Flows from Financing Activities:**Proceeds
                from issuance of common stock
            
            
            -
            
            
            13,969,714
            
            
            -Changes
                in related party receivable / payable
            
            
            (2,415,904
            )
            
            3,882,177
            
            
            (1,570,946
            )Distribution
                to shareholder
            
            
            (207,651
            )
            
            (971,496
            )
            
            (7,822,477
            )Other
                non-trade receivables
            
            
            -
            
            
            -
            
            
            (5,181,418
            )**Net
                Cash (used in) provided by Financing Activities**
            
            
            (2,623,555
            )
            
            16,880,395
            
            
            (14,574,841
            )**Effect
                of Exchange Rate Changes in Cash**
            
            
            1,962,025
            
            
            848,853
            
            
            138,154**Net
                Change in Cash**
            
            
            (8,317,574
            )
            
            23,934,842
            
            
            339,409**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            34,684,142
            
            
            10,749,300
            
            
            10,409,891**Cash
                and Cash Equivalents at End of Period**
            
            $
            26,366,568
            
            $
            34,684,142
            
            $
            10,749,300**Supplemental
                Cash Flow Disclosures:**Cash
                paid for income taxes
            
            $
            2,108,043
            
            $
            872,156
            
            $
            3,485,546**Schedule
                of Non-cash Investing and Financing Activities:****Distribution
                paid by owner directly to investors**
            
            $
            -
            
            $
            -
            
            $
            5,164,922**Non-cash
                capital investment into Eastern Nano by the
                investors**
            
            
            -
            
            
            -
            
            
            8,609,846**Shares
                issued for net assets of Shengdatech, Inc.**
            
            
            -
            
            
            63,509
            
            
            -**Non-cash
                Distribution to Shareholders:**Other
                non-trade receivables
            
            $
            -
            
            $
            -
            
            $
            (301,111
            )Land
                and building
            
            
            -
            
            
            -
            
            
            (5,821,565
            )Intangible
                assets
            
            
            -
            
            
            -
            
            
            (7,795,486
            )Liability
                incurred
            
            
            -
            
            
            -
            
            
            (1,343,442
            )$
            -
            
            $
            -
            
            $
            (15,261,604
            )




See
        the
        Accompanying Notes to the Consolidated Financial Statements
  F-7





**NOTE
      1 – Organization and Nature of Operations**





***Organization
      and nature of operations*** - On
      March 2, 1998, a group of 19 investors (referred to herein as the Investors),
      of
      which Mr. Chen Xiangzhi (Mr. Chen) holds a controlling interest, formed Shandong
      Shengda Nano Co., Ltd. (Shengda Nano) under the laws of the People’s Republic of
      China (PRC). Shengda Nano has developed, and manufactures and markets nano-sized
      precipitated calcium carbonate (NPCC) in the PRC primarily for use in the
      production of automobile tires and polyvinyl chloride (PVC).





On
      November 13, 2001, the Investors formed Shandong Shengda Chemical Co., Ltd.
      (Shengda Chemical) under the laws of the PRC. Shengda Chemical manufactures
      and
      sells ammonium bicarbonate, liquid ammonia and methanol in the PRC for use
      as
      chemical fertilizer and in the production of other organic and inorganic
      chemical products including formaldehyde and pesticides.





During
      September 2004, the Investors formed Dongfang Nano-Materials Pte. Limited,
      a
      Singapore private limited company, subsequently renamed Eastern Nano-Materials
      Holdings Pte. Ltd. (Eastern Nano), and formed Shandong Haize Nano Co. Ltd.
      (Haize Nano) and Shandong Bangsheng Chemical Co. Ltd. (Bangsheng Chemical)
      as
      subsidiaries of Eastern Nano in the PRC (the Eastern Nano Subsidiaries). On
      November 24, 2004, the Investors agreed to transfer all of the operations and
      all of the assets and liabilities of Shengda Nano and Shengda Chemical, except
      for $7,822,477 of cash, $301,111 of other non-trade receivables, their land,
      land use rights and buildings, (the transferred assets and liabilities are
      referred to herein as the Acquired Assets) to the Eastern Nano Subsidiaries
      and
      to cause the Eastern Nano Subsidiaries to assume $1,343,442 of additional
      liabilities from the Investors. In June 2005, the Eastern Nano Subsidiaries
      consummated the acquisition of the Acquired Assets for $5,164,922. The purchase
      was financed and paid by Mr. Chen personally borrowing $5,250,000 from a
      third-party lender and paying $5,164,922 thereof to the Investors. The payments
      were made to the Investors in order to accomplish the transfer in accordance
      with the laws of the PRC and in accordance with the terms of the purchase
      agreement. Immediately thereafter, the Investors each repaid their proportionate
      share of $5,164,922 of Mr. Chen’s note payable to the third-party. The land,
      land use rights and buildings that Shengda Nano and Shengda Chemical retained
      were thereafter leased to the Eastern Nano Subsidiaries.





The
      transfer of the Acquired Assets to the Eastern Nano Subsidiaries was recognized
      in June 2005 as a reorganization of Shengda Nano and Shengda Chemical into
      the
      Eastern Nano Subsidiaries. The assets and liabilities of Shengda Nano and
      Shengda Chemical, including the assets retained by Shengda Nano and Shengda
      Chemical, were recorded at their historical carrying value of $28,249,003.
      The
      net assets that were retained by Shengda Nano and Shengda Chemical and the
      liabilities assumed from the Investors were recognized as distributions to
      the
      Investors at their fair values and consisted of the following:




F-8





**Distribution
                to shareholders:**Cash
            
            $
            7,822,477Other
                non-trade receivables
            
            
            301,111Land
                and buildings
            
            
            5,821,565Intangible
                assets - land use rights
            
            
            7,795,486Liabilities
                assumed
            
            
            1,343,442$
            23,084,081





Those
      net
      assets and the $5,164,922 paid to the Investors by Mr. Chen were recognized
      as
      capital distributions to the Investors totaling $28,249,003. The repayment
      by
      the Investors of $5,164,922 of Mr. Chen’s note payable to the third-party lender
      was recognized as an $8,609,846 non-cash capital investment into Eastern Nano
      by
      the Investors, which included a $3,444,924 receivable from a shareholder. The
      accompanying consolidated financial statements include the operations of Shengda
      Nano and Shengda Chemical for the periods prior to the reorganization and the
      operations of Eastern Nano and its subsidiaries for the periods after the
      reorganization.





On
      November 15, 2005, the Investors formed Faith Bloom Limited (Faith Bloom) under
      the laws of the British Virgin Islands. On December 31, 2005, Eastern Nano
      transferred the Eastern Nano Subsidiaries to Faith Bloom in exchange for the
      issuance of 10,000,000 shares of Faith Bloom common stock to the Investors.
      The
      transfer of the Eastern Nano Subsidiaries to Faith Bloom was recognized as
      a
      reorganization of Eastern Nano and the Eastern Nano Subsidiaries into Faith
      Bloom with the assets and liabilities remaining at their historical
      cost.





On
      March
      31, 2006, Faith Bloom issued 1,293,795 shares of common stock to certain
      unrelated institutional and accredited investors in exchange for $15,000,000
      less $1,030,286 of costs associated therewith. Upon consummation of this
      transaction and on the same date, Faith Bloom entered into an agreement with
      Zeolite Exploration Company, a Nevada corporation (”Zeolite”), to exchange all
      of Faith Bloom’s 11,293,785 outstanding common shares for 50,957,603 shares of
      Zeolite’s common stock. Subsequent to this transaction, the Faith Bloom
      shareholders owned 94.2% of Zeolite. Before the transaction, Zeolite had no
      operations. The transaction with Zeolite was recognized as a 4.5-for-1 stock
      split of the Faith Bloom common stock and the reverse acquisition of Zeolite’s
      net monetary assets totaling $63,509 in exchange for the 3,137,500 shares of
      common stock that remained outstanding. Faith Bloom’s assets and liabilities
      remained at their historical cost.





On
      April
      4, 2006, Faith Bloom formed Shaanxi Haize Nano-Material Co., Ltd (Shaanxi Haize)
      a wholly-owned subsidiary in Shaanxi, China to run a NPCC facility. The relative
      importance of the NPCC and Chemical businesses are described in Note
      11.





During
      January 2007, the shareholders of Zeolite changed its name to Shengdatech,
      Inc.




F-9




The
      accompanying consolidated financial statements have been restated on a
      retroactive basis to present the reorganizations of the Eastern Nano
      Subsidiaries into Faith Bloom and Faith Bloom into Zeolite as though the
      reorganizations had been in place for all periods presented. The operations
      of
      Shengdatech, Inc. have been included in the accompanying financial statements
      from March 31, 2006.





***Restatement
      of Financial Statements*** –
      During March 2008, the Company realized that the December 31, 2007 consolidated
      financial statements needed to be revised to correct an overstatement of
      advances paid to suppliers and an understatement of property and equipment
      in
      the amount of $17,186,677. The Company concluded that advances made for
      production equipment should be treated as construction in progress within
      property and equipment. The correction of these balances had no effect on the
      previously reported net income. The effects of the restatements were as
      follows:





**As Previously**
              **Reported**
            
            **Effect
                of**
              **Restatement**
            
            **As
                Restated****Consolidated
                Balance Sheet As of December 31, 2007**Advances
                to suppliers
            
            $
            19,436,544
            
            $
            (17,186,677
            )
            $
            2,249,867**Total
                Current Assets**
            
            
            55,663,171
            
            
            (17,186,677
            )
            
            38,476,494**Property
                and Equipment**
            
            
            45,156,739
            
            
            17,186,677
            
            
            62,343,416**TOTAL
                ASSETS**
            
            
            100,943,938
            
            
            -
            
            
            100,943,938**Consolidated
                Statement of Cash Flows****For
                the year ended December 31, 2007**Advances
                to suppliers
            
            $
            (17,767,908
            )
            $
            17,186,677
            
            $
            (581,231
            )**Net
                Cash provided by Operating Activities**
            
            
            13,760,190
            
            
            17,186,677
            
            
            30,946,867Construction
                in progress
            
            
            (2,206,133
            )
            
            (17,186,677
            )
            
            (19,392,810
            )**Net
                Cash used in Investing Activities**
            
            
            (21,416,234
            )
            
            (17,186,677
            )
            
            (38,602,911
            )**Net
                Change in Cash**
            
            
            (8,317,574
            )
            
            -
            
            
            (8,317,574
            )




**NOTE
      2 – Significant Accounting Policies**





***Basis
      of Presentation and Translating Financial Statements*** - The
      accompanying consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America.
      The functional currency of the operating subsidiaries in the PRC is the Chinese
      Yuan Renminbi (CNY); however, the accompanying financial statements have been
      expressed in United States Dollars (“USD”). The accompanying consolidated
      balance sheets have been translated into USD at the exchange rates prevailing
      at
      each balance sheet date. The accompanying consolidated statements of income
      have
      been translated using the average exchange rates prevailing during the periods
      of each statement. See Note 8.




F-10




***Consolidation*** - The
      accompanying consolidated financial statements include the accounts and
      transactions of Shengda Nano and Shengda Chemical through June 2005, the
      accounts of Eastern Nano from September 2004 through November 15, 2005, the
      accounts and transactions of Faith Bloom and its wholly owned subsidiaries
      from
      November 15, 2005 through March 31, 2006 and the accounts of Shengdatech, Inc.
      and its wholly owned subsidiaries from March 31, 2006. These combined entities
      are referred to herein as “the Company.” In
      connection with the lease agreements relating to the land, land use rights,
      buildings, and certain equipment, as described in Note 8, the Company has
      determined that it is not the primary beneficiary due to the significant other
      operations and substantial equity of the Lessors and therefore those entities
      are not consolidated in the Company’s financial statements.





***Accounting
      Estimates*** - The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the 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
      estimates.





***Fair
      Values of Financial Instruments*** - The
      carrying amounts reported in the consolidated balance sheets for trade accounts
      receivable, other non-trade receivables, advances to suppliers, receivable
      from
      related parties, trade accounts payable, other payables and accrued expenses,
      advances from customers, and payable to related parties approximate fair value
      because of the immediate or short-term maturity of these financial
      instruments.





***Cash
      and Cash Equivalents*** - Cash
      and cash equivalents include interest bearing and non-interest bearing bank
      deposits, money market accounts, and short-term certificates of deposit with
      original maturities of three months or less.





***Trade
      Receivables and Allowance for Doubtful Accounts*** - Trade
      receivables are carried at original invoiced amounts. As a result of the Company
      historically having no write-offs and all accounts receivables being current,
      there were no doubtful accounts recorded as of December 31, 2007 and
      2006.





***Inventory*** -
      Inventories are stated at the lower of cost or net realizable value, with cost
      determined on an average cost basis.





***Valuation
      of Long-lived Assets*** - The
      carrying values of the Company's long-lived assets are reviewed for impairment
      annually or whenever events or changes in circumstances indicate that they
      may
      not be recoverable. When such an event occurs, the Company projects the
      undiscounted cash flows to be generated from the use of the asset and its
      eventual disposition over the remaining life of the asset. If projections were
      to indicate that the carrying value of the long-lived asset will not be
      recovered, the carrying value of the long-lived asset is reduced by the
      estimated excess of the carrying value over the projected discounted cash
      flows.





***Property
      and Equipment*** -
      Property and equipment are stated at cost. Maintenance and repairs are charged
      to expense as incurred and major improvements are capitalized. Gains or losses
      on sales, trade-ins, or retirements are included in the statements of operations
      in the period of disposition, determined by reference to their carrying
      amounts.




F-11




***Intangible
      Assets*** -
      Acquisition costs of land use rights are capitalized and amortized using the
      straight-line method over their estimated useful lives.





***Advances
      to Suppliers and Advances from Customers*** - The
      Company, as is the common practice in the PRC, will often pay advance payments
      to suppliers for materials, property, and equipment, or receive advance payments
      from customers. Advances to suppliers were $2,249,867 and $872,289 as of
      December 31, 2007 and 2006, respectively. Advances from customers were $0 and
      $119,923 as of December 31, 2007 and 2006, respectively. As a result of the
      Company historically having no write-offs and all advances to suppliers being
      current, there was no bad debt allowance recorded against these advances as
      of
      December 31, 2007 and 2006.





***Leases*** -
      The
      Company has lease committments that are accounted for as operating leases under
      which payments are expensed on a straight-line basis over the periods of the
      respective leases.





***Revenue
      Recognition*** - The
      Company recognizes revenues from the sale of products when they are realized
      and
      earned. The Company considers revenue realized or realizable and earned when
      (1)
      it has persuasive evidence of an arrangement, (2) delivery has occurred, (3)
      the
      sales price is fixed or determinable, and (4) collectability is reasonably
      assured. Revenues are not recognized until products have been shipped to the
      client, risk of loss has transferred to the client and client acceptance has
      been obtained, client acceptance provisions have lapsed, or the Company has
      objective evidence that the criteria specified in client acceptance provisions
      have been satisfied. The Company sells all products to end-users and recognizes
      revenues when the products are shipped. The Company has no post-delivery
      obligations on its products sold.





***Cost
      of Products Sold*** - Cost
      of products sold include wages, materials, handling charges, and other expenses
      associated with the manufacture and delivery of product.




***Shipping
      and Handling Costs*** -
      Shipping and handling billed to customers are recorded as revenue. Shipping
      and
      handling costs are included in cost of products sold.





***Research
      and product development expenses***  **-** Research
      and product development expenses are included in general and administrative
      expenses in the statements of income and include researching, developing, and
      testing of the Company’s products. For
      the
      years ended December 31, 2007, 2006 and 2005, such expenses were $153,057,
      $340,771 and $103,617, respectively.





***Retirement
      Benefit Plans*** - The
      Company contributes to various employee retirement benefit plans organized
      by
      provincial governments under which it is required to make monthly contributions
      at rates prescribed by the related provincial governments. The provincial
      governments undertake to assume the retirement benefit obligations of all
      existing and future retired employees of the Company. Contributions to these
      plans are charged to expense as incurred.




F-12




***Basic
      and Diluted Earnings per Share*** - The
      computation of basic and diluted earning per share is based on the
      weighted-average number of shares outstanding during the periods presented.
      The
      following table is a reconciliation of the numerators and denominators used
      in
      the calculation of basic and diluted earnings per share and the weighted-average
      common shares outstanding, respectively:




**For
                the Years Ended December 31,****2007**
            
            **2006**
            
            **2005**Net
                income
            
            $
            27,030,345
            
            $
            17,526,648
            
            $
            15,962,471Basic
                weighted-average common shares outstanding
            
            
            54,107,408
            
            
            51,900,641
            
            
            64,455,210Effect
                of dilutive securities:Warrants
            
            
            81,002
            
            
            122,160
            
            
            -Diluted
                weighted-average common shares outstanding
            
            
            54,188,410
            
            
            52,022,801
            
            
            64,455,210Basic
                earnings per share
            
            $
            0.50
            
            $
            0.34
            
            $
            0.25Diluted
                earnings per share
            
            $
            0.50
            
            $
            0.34
            
            $
            0.25




***Other
      Comprehensive Income*** - Other
      comprehensive income presented in the accompanying consolidated financial
      statements consists of foreign currency translation adjustments.




***Credit
      Risk -***  Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk primarily consist of cash and cash equivalents, trade accounts
      receivable and other non-trade receivables included in the consolidated balance
      sheets.




The
      Company has its cash in bank deposits and money market funds primarily in the
      PRC. Historically, deposits in Chinese banks have been secure due to the state
      policy on protecting depositors’ interests. China promulgated a new Bankruptcy
      Law in August 2006, which came into effect on June 1, 2007, which contains
      provisions for the implementation of measures for the bankruptcy of Chinese
      banks. In the event that bankruptcy laws are enacted for banks in the PRC,
      the
      Company’s deposits may be at a higher risk of loss.





The
      carrying amounts of trade accounts receivable and other non-trade receivables
      included in the consolidated balance sheets represent the Company’s exposure to
      credit risk in relation to its financial assets. No other financial assets
      carry
      a significant exposure to credit risk. The Company performs ongoing credit
      evaluations of each customer’s financial condition.





***Recently
      Enacted Accounting Standards*** - In
      September 2006, the Financial Accounting Standards Board (FASB) issued
      SFAS No. 157, *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles and expands disclosures about fair
      value measurements. SFAS No. 157 is effective for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years. In
      February 2008, the FASB issued FASB Staff Position (FSP FIN) No. 157-2 which
      extended the effective date for certain nonfinancial assets and nonfinancial
      liabilities to fiscal years beginning after November 15, 2008. The Company
      does
      not expect the adoption of SFAS No. 157 to have a material impact on our
      consolidated financial statements.




F-13




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      SFAS
      No. 159 permits companies to choose to measure many financial instruments
      and certain other items at fair value. SFAS No. 159 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007. The Company does not expect the adoption of SFAS No. 159 to have a
      material impact on our consolidated financial statements.





In
      June
      2007, the Emerging Issues Task Force of the FASB issued EITF Issue No. 07-3,
      “Accounting for Nonrefundable Advance Payments for Goods or Services to be Used
      in Future Research and Development Activities”, (“EITF 07-3”) which is effective
      for fiscal years beginning after December 15, 2007. EITF 07-3 requires that
      nonrefundable advance payments for future research and development activities
      be
      deferred and capitalized. Such amounts will be recognized as an expense as
      the
      goods are delivered or the related services are performed. EITF 07-3 is not
      expected to
      have a
      material impact on our results of operations or financial position.





In
      December 2007, the FASB issued SFAS No. 141(R), *Business
      Combinations* ,
      and
      SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements.* SFAS
      No. 141(R) requires an acquirer to measure the identifiable assets
      acquired, the liabilities assumed and any non-controlling interest in the
      acquiree at their fair values on the acquisition date, with goodwill being
      the
      excess value over the net identifiable assets acquired. SFAS No. 160
      clarifies that a non-controlling interest in a subsidiary should be reported
      as
      equity in the consolidated financial statements, consolidated net income shall
      be adjusted to include the net income attributed to the non-controlling interest
      and consolidated comprehensive income shall be adjusted to include the
      comprehensive income attributed to the non-controlling interest. The calculation
      of earnings per share will continue to be based on income amounts attributable
      to the parent. SFAS No. 141(R) and SFAS No. 160 are effective for
      financial statements issued for fiscal years beginning after December 15,
      2008. Early adoption is prohibited. The Company has not yet determined the
      effect on our consolidated financial statements, if any, upon adoption of SFAS
      No. 141(R) or SFAS No. 160. SFAS No. 141(R) and SFAS No. 160 are
      not expected to
      have a
      material impact on our results of operations or financial position.





**NOTE
      3 – Inventory**





Inventory
      consisted of the following:




**December
                31,****2007**
            
            **2006**Raw
                materials
            
            $
            1,357,510
            
            $
            1,679,938Work-in-process
            
            
            104,872
            
            
            219,885Finished
                goods
            
            
            493,002
            
            
            251,789Total
                Inventory
            
            $
            1,955,384
            
            $
            2,151,612





F-14





**NOTE
      4 – Property and Equipment**





Property
      and equipment consisted of the following:




**December
                31,****2007**
            
            **2006**Building
            
            $
            10,908,890
            
            $
            1,854,717Plant,
                machinery and equipment
            
            
            37,771,726
            
            
            25,106,521Motor
                vehicle
            
            
            125,157
            
            
            108,851Office
                equipment
            
            
            79,381
            
            
            84,241Construction
                in progress
            
            
            19,584,655
            
            
            93,955Total
                property and equipment
            
            
            68,469,809
            
            
            27,248,285Less:
                accumulated depreciation
            
            
            (6,126,393
            )
            
            (3,674,605
            )Total
                property and equipment, net
            
            $
            62,343,416
            
            $
            23,573,680




Depreciation
      is computed on a straight-line basis over the estimated useful lives of the
      assets, which were as follows:





**Asset**
            
            **Life**Building
            
            
            15
                - 25Plant,
                machinery and equipment
            
            
            10
                - 17Motor
                vehicle
            
            
            5
                -
                10Office
                equipment
            
            
            3
                -5




Depreciation
      expense for the years ended December 31, 2007, 2006 and 2005 was $2,127,990,
      $1,031,387 and $1,009,577, respectively.





The
      increase in property and equipment for 2007 was primarily due to the purchase
      of
      equipment for $10,142,990 to increase the NPCC production capacity of the
      Shaanxi plant by an additional 40,000 tons, the construction of the NPCC factory
      expansion in Shaanxi for $11,813,649, the construction in progress related
      to
      the further increase of the NPCC production capacity of the Shaanxi plant by
      an
      additional 60,000 tons for $17,186,677 and the purchase of the research and
      development center for $1,580,321 from a related party which is further
      described in Note 9.





During
      April 2006, the Company purchased approximately $1.1 million of equipment to
      replace old equipment, of which approximately $815,000 was purchased from a
      related party. In addition, the Company constructed and put into operations
      a
      new plant in Shaanxi, China at a cost of approximately $14 million.





**NOTE
      5 – Land Use Rights**





In
      August
      2007, the company purchased intangible assets of $125,059 consisting of land
      use
      rights, which are amortized at the rate of $2,402 per year using the straight
      line method over their contractual life of 50 years. Amortization expense for
      the years ended December 31, 2007, 2006 and 2005 was $990, $0 and
      $69,249.





**NOTE
      6 – Other Payables and Accrued Expenses**





Other
      payables and accrued expenses consisted of the following:




F-15




**December
                31,****2007**
            
            **2006**Utility
                payment
            
            $
            1,473,374
            
            $
            1,228,884Accrued
                payroll
            
            
            416,826
            
            
            423,280Other
                payables
            
            
            1,386,273
            
            
            583,594Total
                Other Payables and Accrued Expenses
            
            $
            3,276,473
            
            $
            2,235,758





**NOTE
      7 – Income Taxes**





Upon
      completion of the reorganization referred to in Note 1, the Company changed
      its
      fiscal year to December to conform to the fiscal year of its operating
      subsidiaries. To date, the Company has not paid any income taxes in the United
      States or the British Virgin Islands. The Company’s pre-tax income is comprised
      primarily from operations in the PRC. Amounts included in pre-tax income in
      the
      United States for the years ended December 31, 2007, 2006 and 2005 include
      general and administrative expenses of $399,267, $518,716, and $0, respectively.
      Enterprises with foreign investment and foreign enterprises doing business
      in
      the PRC are generally subject to federal (state) enterprise income tax at a
      rate
      of 30% and a local income tax at a rate of 3%. Effective at the beginning of
      2005, the Company’s Bangsheng Chemical and Haize Nano subsidiaries were granted
      a “tax holiday” that allows the Company to be exempt from both the federal and
      local income taxes for the first two profitable years. The “tax holiday” allows
      the Company to be exempt from 50% of both the federal and local income taxes
      during the third through the fifth years. The reduced federal and local rates
      for 2007 through 2009 are 15% and 1.5%, respectively. Effective at the beginning
      of 2006, the Company’s Shaanxi Nano subsidiary was granted the same tax holiday
      and in 2006 and 2007 is exempt from both federal and local income taxes. Shaanxi
      Nano’s tax rates for 2008 through 2010 are 15% and 1.5% for federal and local
      taxes, respectively.





Undistributed
      earnings of the Company’s foreign subsidiaries since acquisition amounted to
      approximately $30.9 million at December 31, 2007. Those earnings, as well
      as the investment in the subsidiaries of approximately $58.3 million are
      considered to be indefinitely reinvested and, accordingly, no U.S. federal
      and
      state income taxes have been provided thereon. Upon distribution of those
      earnings in the form of dividends or otherwise, the Company would be subject
      to
      both U.S. income taxes (subject to an adjustment for foreign tax credits) and
      withholding taxes payable to the PRC. Determination of the amount of
      unrecognized deferred U.S. income tax liability is not practical because of
      the
      complexities associated with its hypothetical calculation; however, unrecognized
      foreign tax credits may be available to reduce a portion of the U.S. tax
      liability.





On
      March
      16, 2007, the National People’s Congress of China passed the new Enterprise
      Income Tax Law, (“EIT Law”), and on December 6, 2007, the State Council of China
      issued the Implementation Regulations for the EIT Law which took effect on
      January 1, 2008. The EIT Law and Implementation Regulations Rules impose a
      unified EIT of 25.0% on all domestic-invested enterprises and Foreign Invested
      Entities, or FIEs, unless they qualify under certain limited exceptions. The
      Company does not qualify for any of these limited exceptions, and as a result
      the Company will be subject to a 25% tax rate beginning January 1, 2010 for
      the
      Bangsheng Chemical and Haize Nano subsidiaries and January 1, 2011 for the
      Shaanxi Nano subsidiary.




F-16




Income
      and other taxes payable consisted of:





**December
                31,****2007**
            
            **2006**Value
                added tax
            
            $
            891,915
            
            $
            710,981Income
                tax
            
            
            728,255
            
            
            -Surtax,
                insurance, other
            
            
            683,232
            
            
            526,199Total
                Taxes
            
            $
            2,303,402
            
            $
            1,237,180




The
      provision for income taxes was $2,787,640, $0, and $0 for December 31, 2007,
      2006, and 2005, respectively.





Following
      is a reconciliation of income taxes calculated at the federal and local
      statutory rates to actual income tax expense:




**For
                the Years Ended December 31,****2007**
            
            **2006**
            
            **2005**Income
                tax calculated at statutory federal and local rates is 30% and 3%,
                respectively
            
            $
            9,839,935
            
            $
            5,783,794
            
            $
            5,267,615Benefit
                of tax holiday
            
            
            (7,052,295
            )
            
            (5,783,794
            )
            
            (5,267,615
            )Provision
                for income taxes
            
            $
            2,787,640
            
            $
            -
            
            $
            -




If
      the
      Company had not received the benefit of a tax holiday for the years ended
      December 31, 2007, 2006 and 2005, the provision for income taxes would have
      been
      $9,839,935, $5,783,794 and $5,267,615, respectively, net income after income
      tax
      would have been $19,978,050, $11,742,854 and $10,694,856, respectively, and
      basic and diluted earnings per share would have been $0.37, $0.23 and
      $0.17.





Deferred
      taxes with respect to temporary timing differences between carrying amounts
      of
      assets and liabilities for financial reporting and amounts used for tax
      reporting purposes were immaterial.





Shengdatech,
      Inc. has net operating losses in the United States of approximately $1,485,000
      which if are not utilized will begin to expire in 2026. The net operating losses
      use may be limited due to change in ownership of the Company’s common
      stock.





**NOTE
      8 – Commitments and Contingencies**





***Economic
      environment*** - The
      Company is subject to special considerations and significant risks not typically
      associated with companies operating in the United States of America. These
      risks
      include, among others, the political, economic and legal environments and
      foreign currency exchange. The Company’s results of operations may be adversely
      affected by changes in the political and social conditions in the PRC, and
      by
      changes in governmental policies with respect to laws and regulations,
      anti-inflationary measures, currency conversion and remittance abroad, and
      rates
      and methods of taxation, among other things.




F-17




***Foreign
      currency remittance*** - The
      majority of the Company’s revenue is earned in the PRC and is denominated in the
      PRC’s currency of CNY, which must be converted into other currencies before
      remittance out of the PRC. Both the conversion of CNY into foreign currencies
      and the remittance of foreign currencies abroad require approval of the PRC
      government.





***Leases*** - In
      December 2007 Haize Nano and Bangsheng Chemical entered into three year lease
      agreements for land, land use rights, buildings and certain equipment from
      the
      Lessors. Remaining future minimum lease payments under these agreements total
      $1,918,500, of which $1,280,785 was for land and buildings and $637,715 was
      for
      equipment. Payments under operating leases are expensed on a straight-line
      basis
      over the periods of the respective leases. The Company incurred rental expense
      of $843,665, $720,490 and $593,811 during the years ended December 31, 2007,
      2006 and 2005, respectively.





Future
      minimum lease payments under the Company’s lease agreements are as
      follows:





**For
                the Years Ended December 31,****2008**
            
            **2009**
            
            **2010**
            
            **Total**Total
                minimum lease payments
            
            $
            639,500
            
            $
            639,500
            
            $
            639,500
            
            $
            1,918,500




**NOTE
      9 – Related Parties**





***Receivable
      from related parties*** –
At
      December 31, 2007 and 2006, the Company had a receivable of $1,712 and $1,601
      from Shengda Nanomaterials Company, respectively, which was used primarily
      for
      the purchase of equipment and machinery and was recorded at the cost of the
      assets purchased.





***Payable
      to related parties*** –
At
      December 31, 2007, the Company owed related parties $1,064,348 of which $869,179
      is for the accrual of rent expense, as explained in Note 8, and $142,739 is
      due
      to Shandong Shengda Technology Co. Ltd. for the purchase of property and
      equipment. As of December 31, 2007, Shandong Shendgda Chemical Machinery Co.
      Ltd
      is no longer a related party due to its sale to an unrelated third
      party.





At
      December 31, 2006, the Company owed related parties $3,349,814, of which
      $1,616,892 was due to Shandong Shengda Technology Co. Ltd. for the purchase
      of
      property and equipment, and $398,457 was due to Shandong Shengda Chemical
      Machinery Co., Ltd. Those funds were considered retained funds for the
      installation of property and equipment for performance. In addition, $717,199
      was due to Shandong Shengda Technology Co., Ltd for the accrual of rent expense,
      $156,625 for the accrual of professional fees, and $460,641 for research and
      development.




F-18




On
      June
      30, 2007 the Company purchased certain buildings and land use rights from
      Shandong ShengdaTechnology Co. Ltd. The purchase price of $5,972,912 exceeded
      the cost of the assets paid by Shandong Shengda Technology Co. Ltd by $150,725
      and, accordingly, this amount was treated as a distribution to Shandong Shengda
      Technology Co. Ltd. The cost of the building was recorded at $5,727,607 and
      the
      land use rights were recorded at $95,428, which represents the historical
      carrying value to the seller.





On
      November 20, 2007 the Company purchased a research and development center from
      Shandong ShengdaTechnology Co. Ltd. The purchase price of $1,637,199 exceeded
      the cost of the assets paid by Shandong Shengda Technology Co., Ltd by $56,926
      and, accordingly, this amount was treated as a distribution to Shandong Shengda
      Technology Co. Ltd. The cost of the research and development center was recorded
      at $1,580,321, which represents the historical carrying value to the
      seller





**NOTE
      10 - Shareholders’ Equity**




***Common
      and preferred shares***  **-** In
      January 2007, the shareholders of the Company amended and restated the Company’s
      articles of incorporation and thereby: 1) changed the name of the Company from
      Zeolite Exploration Company to Shengdatech, Inc.; 2) increased the authorized
      number of shares of common stock to 100,000,000, $0.00001 par value; and 3)
      authorized the issuance of 10,000,000 shares of preferred stock, $0.00001 par
      value. The shares of preferred stock may be issued in one or more series and
      may
      be granted voting rights, at the discretion of the Company’s board of directors.
      The accompanying financial statements have been restated for all periods
      presented for the effects of changes to the articles of
      incorporation.





***Statutory
      Reserves*** -
      According to the Articles of Association, the Company is required to transfer
      a
      certain portion of its net profits, as determined under PRC accounting
      regulations, from net income to both the surplus reserve fund and the public
      welfare fund.





***Distribution*** – During
      2007 and 2006, the Company purchased equipment from select shareholders. The
      Company recorded the equipment at the cost to the related parties and recorded
      the excess as a distribution to select shareholders of $207,651 and $971,496,
      respectively.





***Warrants*** –
On
      April 1, 2006, the Company issued a warrant to purchase 162,285 shares of common
      stock to a vendor for services provided. The warrant was exercisable at $2.57
      per share through March 31, 2008. The value of the services of $153,619 was
      recognized as an expense on the date the warrant was issued and was based upon
      the fair value of the warrant using the Black-Scholes option pricing model.
      Under the terms of the warrant, the vendor was permitted to pay the exercise
      price by the Company indirectly repurchasing shares from the vendor at the
      30-day average closing price of the Company’s common stock ending three days
      prior to the exercise date. The vendor exercised the warrant on November 19,
      2007 when the 30-day average closing price was $7.54 per share which resulted
      in
      the issuance of 106,933 shares of common stock to the vendor. No tax benefit
      was
      realized from the exercise of the warrant.




F-19




The
      Company recorded a liability for services provided by a vendor during the year
      ended December 31, 2007 that will be settled by issuance of a three year warrant
      to be issued in the first quarter of 2008 . The services were valued based
      on
      the warrant’s estimated fair value in the amount of $84,700. The exercise price
      of the warrant will be $6.80 per share. Under the agreement with the service
      provider, the Company is committed to issue warrants to purchase 10,000 shares
      of common stock for services for each of the first three quarters of 2008.
      The
      agreement will then continue on a month to month basis until terminated. The
      agreement can be terminated at any time by either party.





The
      fair
      value of the warrants were calculated using the Black-Scholes option pricing
      model with the following assumptions:





**2007**
            
            **2006**Expected
                Life
            
            3
                years
            
            2
                yearsExpected
                volatility
            
            72.93%
            
            66.97%Risk
                Free interest rate
            
            2.55%
            
            4.82%Dividend
                yield
            
            0%
            
            0%




**NOTE
      11 – Segment Information**





The
      Company operates in the following segments:





***NPCC*** - The
      Company is engaged in the development, manufacture, and marketing of nano-sized
      ultra fine Precipitated Calcium Carbonated (NPCC).   Limestone is converted
      into NPCC by a proprietary production method. The unique chemical and physical
      attributes make NPCC a valuable functional ingredient in tire products. The
      Nano-Materials segment includes the operations of the Haize Nano and Shaanxi
      Haize subsidiaries.





***Chemical*** - The
      Company is also engaged in the manufacture and sale of ammonia-based products,
      namely ammonium bicarbonate, liquid ammonia, and methanol. The ammonia-based
      products are mainly used as chemical fertilizers and raw materials for the
      production of other chemical products (both organic and inorganic,) including
      formaldehyde and pesticides.





Certain
      condensed segment information for the three years ended December 31, 2007,
      2006
      and 2005 follows:




**As
                of and For the Year Ended December 31, 2007**
            
            **Chemical**
            
            **NPCC**
            
            **Inter-Segment and**
              **Reconciling Items**
            
            **Total**Sale
                of products
            
            $
            53,933,120
            
            $
            46,721,673
            
            $
            -
            
            $
            100,654,793Cost
                of products sold
            
            
            39,282,251
            
            
            26,812,587
            
            
            -
            
            
            66,094,838Selling
                expenses
            
            
            90,908
            
            
            1,680,260
            
            
            -
            
            
            1,771,168General
                and administrative expenses
            
            
            1,289,240
            
            
            1,544,291
            
            
            399,380
            
            
            3,232,911Depreciation
                and amortization
            
            
            352,300
            
            
            1,776,680
            
            
            -
            
            
            2,128,980Segment
                income
            
            
            11,828,122
            
            
            15,601,489
            
            
            (399,266
            )
            
            27,030,345Segment
                assets
            
            
            22,248,211
            
            
            78,692,626
            
            
            3,101
            
            
            100,943,938Expenditures
                for segment assets
            
            
            420,102
            
            
            20,996,132
            
            
            -
            
            
            21,416,234





F-20




**As
                of and For the Year Ended December 31, 2006**
            
            **Chemical**
            
            **NPCC**
            
            **Inter-Segment and**
              **Reconciling Items**
            
            **Total**Sale
                of products
            
            $
            50,592,217
            
            $
            22,007,814
            
            $
            -
            
            $
            72,600,031Cost
                of products sold
            
            
            37,924,593
            
            
            13,297,976
            
            
            -
            
            
            51,222,569Selling
                expense
            
            
            79,306
            
            
            1,181,341
            
            
            -
            
            
            1,260,647General
                and administrative expense
            
            
            1,051,119
            
            
            1,590,355
            
            
            -
            
            
            2,641,474Depreciation
                and amortization
            
            
            335,074
            
            
            696,313
            
            
            -
            
            
            1,031,387Segment
                income
            
            
            11,865,994
            
            
            5,660,654
            
            
            -
            
            
            17,526,648Segment
                assets
            
            
            32,420,452
            
            
            34,608,900
            
            
            -
            
            
            67,029,352Expenditures
                for segment assets
            
            
            1,114,735
            
            
            14,343,183
            
            
            -
            
            
            15,457,918




**As
                of and For the Year Ended December 31, 2005**
            
            **Chemical**
            
            **NPCC**
            
            **Inter-Segment and**
              **Reconciling Items**
            
            **Total**Sale
                of products
            
            $
            43,985,596
            
            $
            14,613,733
            
            $
            -
            
            $
            58,599,329Cost
                of products sold
            
            
            31,752,100
            
            
            9,264,339
            
            
            -
            
            
            41,016,439Selling
                expense
            
            
            69,264
            
            
            796,074
            
            
            -
            
            
            865,338General
                and administrative expense
            
            
            541,018
            
            
            426,339
            
            
            -
            
            
            967,357Depreciation
                and amortization
            
            
            528,151
            
            
            550,675
            
            
            -
            
            
            1,078,826Segment
                income
            
            
            11,827,016
            
            
            4,135,455
            
            
            -
            
            
            15,962,471Segment
                assets
            
            
            18,691,092
            
            
            11,266,236
            
            
            -
            
            
            29,957,328Expenditures
                for segment assets
            
            
            2,517,152
            
            
            -
            
            
            -
            
            
            2,517,152




**NOTE
      12 - Quarterly Financial Data (Unaudited)**





Quarterly
      financial information is presented in the following summary:




**2007****Three
                Months Ended****March
                31**
            
            **June
                30**
            
            **September
                30**
            
            **December
                31**Sale
                of products
            
            $
            22,180,271
            
            $
            22,680,529
            
            $
            27,170,790
            
            $
            28,623,203Gross
                Profit
            
            
            6,974,585
            
            
            7,664,907
            
            
            9,660,956
            
            
            10,259,507Net
                Income
            
            
            5,406,628
            
            
            6,032,887
            
            
            7,811,260
            
            
            7,779,570Basic
                earnings per share
            
            
            0.10
            
            
            0.11
            
            
            0.14
            
            
            0.15Diluted
                earnings per share
            
            
            0.10
            
            
            0.11
            
            
            0.14
            
            
            0.15




**2006****Three
                Months Ended****March
                31**
            
            **June
                30**
            
            **September
                30**
            
            **December
                31**Sale
                  of products
            
            $
            16,308,211
            
            $
            14,291,787
            
            $
            18,818,131
            
            $
            23,181,902Gross
                Profit
            
            
            4,117,939
            
            
            4,001,939
            
            
            5,580,788
            
            
            7,676,796Net
                Income
            
            
            3,492,859
            
            
            3,157,860
            
            
            4,727,588
            
            
            6,148,341Basic
                  earnings per share
            
            
            0.08
            
            
            0.06
            
            
            0.09
            
            
            0.11Diluted
                  earnings per share
            
            
            0.08
            
            
            0.06
            
            
            0.09
            
            
            0.11




**2005****Three
                Months Ended****March
                31**
            
            **June
                30**
            
            **September
                30**
            
            **December
                31**Sale
                  of products
            
            $
            13,290,138
            
            $
            12,889,931
            
            $
            17,159,831
            
            $
            12,259,429Gross
                Profit
            
            
            4,145,533
            
            
            3,957,707
            
            
            5,309,213
            
            
            4,170,437Net
                Income
            
            
            3,671,996
            
            
            3,304,508
            
            
            4,857,724
            
            
            4,128,243Basic
                  earnings per share
            
            
            0.08
            
            
            0.04
            
            
            0.06
            
            
            0.07Diluted
                  earnings per share
            
            
            0.08
            
            
            0.04
            
            
            0.06
            
            
            0.07




F-21




**NOTE 13
      - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION**




**Basis
      of presentation**





For
      the
      purpose of presenting parent company only condensed financial information,
      the
      basis used in this presentation assumes the reorganization and the change of
      the
      reporting entity had taken place for all periods presented. The investment
      in
      the consolidated subsidiaries, which occurred on March 31, 2006, is recorded
      under the equity method of accounting as prescribed in APB opinion No. 18,
“ *The
      Equity Method of Accounting for Investments in Common Stock* ”.
      Under
      PRC laws and regulations, there are restrictions on the Company’s ability to
      transfer substantially all of its assets out of the PRC, regardless of the
      form
      of such transfer (dividends, loans, advances).




**SHENGADATECH,
      INC**


**CONDENSED
      BALANCE SHEETS**





**December
                31,**
            
            **December
                31,****2007**
            
            **2006****ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            $
            3,102
            
            $
            10,580Other
                receivables
            
            
            -
            
            
            136,257**Total
                Current Assets**
            
            
            3,102
            
            
            146,837**Investment
                in unconsolidated subsidiaries**
            
            
            89,255,615
            
            
            56,982,427**TOTAL
                ASSETS**
            
            $
            89,258,717
            
            $
            57,129,264**LIABILITIES
                AND SHAREHOLDERS' EQUITY****Current
                Liabilities:**Accrued
                expenses
            
            $
            255,532
            
            $
            -**Shareholders'
                Equity**Preferred
                stock - $0.00001 par value; 10,000,000 shares authorized, no shares
                outstanding
            
            
            -
            
            
            -Common
                stock - $0.00001 par value; 100,000,000 shares authorized, 54,202,036
                shares and 54,095,103 shares outstanding, respectively
            
            
            541
            
            
            540Additional
                paid-in capital
            
            
            21,616,469
            
            
            21,824,121Statutory
                reserves
            
            
            5,642,419
            
            
            3,301,379Retained
                earnings
            
            
            54,877,045
            
            
            30,187,740Accumulated
                other comprehensive income
            
            
            6,866,711
            
            
            1,815,484**Total
                Shareholders' Equity**
            
            
            89,003,185
            
            
            57,129,264**TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY**
            
            $
            89,258,717
            
            $
            57,129,264




F-22




**SHENGDATECH,
      INC.**


**CONDENSED
      STATEMENTS OF INCOME**





**For
                the Years Ended December 31,****2007**
            
            **2006**
            
            **2005****Equity
                in earnings of unconsolidated subsidiaries**
            
            $
            27,429,612
            
            $
            18,045,364
            
            $
            15,962,471**Operating
                Expenses**
            
            
            399,267
            
            
            518,716
            
            
            -**Net
                Income**
            
            $
            27,030,345
            
            $
            17,526,648
            
            $
            15,962,471**Basic
                and Diluted Earnings Per Share**
            
            $
            0.50
            
            $
            0.34
            
            $
            0.25




F-23




**SHENGDATECH,
      INC.**


**CONDENSED
      STATEMENTS OF CASH FLOWS**





**For
                the Years Ended December 31,****2007**
            
            **2006**
            
            **2005****Cash
                Flows from Operating Activities:**Net
                income
            
            $
            27,030,345
            
            $
            17,526,648
            
            $
            15,962,471Adjustments
                to reconcile net income to cash used in operating
                activities:Compensation
                paid with warrants
            
            
            -
            
            
            153,619
            
            
            -Equity
                in earnings of unconsolidated subsidiaries
            
            
            (27,429,612
            )
            
            (18,045,364
            )
            
            (15,962,471
            )Changes
                in assets and liabilities:Accrued
                expenses
            
            
            255,532
            
            
            -
            
            
            -**Net
                Cash used in Operating Activities**
            
            
            (143,735
            )
            
            (365,097
            )
            
            -**Cash
                Flows from Investing Activities:**Other
                receivables
            
            
            136,257
            
            
            (136,257
            )
            
            -Investment
                in subsidiaries
            
            
            -
            
            
            (13,457,780
            )
            
            -**Net
                Cash provided by (used in) Investing Activities**
            
            
            136,257
            
            
            (13,594,037
            )
            
            -**Cash
                Flows from Financing Activities:**Proceeds
                from issuance of common stock
            
            
            -
            
            
            13,969,714
            
            
            -**Net
                Cash provided by Financing Activities**
            
            
            -
            
            
            13,969,714
            
            
            -**Net
                Change in Cash**
            
            
            (7,478
            )
            
            10,580
            
            
            -**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            10,580
            
            
            -
            
            
            -**Cash
                and Cash Equivalents at End of Period**
            
            $
            3,102
            
            $
            10,580
            
            $
            -**Supplemental
                Cash Flow Disclosures:**Cash
                paid for income taxes
            
            $
            -
            
            $
            -
            
            $
            -




F-24





**EXHIBIT
      INDEX**




3.1
            Articles
                of Incorporation of the Registrant filed with the Nevada Secretary
                of
                State on May 11, 2001, as amended by Certificate of Amendment to
                Articles of Incorporation filed with the Nevada Secretary of State
                on
                February 13, 2006. (incorporated by reference to Exhibit 3.1 to
                Pre-Effective Amendment No. 2 to the Registration Statement on Form
                S-1
                (SEC File No. 333-132906) filed on December 18,
                2006




3.2
            Certificate
                of Amendment and Restatement of Articles of Incorporation filed with
                the
                Nevada Secretary of State on January 3, 2007 (incorporated by reference
                to
                Exhibit 3.2 to Pre-Effective Amendment No. 3 to the Registration
                Statement
                on Form S-1 (SEC File No. 333-132906) filed on January 9,
                2007.




3.3
            Amended
                and Restated Bylaws of the Registrant incorporated by reference to
                Exhibit
                3.2 to the Registrant’s Current Report on Form 8-K filed on March 1,
                2007.




5.1
            Opinion
                of Preston Gates Ellis, LLP (incorporated by reference to Exhibit
                5.1 to
                Registrant’s  Registration Statement on Form SB-2 filed on March 31,
                2006).




10.1
            Financial
                Advisory Agreement between Eastern Nanomaterials Pte Co., Ltd. and
                HFG
                International Co., Ltd., dated as of September 26, 2005, as amended
                and
                supplemented on March 29, 2006 (incorporated by reference to Exhibit
                10.1
                to the Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.2
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.,
                Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December
                10,
                2002 (incorporated by reference to Exhibit 10.2 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




10.3
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.,
                Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December
                12,
                2002 (incorporated by reference to Exhibit 10.3 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




10.4
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.,
                Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December
                15,
                2002 (incorporated by reference to Exhibit 10.4 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




10.5
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.,
                Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December
                16,
                2002 (incorporated by reference to Exhibit 10.5 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




10.6
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.,
                Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December
                20,
                2002 (incorporated by reference to Exhibit 10.6 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




10.7
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.,
                Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December
                20,
                2002 (incorporated by reference to Exhibit 10.7 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




10.8
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.,
                Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of December
                26,
                2002 (incorporated by reference to Exhibit 10.8 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).





10.9
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.
                Ltd. and Shandong Shengda Chemicals Co. Ltd., dated as of December
                26,
                2002 (incorporated by reference to Exhibit 10.9 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




F-25




10.10
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.
                Ltd. and Shandong Shengda Chemicals Co. Ltd., dated as of December
                26,
                2002 (incorporated by reference to Exhibit 10.10 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




10.11
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.,
                Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of January
                10,
                2003 (incorporated by reference to Exhibit 10.11 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




10.12
            Industrial
                Product Sales Agreement between Shandong Shengda Chemical Machinery
                Co.,
                Ltd. and Shandong Shengda Chemicals Co., Ltd., dated as of January
                12,
                2003 (incorporated by reference to Exhibit 10.12 to the Registrant’s
                Current Report on Form 8-K filed on April 6,
                2006).




10.13
            Industrial
                Product Sales Contract between Feicheng Longxin Material Storage
&
                Transportation Co., Ltd. and Shandong Shengda Chemical Co., Ltd.
                dated as
                of January 15, 2003 (incorporated by reference to Exhibit 10.13 to
                the
                Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.14
            Industrial
                Product Sales Contract between Xintai Quangou Coal Mine and Shandong
                Shengda Chemical Co., Ltd. dated as of January 15, 2003 (incorporated
                by
                reference to Exhibit 10.14 to the Registrant’s Current Report on Form 8-K
                filed on April 6, 2006).




10.15
            Industrial
                Product Sales Contract between Xintai Zhaizhen Coal Mine and Shandong
                Shengda Chemicals Co., Ltd. dated as of January 19, 2003 (incorporated
                by
                reference to Exhibit 10.15 to the Registrant’s Current Report on Form 8-K
                filed on April 6, 2006).




10.16
            Industrial
                Product Sales Contract between Shandong Shengda Chemical Machinery
                Co.,
                Ltd and Shandong Shengda Chemicals Co., Ltd. dated as of July 5,
                2004
                (incorporated by reference to Exhibit 10.16 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.17
            Joint
                Research and Development Agreement between Shandong Shengda Technology
                Co., Ltd and Qingdao University of Science and Technology dated as
                of
                September 28, 2004 (incorporated by reference to Exhibit 10.17 to
                the
                Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.18
            Asset
                Purchase Agreement between Shandong Shengda Chemical Co., Ltd. and
                Dongfang Nanomaterials Pte., Ltd. dated as of November 24 2004, as
                amended
                and supplemented on February 20, 2005 (incorporated by reference
                to
                Exhibit 10.18 to the Registrant’s Current Report on Form 8-K filed on
                April 6, 2006).





10.19
            Asset
                Purchase Agreement between Shandong Shengda Nanomaterials Co., Ltd.
                and
                Dongfang Nanomaterials Pte., Ltd. dated as of November 24 2004, as
                amended
                and supplemented on February 20, 2005 (incorporated by reference
                to
                Exhibit 10.19 to the Registrant’s Current Report on Form 8-K filed on
                April 6, 2006).




10.20
            Joint
                Technology Development Contract between Shandong Haize Nanomaterials
                Co.,
                Ltd. and Tsinghua University dated as of January 12, 2005, as supplemented
                on May 10, 2005 (incorporated by reference to Exhibit 10.20 to the
                Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




F-26




10.21
            Contract
                on the Joint Development & Application of NPCC by and among Shandong
                Shengda Technology Co., Ltd, Polymer Modification Research Lab of
                Qingdao
                University of Science and Technology and Tsingdao Siwei Chemicals
                Co.,
                Ltd. dated as of March 4, 2003, as amended on January 31, 2005 to
                designate Shandong Haize Nanomaterials Co., Ltd as the assignee of
                Shandong Shengda Technology Co., Ltd. (incorporated by reference
                to
                Exhibit 10.21 to the Registrant’s Current Report on Form 8-K filed on
                April 6, 2006).




10.22
            Nano
                Technology License & Transfer Agreement between Shandong Shengda
                Technology Co., Ltd. and Shandong Haize Nanomaterials Co., Ltd. dated
                as
                of January 6, 2005 (incorporated by reference to Exhibit 10.22 to
                the
                Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.23
            Equipment
                Leasing Agreement between Shandong Shengda Technology Co., Ltd and
                Shandong Bangsheng Chemicals Co., Ltd. dated as of February 20, 2005
                (incorporated by reference to Exhibit 10.23 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.24
            Trademark
                Transfer Agreement between Shandong Shengda Technology Co., Ltd and
                Shandong Haize Nanomaterials Co., Ltd. dated as of February 22, 2005
                (incorporated by reference to Exhibit 10.24 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.25
            Trademark
                Transfer Agreement between Shandong Shengda Chemicals Co., Ltd. and
                Shandong Bangsheng Chemical Co., Ltd. dated as of February 22, 2005
                (incorporated by reference to Exhibit 10.25 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.26
            Land-use
                Right and Building Leasing Agreement between Shandong Haize Nanomaterials
                Co., Ltd. and Shandong Shengda Technology Co., Ltd, Ltd. dated as
                of
                February 22, 2005, as amended and supplemented on March 21, 2006
                (incorporated by reference to Exhibit 10.26 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.27
            Land-use
                Right and Building Leasing Agreement between Shandong Bangsheng Chemical
                Co., Ltd. and Shandong Shengda Technology Co., Ltd. dated as of February
                22, 2005, as amended and supplemented on March 21, 2006 (incorporated
                by
                reference to Exhibit 10.27 to the Registrant’s Current Report on Form 8-K
                filed on April 6, 2006).




10.28
            Industrial
                Product Sales Contract between Shandong Shengda Chemical Machinery
                Co.,
                Ltd and Shandong Bangsheng Chemicals Co., Ltd. dated as of March
                2, 2005
                (incorporated by reference to Exhibit 10.28 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.29
            Industrial
                Product Sales Contract between Shandong Taifeng Mining Co., Ltd.
                and
                Shandong Bangsheng Chemicals Co., Ltd. dated as of March 5, 2005
                (incorporated by reference to Exhibit 10.29 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.30
            Anthracite
                Supply Contract between Shandong Bangsheng Chemicals Co., Ltd. and
                Jincheng Yapeng Trading Co., Ltd. dated as of March 6, 2005 (incorporated
                by reference to Exhibit 10.30 to the Registrant’s Current Report on Form
                8-K filed on April 6, 2006).




10.31
            Construction
                Contract between Shandong Bangsheng Chemicals Co., Ltd. and Chen
                Houzhi
                dated as of March 1, 2005 (incorporated by reference to Exhibit 10.31
                to
                the Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




F-27




10.32
            Construction
                Contract between Shandong Bangsheng Chemicals Co., Ltd. and Chen
                Houzhi
                dated as of April 1, 2005 (incorporated by reference to Exhibit 10.32
                to
                the Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.33
            Urea
                Supply Contract between Shandong Feida Chemical Technology Co., Ltd.
                and
                Shandong Bangsheng Chemical Co., Ltd. dated as of May 26, 2005
                (incorporated by reference to Exhibit 10.33 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.34
            Anthracite
                Supply Contract between Shandong Haize Nanomaterials Co., Ltd. and
                Feicheng Longxin Material Storage & Transportation Co., Ltd. dated as
                of June 1, 2005 (incorporated by reference to Exhibit 10.34 to the
                Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.35
            Industrial
                Product Sales Contract between Shandong Taifeng Mining Co., Ltd.
                and
                Shandong Haize Nanomaterials Co., Ltd. dated as of June 13, 2005
                (incorporated by reference to Exhibit 10.35 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.36
            Industrial
                Product Sales Contract between Shandong Haize Nanomaterials Co.,
                Ltd. and
                Dalian Jinyuan Construction Plastics Co. dated as of June 19, 2005
                (incorporated by reference to Exhibit 10.36 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.37
            Industrial
                Product Sales Contract between Shandong Haize Nanomaterials Co.,
                Ltd. and
                Zhaoyuan LiAo Rubber Products Co. dated as of August 8, 2005 (incorporated
                by reference to Exhibit 10.37 to the Registrant’s Current Report on Form
                8-K filed on April 6, 2006).




10.38
            Industrial
                Product Sales Contract between Shandong Haize Nanomaterials Co.,
                Ltd. and
                Triangle Tire Co., Ltd dated as of August 10, 2005 (incorporated
                by
                reference to Exhibit 10.38 to the Registrant’s Current Report on Form 8-K
                filed on April 6, 2006).




10.39
            Share
                Transfer Agreement between Singapore Dongfang Nanomaterials Pte.,
                Ltd. and
                Faith Bloom Limited dated as of December 31, 2005 (incorporated by
                reference to Exhibit 10.39 to the Registrant’s Current Report on Form 8-K
                filed on April 6, 2006).




10.40
            Share
                Transfer Agreement between Singapore Dongfang Nanomaterials Pte.,
                Ltd. and
                Faith Bloom Limited dated as of December 31, 2005 (incorporated by
                reference to Exhibit 10.40 to the Registrant’s Current Report on Form 8-K
                filed on April 6, 2006).




10.41
            Lime
                Stone Supply Contract between Shandong Haize Nanomaterials Co., Ltd.
                and
                Laiwu Yujie Stone Materials Factory dated as of March 27, 2005
                (incorporated by reference to Exhibit 10.41 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




10.42
            Employment
                Contract between Shandong Haize Nanomaterials Co., Ltd. and Zhaowei
                Ma
                dated as of January 1, 2005 (incorporated by reference to Exhibit
                10.42 to
                the Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.43
            Employment
                Contract between Shandong Bangsheng Chemicals Co., Ltd. and Xiqing
                Xu
                dated as of January 1, 2005 (incorporated by reference to Exhibit
                10.43 to
                the Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.44
            Loan
                Agreement among Eastern Nano-Materials Holdings Pte. Ltd., Value
                Monetization Ltd. and International Factors (Singapore) Ltd. dated
                as of
                May 6, 2005, as terminated by two letters from Value Monetization
                and
                International Factors (Singapore) Ltd, dated December 30, 2005 and
                December 29, 2005, respectively (incorporated by reference to Exhibit
                10.44 to the Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




F-28




10.45
            Employment
                Contract between Shandong Haize Nanomaterials Co., Ltd. and Xukui
                Chen
                dated as of January 1, 2005 (incorporated by reference to Exhibit
                10.45 to
                the Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.46
            Financing
                Agreement between HFG International and Eastern Nanomaterials Pte.
                Co.,
                Ltd., dated as of September 26, 2005, as amended and supplemented
                on March
                29, 2006 to designate Faith Bloom as the assignee for Eastern
                Nanomaterials Pte. Co., Ltd. (incorporated by reference to Exhibit
                10.46
                to the Registrant’s Current Report on Form 8-K filed on April 6,
                2006).




10.47
            Short
                Term Loan Agreement between Shandong Shengda Chemicals Co., Ltd.
                and Bank
                of China Taian Branch, dated as of February 1, 2003 (incorporated
                by
                reference to Exhibit 10.47 to the Registrant’s Current Report on Form 8-K
                filed on April 6, 2006).




10.48
            Short
                Term Loan Agreement between Shandong Shengda Nanomaterials Co., Ltd.
                and
                Bank of China, Taian Branch, dated as of January 9, 2003 (incorporated
                by
                reference to Exhibit 10.48 to the Registrant’s Current Report on Form 8-K
                filed on April 6, 2006).




10.49
            Memorandum
                of Understanding between Faith Bloom Limited and Shandong Shengda
                Technology Co., Ltd. dated as of March 21, 2006 (incorporated by
                reference
                to Exhibit 10.49 to the Registrant’s Current Report on Form 8-K filed on
                April 6, 2006).




10.50
            Engagement
                Letter of Sterne Agee & Leach, Inc., as managing placement agent, and
                Global Hunter Securities, as co-placement agent, of up to $15,000,000
                of
                common stock of Faith Bloom Limited, dated as of March 16, 2006
                (incorporated by reference to Exhibit 10.50 to the Registrant’s Current
                Report on Form 8-K filed on April 6,
                2006).




16.1
            Letter
                from John Geib, Chartered Accountant (incorporated by reference to
                Exhibit
                16.1 to the Registrant’s Current Report on Form 8-K filed on March 18,
                2005)




16.2
            Letter
                from Swartz Levitsky Feldman LLP, Chartered Accountants (incorporated
                by
                reference to Exhibit 16.2 to the Registrant’s Current Report on Form 8-K
                filed on March 18, 2005)




16.3
            Letter
                from Rotenberg & Co., LLP (incorporated by reference to Exhibit 16.1
                to the Registrant’s Current Report on Form 8-K filed on May 17,
                2006)




21.1
            List
                of Subsidiaries (incorporated by reference to Exhibit 21.1 to Registrant’s
                Registration Statement on Form SB-2 filed on March 31,
                2006).





31.1*
            Certification
                of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a),
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002*.





31.2*
            Certification
                of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a),
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002*.





32.1**
            Certification
                of the Chief Executive Officer pursuant to 18 U.S.C Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.*.





32.2**
            Certification
                of the Chief Financial Officer pursuant to 18 U.S.C Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.*.





*
            Filed
                herewith.**
            Furnished
                herewith




F-29




**SIGNATURES**
  Pursuant
        to the requirements of the Section 13 or 15(d) of the Securities Exchange
        Act of 1934, the registrant has duly caused this report to be signed on its
        behalf by the undersigned, thereunto duly authorized.
  SHENGDATECH,
                  INC.Date: May
                  14, 2008
              By:
              /s/ XIANGZHI
                  CHENName: Xiangzhi
                  ChenTitle:
                  Chairman, Director and Chief Executive Officer
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
  **Signature**
              
              **Title**
              
              **Date**/s/
                  Xiangzhi Chen
              
              Chairman,
                  Director and Chief Executive Officer
              
              May
                  14, 2008(Xiangzhi
                  Chen)
              
              (Principal
                  Executive Officer)/s/
                  Anhui Guo
              
              Director
                  and Chief Financial Officer
              
              May
                  14, 2008(Anhui
                  Guo)/s/
                  Carl Mudd
              
              Director
              
              May
                  14, 2008(Carl
                  Mudd)/s/
                  Sheldon Saidman
              
              Director
              
              Mary
                  14, 2008(Sheldon
                  Saidman)