**UNITED
      STATES**


**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **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, 2006




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**
              (State
                or other jurisdiction
              of
                incorporation or organization)
            **N/A**
              (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
            None





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. þ




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
                filero
            Non-accelerated
                filerþ


Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act): Yes o No þ




As
      of
      March 15, 2007, there were 54,095,103 shares
      of
      common stock of ShengdaTech, Inc. outstanding. There was no active public
      trading market as of the last business day of the Company’s second fiscal
      quarter.









**SHENGDATECH,
      INC.**


**(A
      Maryland Corporation)**





**TABLE
      OF CONTENTS**




**Page****PART
                  I**Item1
              Business
              1Item
                  1A
              Risk
                  Factors
              12Item
                  1B
              Unresolved
                  Staff Comments
              18Item
                  2
              Properties
              18Item3
              Legal
                  Proceedings
              18Item
                  4
              Submission
                  of Matters to a Vote of Security Holders
              18**PART
                  II**Item
                  5
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              20Item
                  6
              Selected
                  Financial Data
              21Item
                  7
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operation
              22Item
                  7A
              Quantitative
                  and Qualitative Disclosures About Market Risk
              34Item
                  8
              Financial
                  Statements and Supplementary Data
              34Item
                  9
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              34Item
                  9A
              Controls
                  and Procedures
              35Item
                  9B
              Other
                  Information
              35**PART
                  III**Item
                  10
              Directors,
                  Executive Officers and Corporate Governance
              36Item
                  11
              Executive
                  Compensation
              38Item
                  12
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              40Item
                  13
              Certain
                  Relationships and Related Transactions,
                  and Director Independence
              40Item
                  14
              Principal
                  Accounting Fees and Services
              41**PART
                  IV**Item
                  15
              Exhibits
                  and Financial Statement Schedules
              42


-i-




**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 products to plants and farmers mainly
      through a direct sales force. 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.





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


-1-




**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.





NPCC
      products are widely used in the water based paints industry. 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 oil
      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.





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  -2-


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 2007, 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.




The
      second new market we are targeting is the paints and ink market. NPCC products
      are widely used in the paints industry. China’s consumption of oil based paints
      has grown due to the growing construction and building industry.




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 will finish
      the polypropylene and polyethylene sample testing in the second half of
      2007.





**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 will
      attract more intelligent and excellent NPCC researchers and scholars. Currently
      there are ten staff working in this lab, each having a masters degree in
      chemical related fields. 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 expect to ship these products to the market gradually in the
      second half of 2007.





We
      deliver our products directly to our customers, including manufacturers and
      distributors of agrochemicals. We operate sales liaison offices in three major
      cities in China. 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.





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  -3-


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, NPCC has been widely applied in 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. 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 will enable 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
                suite 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 entered 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 partnerships with various universities in China to develop
                new
                NPCC technologies and new NPCC products. We are currently working
                with
                Qinghua University to establish a NPCC research center.





·
            *Greater
                capacity to meet the demand.*We
                currently have a capacity of 90,000 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 the suppliers who can steadily supply NPCC in large
                amounts. Due to our capacity, we are in a better position to attract
                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.





·
            *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 will attract more intelligent and excellent NPCC researchers
                and scholars. Now there are ten staff working in this lab, each having
                a
                master degree in chemical related fields. 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 expect to
                ship
                these products to the market gradually in the second half of
                2007.





-4-




**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.





*Expanding
      Our Capacity to Meet Demand*





Our
      current NPCC production capacity is 90,000 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 plan to add 40,000 tons of NPCC production capacity in May,2007
      and
      60,000 tons in December,2007. By then, our total NPCC annual production capacity
      will reach 190,000 tons and we will be the largest NPCC manufacturer in China.





*Achieving
      Low Production Costs*





We
      have
      adopted new technologies in our manufacturing process. Our use of the membrane
      dispersion technology jointly developed with Tstinghua University has enabled
      us
      to save energy in the production process. In addition, we anticipate spending
      an
      average of approximately $2 million per year for the next three years to replace
      our existing chemical equipment in order to reduce energy consumption and
      pollution. We believe as a result of these and other factors our production
      costs will be significantly lower.





*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 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 is expected to be certified with
      ISO9001in the third quarter of 2007. 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 research
      and development centers in Beijing and Shanghai. We intend to focus significant
      efforts on opening new markets for our new products. These new products include
      NPCC products for the paper, paints, coatings, polypropylene and polyethylene
      industries. We believe these new products will contribute to our growth.





*Building
      a Strong Management Team*





Our
      experienced management team has strong capabilities in leadership and execution.
      Under their leadership, we have a demonstrated rapid and controlled growth.
      The
      members of our management team have an average of ten years of industry
      experience . To meet the challenges of our growing business, we plan to grow
      our  -5-


management
      team by recruiting more high-quality college graduates including those with
      higher degrees and training them by giving them increasing responsibilities.
      We
      believe a strong management team will ensure our continued success in this
      industry.





*Building
      a Broad Customer Base*





Currently,
      our products are sold primarily to major customers in Shandong and parts of
      northern China. We plan to increase our customer base and market our products
      to
      other geographic areas in China. We will expand our sales network by setting
      new
      sales offices in Xian, Guangzhou and Dalian, in addition to our existing ones
      in
      Shanghai, Tsingdao and Beijing. Although our NPCC products are in higher demand,
      they are only sold to customers concentrated in a couple of industries. We
      have
      recently begun our marketing efforts in the paper and paints industries and
      successfully completed the trial and testing of our samples. We plan to increase
      our marketing efforts in these industries. We believe doing so will expand
      and
      diversify our customer base.




**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 coatings**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, which have a gross margin
      8% higher than coal-based chemical products.





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 paper, polypropylene,/polyethylene and silicon adhesive . We have completed
      some testing in the paper industry and received positive results. 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 product is expected to pass ISO 9001 in the third quarter of
      2007.
      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  -6-


Chemical
      Technology, for twenty years. In addition, we jointly own a pending patent
      developed by Tsinghua University on next generation NPCC particle producing
      technology based on membrane-dispersion techniques. The pending patent is
      expected to be officially issued in November, 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.




We
      expect
      to obtain 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. We are in the process
      of registering the trademarks under our name and expect to complete the process
      shortly.





**Our
      Research and Development Efforts**





We
      currently have more than 10 staff members on our research and development team
      located in Tsingdao, Taian and Beijing. All of our research and development
      staff graduated from junior colleges or achieved an equivalent educational
      level. Among them, one holds a PhD degree, one is a senior technician, and
      seven
      hold masters degrees. Most of our research and development staff have been
      working in this field for more than four years. Mr. Xukui Chen, our Director
      of
      research and development, has engaged in NPCC product research for more than
      six
      years. He has spearheaded the effort to develop proprietary technology for
      chemical modification in NPCC products, which enabled our successful entry
      into
      the tire, paints and PVC building material industries. 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. With
      this
      new technology, tires and PVC building materials 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.
      First, we conduct small scale tests after consultation with scholars at Tsinghua
      University and Tsingdao University of Science and Technology. 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, about 300
      kilograms 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 2006,
      we
      completed samples testing of our NPCC products with 22 companies in various
      industries, such as PVC, rubber, adhesive, latex and coating. We have received
      positive results from these companies after testing our products and we consider
      most of them to be potential new customers.





We
      have
      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.





In
      addition, we have adopted advanced new technology used exclusively for our
      processing system in our new Xianyang 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 R&D building with a total
      investment of $2.5 million. This center is able to meet our current R&D
      demand. In  -7-


addition,
      we maintain our R&D cooperation relationship with Tsinghua University and
      will pay an annual fee of $130,000 to Tsinghua University. As a result, we
      believe we can better attract senior research personnel at a reasonable cost.
      We
      expect the centers to have approximately 34 employees devoted to our research
      and development efforts. The centers will be a base for training research and
      technical personnel and developing proprietary technologies. The centers will
      allow us to partner with research universities in China, such as Tsinghua
      University and Tsingdao University of Science and Technology.




**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 industry and generated significant
      sales. We are actively marketing our NPCC products to the paper and ink
      industries. We have successfully completed sampling and testing of our products
      with a number of companies in these industries and expect to start shipping
      our
      products to them in the near future.





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 Shandong. 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 products is direct marketing supplemented with indirect marketing. Our
      products are sold directly to manufacturers and farmers. We are actively
      expanding our marketing network into other parts of China. We have established
      sales offices in multiple locations in China including Shanghai, Tsingdao,
      Beijing, Xian, Guangzhou and Dalian. We also intend to expand into the
      international market for NPCC products. We have completed sampling and testing
      with four foreign companies which are in the paints, PVC and polyethylene
      industries, respectively. They are located in Thailand, Indonesia, Malaysia
      and
      Korea and we expect to supply products to them in the near future. Additionally,
      our products are being tested by customers from Japan and
      Netherlands.





Our sales
      team has approximately 41 members with six in coal-based chemical division,
      14
      in Shandong Haize Nanomaterials Co., Ltd. and 21 in Shaanxi Haize Nano-materials
      Co., Ltd. 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.


-8-




*Major
      Suppliers*





The
      table
      below lists our major suppliers (5%) as of December 31, 2006.





**Major
      Suppliers for NPCC Business**





**Suppliers**
            
            **Amount
                Purchased in 2006**
              **(RMB
                1,000,000)**
            
            **%
                of Total**
              **Purchases
                in 2006**Soft
                Coal
            
            Shandong
                Taifeng Minerals Co.
            
            12.90
            
            20.97%Limestone
            
            Laiwu
                Niuquan Yujie Stone Factory
            
            2.88
            
            4.67%Modification
                agent
            
            Qingdao
                Siwei Chemical Co. Ltd.
            
            21.00
            
            34.12%Anthracite
            
            Feicheng
                Longxin Supply Storage & Transport Co.
            
            10.23
            
            16.63%**Total**
            
            
            
            
            
            **76.39**%





**Major
      Suppliers for Coal Based Chemical Business**





**Suppliers**
            
            **Amount
                Purchased in 2006**
              **(RMB
                1,000,000)**
            
            **%
                of Total**
              **Purchases
                in 2006**Anthracite
            
            Jincheng
                Qinshui Road Coal Sales Co.
            
            24.58
            
            12.97%Anthracite
            
            Jincheng
                Riyuejiu Trading Co., Ltd.
            
            23.68
            
            12.50%Anthracite
            
            Feicheng
                Longxin SupplyStorage
                & Transport Co.
            
            20.32
            
            10.72%Anthracite
            
            Feicheng
                Tongyun Coal Co.
            
            19.57
            
            10.33%Urea
            
            Shandong
                Feicheng City Fertilizer Factory
            
            21.48
            
            11.33%Urea
            
            Shandong
                Feida Chemical Technology Co.
            
            19.11
            
            10.08%Soft
                Coal
            
            Sahndong
                Taifeng Minerals Co.
            
            9.91
            
            5.23%**Total**
            
            
            
            
            
            **73.16**%





-9-




**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 , 2006, were as follows:




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





**Name**
            **Industry**
            **Amount
                of Sale(RMB 1,000,000)**
            **Percentage
                of**
              **Total
                Sales**Triangle
                Tire
            
            Tire
            
            14.72
            
            14.03%Zhaoyuan
                Liao
            
            Tire
            
            12.60
            
            12.01%Double
                Star Tire
            
            Tire
            
            10.29
            
            9.80%Zhengjiang
                Suhui
            
            Tire
            
            6.98
            
            6.65%**Total**
            
            
            
            
            
            **42.49**%Dalian
                Jinyuan
            
            PVC
            
            11.71
            
            20.46%Qingdao
                Haiwei
            
            PVC
            
            9.85
            
            17.22%Quanzhou
                Lida
            
            PVC
            
            4.57
            
            7.99%Cangzhou
                Cangjing
            
            PVC
            
            3.98
            
            6.97%Changzhou
                Chuangjia Plastic
            
            PVC
            
            3.92
            
            6.84%**Total**
            
            ****
            
            ****
            
            **59.48%**








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





**Name**
            
            **Product**
            
            **Amount
                of Sale in 2006**
              **(RMB
                1,000,000)**
            
            **Percentage
                of**
              **Total
                Sales**Jiulong
                Experiment Chemical
            
            Liquid
                Ammonia
            
            6.90
            
            5.50%Taixin
                Chemical
            
            Liquid
                Ammonia
            
            6.84
            
            5.45%Huayangdier
                Chemical
            
            Liquid
                Ammonia
            
            6.72
            
            5.36%Linyi
                Zhengfa Chemical
            
            Liquid
                Ammonia
            
            6.51
            
            5.19%Laiwu
                Jinjian Chemical
            
            Liquid
                Ammonia
            
            6.39
            
            5.09%**Total**
            
            
            
            
            
            **26.59**%****Tongfa
                Formaldehyde Factory
            
            Methanol
            
            5.99
            
            7.13%Jinan
                Fushihongxin
            
            Methanol
            
            5.75
            
            6.84%Linyi
                Yongda Formaldehyde Factory
            
            Methanol
            
            5.67
            
            6.74%Xinhua
                Construction Materials
            
            Methanol
            
            5.01
            
            5.95%**Total**
            
            
            
            
            
            **26.66**%****


-10-


**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**
            
            **Segment
                Market**
            
            **Price
                ($)**Guangdong
                EnpingJiawei
                Chemical Co, Ltd.
            
            PCC:
                90,000 mt/year
              NPCC:
                10,000 mt/year
            
            Electrical
                wire and cable
            
            161-198/metric
                tonShanghai
                Perfection Co. Ltd.
            
            N/A
            
            Rubber,
                adhesive and paints
            
            223-297/metric
                tonShanghai
                Xuemei Refined Chemical Factory
            
            
            
            Adhesive,
                paints and plastics
            
            371/metric
                tonShiraishi
                Calcium Kaisha, Ltd.
            
            N/A
            
            Paints
                and coatings, printing ink
            
            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





**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


-11-




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, 2006, we employed 1,355 full-time employees with 433 in Shandong
      Haize Nano-materials Co.,Ltd., 346 in Shaanxi Haize Nano-materials Co.,Ltd.
      and
      576 in the chemical division. Of our total employees, 5% are management
      personnel and 3% are sales staff members. We plan to establish trade unions
      which protect employees’ rights, aim to assist in the fulfillment of our
      economic objectives, encourage employee participation in management decisions,
      and assist in mediating retirement disputes with union 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 8% to 20% 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 $223,845 and
      $302,864 for fiscal year 2005 and 2006, respectively. In the event that any
      current employee, or former employee, files a complaint with Chinese government,
      not only will we be required to purchase insurance for such employee, we may
      be
      subject to administrative fines. We believe that such fines, if imposed, are
      immaterial.





**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.




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.  -12-


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 Business**





***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 and water based paints only. 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 NPCC products. 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.





***Our
      revenues from 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
      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.





***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 two 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 huge demand for energy. If the price for
      coal
      increases again, our profit margin could decrease considerably.





***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  -13-


purchases
      of 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.




***Our
      business depends on our ability to protect our intellectual property
      effectively. If any of our patents is not protected or any of our trade secrets
      is 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 the laws may be
      difficult to enforce 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.





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
      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 per 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
      purchase a similar amount of our products, our revenues and net income would
      decline considerably.





***Some
      of our 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.  -14-


***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.





***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.





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.





***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 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.





***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  -15-


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.




***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.  -16-


***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 **.**





**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;




·
            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  -17-


$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 the affect the ability of brokers to sell our common
      shares and limit the liquidity of our securities.




**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. Therefore, the land leased from our affiliate Shandong Shengda
      constitutes 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. We are leasing the Xianyang facility
      from our affiliate Shandong Shengda Technology and have purchase the equipment
      for the facility. We also plan to expand the capacity of our facility in
      Xianyang if demand emerges.





The
      main
      equipment and machinery of our NPCC business includes ultra gravity reactors,
      carbonation reactors, 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**




Effective
      as of November 22, 2006, our board of directors adopted resolutions approving
      the amendment of our articles of incorporation to (i) change our name from
      "Zeolite Exploration Company" to "ShengdaTech, Inc."; (ii) authorize ten million
      (10,000,000) shares of undesignated preferred stock, whereby our board of
      directors will be authorized to establish, from the authorized shares of
      preferred stock, one or more classes or series of shares, to designated each
      such class and series, and to fix the rights and preferences of each such class
      and series; (iii) delete the name and address of the resident agent; (iv) delete
      the names and addresses of the initial directors; and (v) delete the name and
      address of the incorporator. The amendment of the Articles of Incorporation
      of
      the Company was submitted to the stockholders for approval by written consent
      in
      accordance with Section 78.320(2) of the Nevada  -18-


General
      Corporation Law. On November 22, 2006, the holders of 27,645,024 shares of
      our
      common stock, constituting a majority of those votes entitled to be cast, voted
      in favor of the amendment.


-19-




**PART
      II**





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





Our
      common stock is quoted on the OTC Bulletin Board under the symbol SGAT.OB.
      There
      was no public trading activity in our shares during the past two fiscal years
      through March 31, 2006. Since our March 31, 2006 reverse merger with Faith
      Bloom
      Limited, there has been only 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.




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




On
      December 20, 2006, the last reported sale price of our common stock on the
      OTCBB
      was $6.35 per share.





**Shareholders**





As
      of
      March 15, 2007, we had 54,095,103
      outstanding shares
      of
      common stock held by approximately 169 shareholders 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.


-20-




**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.





***($
      and shares in millions, except per share and employee
      data)***





**Year
                Ended December 31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****Consolidated
                Statement of Operations Data:**
            
            
            **(unaudited)**


RevenueChemical
            
            $
            9,713,234
            
            $
            22,329,209
            
            $
            37,369,278
            
            $
            43,985,596
            
            $
            50,592,217Nano-material
            
            
            4,127,225
            
            
            7,928,481
            
            
            12,741,169
            
            
            14,613,733
            
            
            22,007,814Total
                revenue
            
            
            13,840,459
            
            
            30,257,690
            
            
            50,110,447
            
            
            58,599,329
            
            
            72,600,031Cost
                of revenueChemical
            
            
            8,573,933
            
            
            19,280,693
            
            
            28,526,258
            
            
            31,752,100
            
            
            37,924,593Nano-material
            
            
            2,482,339
            
            
            5,087,965
            
            
            8,124,449
            
            
            9,264,339
            
            
            13,297,976Total
                cost of revenue
            
            
            11,056,272
            
            
            24,368,658
            
            
            36,650,707
            
            
            41,016,439
            
            
            51,222,569Gross
                profit
            
            
            2,784,187
            
            
            5,889,032
            
            
            13,459,740
            
            
            17,582,890
            
            
            21,377,462Operating
                expensesSales
                & marketing
            
            
            213,893
            
            
            463,763
            
            
            763,186
            
            
            865,338
            
            
            1,260,647General
                & administrative
            
            
            966,121
            
            
            1,098,057
            
            
            926,174
            
            
            967,357
            
            
            2,641,474Impairment
                of property and equipment
            
            
            —
            
            
            —
            
            
            230,846
            
            
            —
            
            
            —Total
                operating expenses
            
            
            1,180,014
            
            
            1,561,820
            
            
            1,920,206
            
            
            1,832,695
            
            
            3,902,121Income
                from operations
            
            $
            1,604,173
            
            $
            4,327,212
            
            $
            11,539,534
            
            $
            15,750,195
            
            $
            17,475,341Other
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            129,665
            
            
            _Interest
                income
            
            
            10,757
            
            
            6,939
            
            
            22,848
            
            
            82,611
            
            
            140,375Interest
                expenses
            
            
            198,681
            
            
            219,390
            
            
            5,331
            
            
            —
            
            
            —Other
                expenses
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            89,068Income
                before provision for income taxes
            
            
            1,416,249
            
            
            4,114,761
            
            
            11,557,051
            
            
            15,962,471
            
            
            17,526,648Provision
                for tax
            
            
            619,705
            
            
            1,624,547
            
            
            4,144,713
            
            
            —
            
            
            —Net
                Income
            
            $
            796,544
            
            $
            2,490,214
            
            $
            7,412,338
            
            $
            15,962,471
            
            $
            17,526,648Basic
                and diluted earnings per share
            
            $
            .01
            
            $
            .03
            
            $
            .08
            
            $
            .25
            
            $
            .34Basic
                weighted-average shares outstanding
            
            
            87,305,912
            
            
            87,305,912
            
            
            87,305,912
            
            
            64,455,210
            
            
            51,900,641Diluted
                weighted-average shares outstanding
            
            
            87,305,912
            
            
            87,305,912
            
            
            87,305,912
            
            
            64,455,210
            
            
            52,022,801


-21-


**As
                of December 31,****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****Consolidated
                Balance Sheet Data:**
            
            
            **(unaudited)**


Cash
                and cash equivalents
            
            $
            1,733,191
            
            $
            2,392,280
            
            $
            10,409,891
            
            $
            10,749,300
            
            $
            34,684,142Trade
                accounts receivable
            
            
            565,666
            
            
            3,549,155
            
            
            3,761,726
            
            
            3,929,082
            
            
            5,588,675Advances
                to suppliers
            
            
            914,754
            
            
            51,528
            
            
            —
            
            
            262,591
            
            
            872,289Inventory
            
            
            1,118,988
            
            
            1,589,065
            
            
            1,264,489
            
            
            1,478,510
            
            
            2,151,613Receivable
                from related parties
            
            
            —
            
            
            —
            
            
            —
            
            
            943,308
            
            
            1,601Total
                current assets
            
            
            4,356,836
            
            
            8,928,289
            
            
            15,437,578
            
            
            21,337,652
            
            
            43,455,672Property
                and equipment, net
            
            
            10,590,233
            
            
            12,883,879
            
            
            12,547,242
            
            
            8,579,676
            
            
            23,479,725Total
                assets
            
            
            23,493,617
            
            
            29,891,268
            
            
            35,780,306
            
            
            29,957,328
            
            
            67,029,351Total
                current liabilities
            
            
            5,170,135
            
            
            9,056,131
            
            
            7,531,303
            
            
            5,184,740
            
            
            9,900,088Total
                shareholder's equity
            
            
            18,323,482
            
            
            20,835,137
            
            
            28,249,003
            
            
            24,772,588
            
            
            57,129,264






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





**Overview**





We
      are a
      leading manufacturer and supplier of NPCC for tires, plastics, paints, inks,
      papers and other products in China. We sell our NPCC products directly to
      leading tire and plastics manufacturers in Northern China. We also manufacture
      coal-based chemicals including ammonia bicarbonate, liquid ammonia, methanol
      and
      melamine. Our coal-based chemicals are delivered directly to our customers
      or
      through distributors in Shandong Province, China.





***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 report 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 nano precipitated carbonated calcium (“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 Shanxxi, China to
      run
      the new NPCC facility in Shanxxi. Effective January 3, 2006, Zeolite changed
      its
      name to ShengdaTech, Inc. Our corporate structure is depicted in the following
      chart:  -22-







***Revenue***





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





·
            manufacturing
                capacity of NPCC;


·
            pricing
                of our NPCC; and


·
            industry
                demand.





*Manufacturing
      Capacity of NPCC* .
      Our
      manufacturing capacity of NPCC products rose to 30,000 metric tons per year
      in
      April, 2003. Sufficient capacity ensures a stable supply of NPCC for our
      customers which usually have a large output of products which entails a large
      demand for NPCC. We increased our annual manufacturing capacity of NPCC to
      90,000 metric tons as of December 31, 2006. We plan to add additional 100,000
      metric tons in 2007.





*Pricing
      of our NPCC product* .
      The
      pricing of NPCC products are generally determined by production volume. As
      production volume increases, the NPCC price decreases. With respect to tire
      and
      PVC building materials, the pricing of NPCC products is reduced by replacing
      some of the relatively expensive carbon black and PVC. With respect to paper,
      the pricing of NPCC is principally affected by comparable imports. In the next
      few years, we do not rule out the possibility of reducing selling price properly
      in order to compete with relatively small competitors. However, we still remain
      confident in retaining the current gross profit margin level because our unit
      costs of products are reduced by achieving economies of scale.





*Industry
      demand* .
      Our
      business and revenue growth depends on the industry demand for NPCC. The
      downstream industries we supply are tire, PVC building rubber, paints and oil
      ink. Given the difference between the overall demand of those industries, our
      growing R&D capacity and our current supply volume, we believe in the growth
      potential of our business.





We
      supply
      ammonia-based chemicals to local farmers and chemical plants located in Shandong
      and other surrounding provinces. We have a good relationship with our customers
      and our products enjoy good reputation in their markets. We believe the demand
      for our coal-based chemicals will stay stable in the next few years.





*Seasonality* .
      Our
      chemical business is generally the busiest between February and November of
      each
      year due to the high demand of ammonium bicarbonate during the farming season
      in
      northern China. Our chemical revenue from this season generally accounts for
      70-80% of the total for the year. December to January is typically our slowest
      period during which the price of our ammonium bicarbonate decreases
      approximately 6-8%.


-23-




***Cost
      of Revenue***




Cost
      of
      revenue for both NPCC and chemicals consists primarily of (a) consumption of
      raw
      and auxiliary raw materials, (b) use of water and electricity, and (c) equipment
      depreciation and (d) workers’ salaries.





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





·
            processing
                technologies of NPCC; and


·
            availability
                and price of coal.





*Process
      Technologies of NPCC* .
      The
      advancement of NPCC processing technologies is crucial to deliver value to
      our
      clients. We have already successfully completed the research of a new generation
      membrane-dispersion technology in conjunction with Tsinghua University. The
      technology has been verified by experts and is in the process of securing a
      patent. The Company and Tsinghua University each have 50% ownership of the
      technology and the Company has the exclusive (100%) right to use the technology.
      This new technology will enable us to produce NPCC in a more efficient and
      cost
      effective way.





*Availability
      and Price of Coal* .
      Coal is
      the key raw material for making our coal-based chemicals as well as the key
      fuel
      for calcination of limestone. We have long-term relationship with our coal
      suppliers. We developed a network of supplier candidates for backup purposes.
      Coal prices have experienced fluctuation in the past few years and the price
      curve turned relatively flat in the second half of 2005. The average price
      was
      approximately $70 per metric ton in 2004 and increased to approximately $80
      per
      metric ton in 2005. The average coal price increased to approximately $90 in
      2006.




***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
      (e) the volume and costs of manufacturing of our products.





***Operating
      Expenses***





Operating
      expenses consist of sales and marketing and general and administrative expenses.
      Sales and marketing expense consists primarily of (a) salaries, (b) commissions,
      (c) travel, lodging and other out-of-pocket expenses, (d) rebates for customers,
      and (e) other related overhead. We expect our sales and marketing expense to
      grow in absolute amounts for the foreseeable future as we further increase
      our
      sales. As a result, we will employ more sales staff and pay more commission
      based on the growing sales.





General
      and administrative expense consists primarily of (a) salaries, (b) labor union
      fees, (c) insurance fees, (d) lease for housing and property and (e) other
      related overhead. We expect general and administrative expense to continue
      to
      increase in absolute amounts. 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**





*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); however, the accompanying financial statements have been
      expressed in the United States dollars. The accompanying consolidated balance
      sheets have been translated into the United States dollars at the exchange
      rates
      prevailing at each balance sheet date. The accompanying consolidated statements
      of operations have been translated using the average exchange rates prevailing
      during the periods of each statement. Refer to Note 11.  -24-


*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 and its wholly owned subsidiaries 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 the Company and its wholly owned subsidiaries on from March 31,
      2006
      through December 31, 2006 . In connection with the lease agreements for the
      land, land use rights, buildings, and certain equipment described in Note 10
      to
      our consolidated financial statements, we have determined that it is not the
      primary beneficiary due to the significant other operations of the group and
      therefore those entities are not consolidated in the Company’s financial
      statements.





*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.





*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.





*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)
      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 we have objective evidence that the criteria specified in client acceptance
      provisions have been satisfied.





*Trade
      Receivables and Allowance for Doubtful Account.* Trade
      receivables are carried at original invoiced amounts. As a result of trade
      receivables being collected subsequent to the balance sheet dates, allowances
      for doubtful accounts were not recorded at December 31, 2006 and
      2005.





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





*Valuation
      of Long-lived Assets.* The
      carrying values of our long-lived assets are reviewed for impairment 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.





In
      connection with the agreement between Eastern Nano and Shengda Nano and Shengda
      Chemical in November 2004 (See Note 1 to our consolidated financial statements),
      an appraisal was obtained. The long-term assets belonged to Shandong Shengda
      Nanomaterials Co., Ltd. and Shandong Shengda Chemical Co., Ltd. were transferred
      at a reduced price. Those assets having a book value greater than the appraised
      value were impaired in  -25-


the
      amount of $230,846. As a result, the loss of Shengda Nano Material and Shengda
      Chemical were $63,765 and $167,081, respectively.





*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 or retirements are included in the statements of operations in the
      period of disposition, determined by reference to their carrying amounts.





*Intangible* Assets.
      Acquisition costs of patents, trademarks, licenses, techniques, formulas, land
      use rights, and other intangible assets are capitalized and amortized using
      the
      straight-line method over their estimated useful lives. For those intangible
      assets, such as patents, with legal protection over a period, their useful
      life
      is the protected period. Intangible Assets that do not have legal protection
      periods are amortized generally over 5 to 10 years. We do not capitalize
      internally generated intangible assets. Prior to the transfer of the intangible
      assets to Shengda Nano and Shengda Chemical described in Note 1 to our
      consolidated financial statements, we were amortizing land use rights over
      50
      years and patent techniques over 20 years.





*Advances
      to Suppliers and Advances from Customer* s.
      The
      company, as is the common practice in the PRC, will often pay advanced payments
      to suppliers for materials, or receive advance payments from customers. Advances
      to suppliers were $872,289 as of December 31, 2006, and $262,591 as of December
      31, 2005. Advances from customers as of December 31, 2006 were $119,923, and
      $0
      as of December 31, 2005.





*Retirement
      Benefit Plans* .
      We
      contribute 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
      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.





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





*Credit
      Risk.* The
      carrying amounts of accounts receivable 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. We perform ongoing credit evaluations of each customer’s financial
      condition. Until December 31, 2004, we maintained allowances for doubtful
      accounts and such allowances in the aggregate did not exceeded management’s
      estimates. Since December 31, 2004, all accounts receivable have been collected.




**Results** **of
      Operations**





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




**Revenue**




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





**Total
      Revenue**





The
      total
      revenue of our chemical business increased by $6,606,621 or 15.02% in 2006
      compared to the  -26-


prior
      year. The increase was mainly due to: (1) additional revenue of $1,071,528
      from
      increased methanol sales by 2,782 tons and the increased sale price by $6.5
      per
      ton; (2) $3,353,710 from increased sales of liquid ammonia by 14,233 tons and
      the decreased sale price by $1.58 per ton; (3) $4,579,304 from the increased
      sales of melamine by 4,169 tons and the increased sale price by $1.96 per ton
      respectively, which is offset by the decreased sales of ammonium bicarbonate
      by
      10,242 tons and the decrease of price by $7.03 per ton resulting in a decreased
      revenue of $2,397,921. The increase and decrease of sales were caused by the
      adjustment of our product mix due to market conditions.





The
      increase of total revenue 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 from the increased sales of 14,126 tons as a result of our capacity
      expansion, which was offset by the decreased price by $25.4 per ton which
      resulted in a decrease of $358,800. The decreased price of these products was
      caused by the decrease of cost due to the introduction of new technology and
      lower cost of raw material.


In
      addition, the change of foreign exchange rate contributed to the
      increase.





*Cost
      of Revenue and Gross Profit*




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





The
      cost
      of revenue 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: (1) the adjustment
      of product mix resulting in an increase in revenue by $1,178,748 and increased
      sales of melamine by 4169 tons which resulted in an increase of $2,521,428;
      (2)
      increased unit cost as a result of the increase in raw material cost which
      resulted in an increase in the amount of $1,176,057, the price of anthracite
      increased by $1.9 per ton, and the increase in electricity cost which resulted
      in an increase in the amount of $967,391 , the price increased by $0.004 per
      kwh; (3) the price of package increased by $0.03, which caused an increase
      in
      the amount of $67,428;(4) the lease cost increased by $261,441 as a result
      of
      accounting adjustment.





The
      gross
      profit of our chemical business declined from 27.81% to 25.04% and decreased
      by
      $434,128 or 3.55% for the following reasons: (1) an increase of gross profit
      by
      4.49% caused by an increase of the average selling price of methanol and
      melamine by $6.52 per ton and $1.96 per ton, respectively, and the increase
      of
      sales by 2,782 tons and 4,169 tons, respectively, which was offset by a decrease
      of gross profit by 5.92% caused by a decreased average selling price of ammonium
      bicarbonate and liquid ammonia by $7.03 per ton and $1.56 per ton, respectively,
      resulting in a decrease of 1.43%, and (2) the price of our raw materials and
      electricity increased by $1.9 per ton and $0.04 per kwh, respectively, resulting
      in an increase of cost of revenue. As a result, the gross profit from our
      chemical business decreased by 2.12%.  -27-


The
      cost
      of revenue of our NPCC business increased by $4,033,637 or 43.54% in 2006
      compared to the prior year. This was mainly due to: (1) the cost of revenue
      increased by $3,052,393 from increased sales due to the capacity expansion,
      and
      (2) the price of electricity and raw material increased by $0.002 per kwh and
      $1.69 per ton respectively, resulting in an increase of cost of revenue by
      $905,364 and(3) an increase in the amount of $75,880 caused by the increase
      of
      the equipment repair costs.





Our
      gross
      profit increased from 36.61% to 39.58%. This was mainly due to the unit cost
      decrease as the result of the introduction of new technology, the expansion
      of
      capacity and lower cost of raw materials at our new factory, which resulted
      in
      an increase in gross profit of $3,360,444 or 62.82%.





*Operating
      Expenses*




**For
                the Year Ended December 31,****2005**
            
            **2006**
            
            **Period
                to Period Change****Amount($)**
            
            **%
                of Total Revenue**
            
            **Amount($)**
            
            **%
                of Total Revenue**
            
            **Amount($)**
            
            **%**Operating
                ExpensesSales
                and Marketing
            
            
            865,338
            
            
            1.48
            
            
            1,260,647
            
            
            1.74
            
            
            395,309
            
            
            45.68General
                and Administrative
            
            
            967,357
            
            
            1.65
            
            
            2,641,474
            
            
            3.64
            
            
            1,674,117
            
            
            173.06Total
                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.
      The
      main reasons were: (1) sales commission increased by $307,340 and (2) the
      employee’s salary and insurance and the business expenses grew by $53,483 and
      $34,486 respectively.





The
      general and administrative expenses increased by $1,674,117 or 173.06% in 2006
      compared to the prior year. The main reasons were: (1) the $340,771 increase
      as
      R&D fee and (2) salary of the employees increased by $86,411 due to the
      expansion of the production capacity (3) the lease expense of new NPCC
      facility’s office building increased by $20,718 and (4) production and
      construction amortization expenses increased by $322,557 and (5) expenses of
      $750,041 related to becoming a public company and (6) value of warrant granted
      as the service compensation was $153,619.





*Operating
      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 Operation
            
            
            15,750,195
            
            
            26.88
            
            
            17,475,341
            
            
            24.07
            
            
            1,725,146
            
            
            10.95Interest
                Income
            
            
            82,611
            
            
            0.14
            
            
            140,375
            
            
            0.19
            
            
            57,764
            
            
            69.92Other
                Income
            
            
            129,665
            
            
            0.22
            
            
            —
            
            
            —
            
            
            (129,665
            )
            
            0Other
                Expense
            
            
            —
            
            
            —
            
            
            89,068
            
            
            —
            
            
            89,068
            
            
            100Net
                Profit
            
            
            15,962,471
            
            
            27.24
            
            
            17,526,648
            
            
            24.14
            
            
            1,564,177
            
            
            9.80




-28-


Operating
      income 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%. The increase resulted from
      increased deposit funds.





In
      2006,
      there was no other income. The income from the sale of surplus heat from our
      production process to the heat supply department of the local government was
      recorded in operating income.





Other
      expenses increased by $89,068 in 2006 compared to the prior year due to finance
      fee paid to banks in the amount of $72,909 and additional expenditure for the
      disposition of damaged and outdated equipment in the amount of
      $16,159.





***Comparison
      of years ended December 31, 2005 and 2004***




*Total
      Revenue*




**For
                the Year Ended December 31,****2004**
            
            **2005**
            
            **Period
                to Period Change****Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%**Chemical
            
            
            37,369,278
            
            
            74.57
            %
            
            43,985,596
            
            
            75.05
            %
            
            6,616,318
            
            
            17.71
            %Nano-material
            
            
            12,741,169
            
            
            25.43
            %
            
            14,613,733
            
            
            24.95
            %
            
            1,872,564
            
            
            14.70
            %Total
                Revenue
            
            
            50,110,447
            
            
            100.00
            %
            
            58,599,329
            
            
            100.00
            %
            
            8,488,882
            
            
            16.94
            %




The
      total
      revenue of our chemical business increased by $6,616,318 or 17.71% in 2005
      compared to 2004. The main reasons for the increase included: (1) additional
      revenue from new products such as melamine for $3,914,827 and (2) technical
      improvement (the installation of decarbonators in our chemical plant enabled
      us
      to change our product mix to meet seasonal demand) increasing the sales of
      high
      profit products, which caused the increase of revenue by $5,811,350 which was
      offset by the decrease of sales from low profit products by
      $3,109,859.




The
      increase of total revenue of our NPCC business was $1,872,564 or 14.70% in
      2005
      compared to the prior year. The main reasons for the increase included: (1)
      additional revenue from new products for $419,075 due to the introduction of
      new
      NPCC pulp for tires and (2) revenue increase of $1,453,489 due to increased
      demand from our customers


-29-




*Cost
      of Revenue and Gross Profit*





**For
                the Year Ended December 31,****2004**
            
            **2005**
            
            **Period
                to Period Change****Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%***Cost
                of Revenue*Chemical
            
            
            28,526,258
            
            
            76.34
            %
            
            31,752,100
            
            
            72.19
            %
            
            3,225,842
            
            
            11.31
            %Nano-material
            
            
            8,124,449
            
            
            63.77
            %
            
            9,264,339
            
            
            63.39
            %
            
            1,139,890
            
            
            14.03
            %Total
                cost of revenue
            
            
            36,650,707
            
            
            73.14
            %
            
            41,016,439
            
            
            69.99
            %
            
            4,385,732
            
            
            11.91
            %*Gross
                Profit*Chemical
            
            
            8,843,020
            
            
            23.66
            %
            
            12,233,496
            
            
            27.81
            %
            
            3,390,476
            
            
            38.34
            %Nano-material
            
            
            4,616,720
            
            
            36.22
            %
            
            5,349,394
            
            
            36.66
            %
            
            730,674
            
            
            15.87
            %*Total
                gross profit*
            
            
            13,459,740
            
            
            26.86
            %
            
            17,582,890
            
            
            30.01
            %
            
            4,123,150
            
            
            30.63
            %




The
      cost
      of revenue of our chemical business increased by $3,225,842 or 11.31% in 2005
      compared to the prior year. Such increase of the cost was primarily due to
      following items: (1) along with the increase of sales, the cost of revenue
      increased by $6,732,690 which was offset by the reduction of cost of revenue
      by
      $3,506,848 due to the decrease of sales from low profit products.




The
      cost
      of revenue to total revenue of our chemical declined from 76.34% in 2004 to
      72.19% in 2005 for the reason stated above.




In
      2005,
      the cost of revenue of our NPCC business grew by $1,139,890 or 14.03%. The
      increase is mainly due to: (1) the cost of revenue increased by $1,095,116
      because of the growing sales and (2) higher prices of anthracite, which was
      offset by the decrease of overhead expenses.




Since
      the
      higher product price was offset by the increase of raw materials’ purchasing
      price, the cost of sales to total revenue almost remained the same in 2004
      and
      2005 for our NPCC business.




*Operating
      Expenses*





**For
                the Year Ended December 31,**
            
            **Period
                to Period Change****2004**
            
            **2005****Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%**Operating
                expensesSales
                and marketing
            
            
            763,186
            
            
            1.52
            %
            
            865,338
            
            
            1.48
            %
            
            102,152
            
            
            13.38
            %General
                and administrative
            
            
            926,174
            
            
            1.85
            %
            
            967,357
            
            
            1.65
            %
            
            41,183
            
            
            4.45
            %Total
                operating expenses
            
            
            1,689,360
            
            
            3.83
            %
            
            1,832,695
            
            
            3.13
            %
            
            143,335
            
            
            4.56
            %





The
      sales
      and marketing expenses increased by $ 102,152 or 13.38% in 2005. The
      increase was primarily attributable to the following reasons: (1) sales
      commission increased $81,131 due to the increased sales revenue and (2)
      transportation expenses and business expenses increase of $21,021 due to
      increased sales.




The
      general and administration expenses increased by $ 41,183 or 4.45% in 2005
      compared to the prior year. The increase was caused by (1) asset insurance
      increase of $ 31,183, and (2) retirement pension increase of $
      10,000.


-30-




*Operating
      and Other Income*





**For
                the Year Ended December 31,**
            
            **Period
                to Period Change****2004**
            
            **2005****Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%
                of Total Revenue**
            
            **Amount
                ($)**
            
            **%**Income
                from operations
            
            
            11,539,534
            
            
            23.03
            
            
            15,750,195
            
            
            26.88
            
            
            4,210,661
            
            
            36.49Interest
                income
            
            
            22,848
            
            
            .05
            
            
            82,611
            
            
            .14
            
            
            59,763
            
            
            261.57Interest
                expenses
            
            
            5,331
            
            
            .01
            
            
            —
            
            
            —
            
            
            5,331
            
            
            —Income
                before provision for income taxes
            
            
            11,557,051
            
            
            23.06
            
            
            15,832,806
            
            
            27.02
            
            
            4,275,755
            
            
            37.00





The
      operating revenue increased by $4,210,661 or 36.49% in 2005 compared to 2004.
      The increase was due to the increase of sales revenue of $8,468,457 which was
      offset by the increase of cost of sales by $4,365,732 and increase in business
      expenses of $353,756.




In
      2005,
      the interest income grew by $ 59,763 or 261.57%. The increase resulted from
      increased deposited funds in 2005. Since some of the borrowings were paid off
      in
      2005, the interest expenses decreased by $5,331.





**Liquidity** **and
      Capital Resources**




**Year
                ended 31 December****2003**
            
            
            **2004**
            
            
            **2005**
            
            
            **2006****Amount
                ($)**Cash
                and cash equivalents
            
            
            2,392,280
            
            
            10,409,891
            
            
            10,749,300
            
            
            34,684,142Trade
                accounts receivable
            
            
            3,549,155
            
            
            3,761,726
            
            
            3,929,082
            
            
            5,588,676Working
                capital
            
            
            2,490,214
            
            
            7,412,338
            
            
            15,962,471
            
            
            17,526,648Cash
                provided by operating activities
            
            
            4,970,917
            
            
            9,967,038
            
            
            17,293,248
            
            
            21,509,893Cash
                provided by (used in) investing activities
            
            
            (2,858,884
            )
            
            (701,619
            )
            
            (2,517,152
            )
            
            (15,457,918
            )Cash
                provided by (used in) financing activities
            
            
            (1,454,966
            )
            
            1,248,221
            
            
            14,574,841
            
            
            16,880,395





We
      believe, based on our current cash levels as well as the operating cash flows
      expected in 2007, that we will have sufficient funds to finance our current
      operations for at least the next 12 months. However, we have also budgeted
      additional capital expenditures totaling $29 million in the next 12 months
      to
      expand capacity and set up research and development centers. We anticipate
      that
      these expenditures will be funded from working capital. The Board is in the
      process of completing the 2007 capital budget and the capital expenditures
      noted
      above are subject to change. There is no assurance that we will be able to
      obtain the necessary funds for such capital expenditures.





***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.





***Accounts
      receivable.*** **** Our
      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 43 days in 2003, 27 days in 2004, and 24
      days
      in 2005 and 2006. Our receivable turnover in days has been improved during
      the
      recent years. The main reason is the increasing sales proportion from Bangsheng,
      whose sales are generally on cash basis.  -31-


***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, 2005 was $17,293,248 and consisted of $15,962,471 of net
      income, $1,009,577 of depreciation and $69,249 of amortization. Cash provided
      by
      working capital and other activities primarily reflected a $71,561 increase
      in accounts receivable and a $179,322 increase in inventory, and a $ 662,437
      decrease in accounts payable.





Cash
      provided by operating activities for the year ended December 31, 2004 was
      $9,967,038 and consisted of $7,412,338 of net income, $903,930 of
      depreciation and $188,367 of amortization. Cash provided by working capital
      and
      other activities primarily reflected a $212,347 increase in accounts receivable,
      a $324,660 decrease in inventories, and a $206,783 decrease in accounts payable.





Cash
      provided by operating activities for the year ended December 31, 2003 was
      $4,970,917 and consisted of $2,490,214 of net income, $866,235 of depreciation
      and 188,856 of amortization. Cash provided by working capital and other
      activities primarily reflected a $ 2,982,866 increase in accounts receivable
      and
      a $468,771 increase in inventories, and a $1,470,903 increase in accounts
      payable.





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. Cash provided by working capital and other activities primarily
      reflected a $611,842 decrease in inventories, and a $1,468,602 increase in
      accounts payable.





**Contractual
      Obligations And Contingent Liabilities**




**As
                of**
              **December
                31, 2006**
            
            **Less
                than one year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than 5 years**Short-term
                loan
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Long-term
                Loan
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Capital
                lease for building and lands obligations
            
            
            1,134,206
            
            
            674,144
            
            
            460,062
            
            
            —
            
            
            —Capital
                lease for equipments obligations
            
            
            198,069
            
            
            198,069
            
            
            —
            
            
            —
            
            
            —Trade
                account payable
            
            
            2,957,413
            
            
            2,957,413
            
            
            —
            
            
            —
            
            
            —Other
                payable
            
            
            2,235,758
            
            
            2,162,691
            
            
            —
            
            
            —
            
            
            —Income
                and other taxes payable
            
            
            1,237,180
            
            
            1,237,180
            
            
            —
            
            
            —
            
            
            —Payable
                to related parties
            
            
            3,349,814
            
            
            3,422,881
            
            
            —
            
            
            —
            
            
            —Advanced
                from customers
            
            
            119,923
            
            
            119,923
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            11,232,363
            
            $
            10,772,301
            
            $
            460,062
            
            $
            —
            
            $
            —




**Off-Balance
      Sheet Arrangements**





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




**Recently
      Issued Accounting Standards**





*Recently
      Enacted Accounting*  *Standard.* On
      January 1, 2006, the Company adopted SFAS No. 151, *Inventory
      Costs - An Amendment of ARB No. 43, Chapter 4* (“SFAS
      151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing,
      to clarify the accounting for abnormal amounts of idle facility expense,
      freight, handling costs, and wasted material (spoilage). Among other provisions,
      the new rule requires that items such as idle facility expense, excessive
      spoilage, double freight, and re- handling costs be recognized as current-period
      charges. Additionally, SFAS 151 requires that the allocation of fixed production
      overhead to the costs of conversion be based on the normal capacity of the
      production facilities. The effects of adoption of SFAS 151 were not
      material.  -32-




On
      January 1, 2006, the Company adopted FASB issued SFAS No. 123 (revised 2004), *Share-Based
      Payment* (“SFAS
      123R”), which revises SFAS No. 123, Accounting for Stock-Based Compensation.
      SFAS 123R also superseded APB 25, *Accounting
      for Stock Issued to Employees* , and
      amends SFAS No.95, *Statement
      of Cash Flows* . Under
      SFAS 123R, share-based payments to employees, including the fair value of grants
      of employee stock options, are recognized in the income statement at their
      fair
      value, generally over the option vesting period. The effects of adoption of
      SFAS
      123R were not material.




In
      December 2004, the FASB issued SFAS No. 153, *Exchanges
      of Non-monetary Assets—An Amendment of APB Opinion No. 29* ,
      Accounting for Non-monetary Transactions (“SFAS 153”). SFAS 153 eliminated the
      exception from fair value measurement for non-monetary exchanges of similar
      productive assets in paragraph 21(b) of APB Opinion No. 29, *Accounting
      for Non-monetary Transactions* , and
      replaces it with an exception for exchanges that do not have commercial
      substance. SFAS 153 specifies that a non-monetary exchange has commercial
      substance if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. The effects of adoption of SFAS
      153
      were not material.




In
      June
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* , a
      replacement of APB Opinion No. 20, Accounting *Changes* , and
      FASB No. 3, Reporting *Accounting
      Changes in Interim Financial Statements* .
      Statement 154 applies to all voluntary changes in accounting principle, and
      changes the requirements for accounting for and reporting of a change in
      accounting principle. Statement 154 requires retrospective application to prior
      periods' financial statements of a voluntary change in accounting principle
      unless it is impracticable. It is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      Earlier application is permitted for accounting changes and corrections of
      errors made occurring in fiscal years beginning after June 1, 2005. The effects
      of adoption of SFAS 154 were not material.




In
      June
      2005, the FASB Emerging Issues Task Force (“EITF”) reached a consensus on Issue
      No. 05-6, *Determining
      the Amortization Period for Leasehold Improvements* . The
      guidance requires that leasehold improvements acquired in a business combination
      or purchased subsequent to the inception of a lease be amortized over the lesser
      of the useful life of the assets or a term that includes renewals that are
      reasonably assured at the date of the business combination or purchase. The
      guidance is effective for periods beginning after June 29, 2005. The effects
      of
      adoption of EITF No. 05-6 were not material.




In
      February 2006, the FASB issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments — an amendment of FASB Statements No.
      133 and 140 (* SFAS
      155). SFAS 155 amends SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* and SFAS
      No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* and
      related interpretations. SFAS 155 permits fair value remeasurement for any
      hybrid financial instrument that contains an embedded derivative that otherwise
      would require bifurcation and clarifies which interest- only strips and
      principal-only strips are not subject to recognition as liabilities. SFAS 155
      eliminates the prohibition on a qualifying special-purpose entity from holding
      a
      derivative financial instrument that pertains to a beneficial interest other
      than another derivative financial instrument. SFAS 155 is effective for the
      Company for all financial instruments acquired or issued beginning January
      1,
      2007. The impact of adoption of this statement on the Company’s consolidated
      financial statements, if any, has not yet been determined.




In
      March
      2006, the FASB issued SFAS No. 156, *Accounting
      for Servicing of Financial Assets - an amendment of FASB Statement No. 140
      (* SFAS
      140). SFAS 156 amends SFAS 140 requires an entity to recognize a servicing
      asset
      or servicing liability each time it undertakes an obligation to service a
      financial asset. It also requires all separately recognized servicing assets
      and
      servicing liabilities to be initially measured at fair value, if practicable.
      SFAS 156 permits an entity to use either the amortization method or the fair
      value measurement method for each class of separately recognized servicing
      assets and servicing liabilities. SFAS 156 is effective for the Company as
      of
      January 1, 2007. The impact of adoption of this statement on the Company’s
      consolidated financial statements, if any, has not yet been
      determined.





During
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, *Fair
      Value Measurements* (“FAS 157”).
      FAS 157 defines fair value, establishes a framework for measuring fair
      value  -33-


and
      requires enhanced disclosures about fair value measurements. FAS157 requires
      companies to disclose the fair value of financial instruments according to
      a
      fair value hierarchy as defined in the standard. FAS 157
      is effective for the Company at the beginning of fiscal 2008 and will be applied
      on a prospective basis. The Company is currently evaluating the impact, if
      any,
      the adoption of FAS 157 will have on its financial position and results of
      operations.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No. 159, *The
      Fair Value Option for Financial Assets and Liabilities — Including an
      amendment of FASB Statement No. 115* (FAS 159).
      FAS 159 permits entities to choose to measure certain financial assets and
      liabilities at fair value. Unrealized gains and losses, arising subsequent
      to
      adoption, are reported in earnings. The
      Company is required to adopt FAS 159 for the first fiscal year beginning
      after November 15, 2007.





**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-19 of this report.





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





Not
      applicable.


-34-




Item
      9a.
      Controls And Procedures




(a)  Evaluation
      of disclosure controls and procedures.




Under
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we conducted an
      evaluation of the effectiveness of the design and operation of our disclosure
      controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as of the end of the period covered by this
      Annual Report on Form 10-K (the “Evaluation Date”); and whether any change has
      occurred in the Company’s internal control over financial reporting pursuant to
      Exchange Act Rules 13a-15(d) and 15d-15(d).  Based on this evaluation,
      our principal executive officer and principal financial officer concluded as
      of
      the Evaluation Date that our disclosure controls and procedures were
      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 2006 that has materially affected, or is reasonably likely
      to
      materially affect, our internal control over financial reporting.




**Item
      9b. Other Information**




None.


-35-




**PART
      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
            
            44
            
            President,
                Chief Executive Officer and DirectorAnhui
                Guo
            
            36
            
            Director
                and Chief Financial OfficerDongquan
                Zhang
            
            66
            
            DirectorCarl
                Mudd
            
            63
            
            DirectorSheldon
                Saidman
            
            64
            
            DirectorXueyi
                Zhang
            
            34
            
            Vice
                PresidentXukui
                Chen
            
            33
            
            President
                of Shandong Bangsheng Chemical Co., Ltd.Zhaowei
                Ma
            
            41
            
            President
                of Shandong Haize Nano-Materials Co.,
                Ltd




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
      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. He is a Certified Public Accountant and
      holds a business degree from St. Edward's University.





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 currently has his own consulting business. From May 2001 to
      October 2005, he served as president and chief operating officer of Liberty
      Wire
& Cable, Inc. 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  -36-


director
      of research and development of Shandong Shengda Chemicals Co., Ltd. He was
      president of Shandong Haize Nanomaterials 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.
      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.





**Board
      Composition and Committees**





Our
      Board
      has five (5) members, of which three are independent directors. We have recently
      established an Audit Committee, a Compensation Committee and a Nominating and
      Corporate Governance Committee. The Audit Committee has 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
      rulesand 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, with Dongquan Zhang as the chairman, all of whom are “independent”
directors.





*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  -37-


standards.
      The members of the committee are Sheldon Saidman, Carl Mudd, and Dongquan Zhang,
      with Sheldon Saidman 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).





Based
      solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
      during our most recent fiscal year and amendments thereto furnished to us with
      respect to our most recent fiscal year, we note that Ms. Guo did not timely
      file
      a Form 3.





**Code
      of Ethics**





We
      have
      adopted a Code of Ethics (as defined in Item 406 of Regulation S-B) 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**




Our
      executive compensation program is designed to reward responsibility, performance
      and loyalty. It currently consists of two components: base salary plus retention
      bonus. The base salary accounts for approximately 80% of the total compensation
      while the retention bonus accounts for approximately 20% of the total
      compensation package. The base salary is designed to reward responsibility.
      The
      base salary for each officer is determined on the basis of his/her
      responsibilities and experience and is paid in installments in accordance with
      the length of time an officer serves for the year. We believe the base salary
      for Mr. Xiangzhi Chen meets its objective because the salary directly correlates
      to his corporate responsibility and experience.





The
      retention bonus is designed to retain valued employees. The amount of retention
      bonus is determined by the length of time the officer serves the Company. The
      retention bonus is designed to award officers on the condition that they do
      not
      provide services to other businesses during their employment with the Company.
      We believe the retention bonus has achieved its objectives. In 2006, no
      executive officers left the Company or served any other company during their
      employment. The Company had a performance based bonus plan which was suspended
      in 2004 when the Company was completing its reorganization. The Company may
      reinstate the performance bonus program in the future.  -38-





**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
            
            
            2006
            
            $
            200,000
            
            
            —
            
            $
            50,000
            
            
            —
            
            $
            250,000Anhui
                Guo,CFO
            
            
            2006
            
            $
            80,000
            
            
            —
            
            $
            20,000
            
            
            —
            
            $
            100,000Tim
                Halter (former CFO)
            
            
            2006
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —





**Grants
      of Plan-Based Awards**





The
      Company currently does not have any award plans. No options were granted to
      any
      officer in 2006.





**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 2006.





**Option
      Exercises and Stock Vested**





No
      options were exercised and no shares of stock were vested in 2006.





**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 2006.





**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, of which $17,000
      will be paid in cash and $18,000 in restricted shares of our common stock,
      (ii)
      $1,000 for each telephonic meeting and (iii) $5,000 for each in-person meeting.
      The chairperson of the audit committee will receive an additional $5,000
      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  -39-


annual
      report on Form 10K. The members of the Compensation Committee are Dongquan
      Zhang, Carl Mudd and Sheldon Saidman.





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





The
      following table sets forth information as of March 15, 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 54,095,103
      shares of common stock outstanding as of March 15, 2007.




**Name
                and Address**
            
            **Number of Shares**
            
            **Percentage Owned**Xiangzhi
                Chen
            
            
            22,902,912
            
            
            44.82
            %Anhui
                Guo
            
            
            —
            
            
            —Xueyi
                Zhang
            
            
            —
            
            
            —Dongquan
                Zhang
            
            
            —
            
            
            —Carl
                Mudd
            
            
            —
            
            
            —Sheldon
                Saidman
            
            
            —
            
            
            —Xiqing
                Xu
            
            
            1,154,584
            
            
            2.26
            %Zhaowei
                Ma
            
            
            —
            
            
            —Xukui
                Chen
            
            
            —
            
            
            —Directors
                and executive officers as a group (8 persons)
            
            
            24,062,496
            
            
            47.08
            %





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**





On
      March
      31, 2006, we consummated the transactions contemplated by a share exchange
      agreement among us and the owners of the issued and outstanding capital stock
      of
      Faith Bloom Limited, including Xiangzhi Chen, our current chief executive
      officer and controlling stockholder, and certain of our other officers and
      directors. Pursuant to the share exchange agreement, we acquired all of the
      outstanding capital stock of Faith Bloom in exchange for 50,957,603 shares
      of
      our common stock. As a result of this transaction, Mr. Chen became the owner
      of
      approximately 42% percent of our outstanding common shares.




On
      March
      21, 2006, we entered into a memorandum of understanding with Shandong Shengda
      Technology Co., Ltd., our affiliate, whereby Shandong Shengda Technology
      promises to lease the land and NPCC plant being built in Xianyang, Shaanxi
      to
      the Company when the construction is completed. Mr. Xiangzhi Chen, Chairman
      and
      CEO of the Company, is the controlling shareholder and an executive officer
      of
      Shandong Shengda Technology Co., Ltd.





We
      do not
      have any policies or procedures for the review, approval, or ratification of
      any
      transaction reported under this section.


-40-




**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, 2005 was $84,000 and the fees billed for the
      fiscal year ended December 31, 2006 was $164,750.




**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, 2005 and December 31,
      2006.




**Tax
      Fees.** There
      were no fees for tax compliance, tax advice or tax planning services by Hansen,
      Barnett & Maxwell, P.C., for the fiscal years ended December 31, 2005 and
      December 31, 2006.




**All
      Other Fees** .
      There
      were no other fees for either audit-related or non-audit services billed by
      Hansen, Barnett & Maxwell, P.C., for the fiscal years ended December 31,
      2005 and December 31, 2006.


-41-




**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




Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            F-3Consolidated
                Statements of Income and Comprehensive Income for the Years Ended
                December
                31, 2006, 2005 and 2004
            F-4Consolidated
                Statements of Shareholders’ Equity for the Years Ended December 31, 2004,
                2005, and 2006
            F-5Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006, 2005,
                and
                2004
            F-6Notes
                to Consolidated Financial Statements
            F-7




(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.


-42-




**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, 2006 and 2005
            F-3Consolidated
                Statements of Income and Comprehensive Income for the Years Ended
                December
                31, 2006, 2005 and 2004
            F-4Consolidated
                Statements of Shareholders’ Equity for the Years Ended December 31, 2004,
                2005, and 2006
            F-5Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006, 2005,
                and
                2004
            F-6Notes
                to Consolidated Financial Statements
            F-7




F-1






**H****ANSEN****,****B****ARNETT****&
                M****AXWELL,****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**
              ****




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Board of Directors and the Stockholders


Shengdatech,
      Inc.





We
      have
      audited the accompanying consolidated balance sheets of Shengdatech, Inc. and
      subsidiaries as of December 31, 2006 and 2005, and the related consolidated
      statements of income and comprehensive income, stockholders’ equity, and cash
      flows for each of the three years in the period ended December 31, 2006. These
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these financial statements 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. An audit includes
      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, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





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, 2006 and 2005 and the results of their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2006, in conformity with accounting principles generally accepted
      in the United States of America.





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


Salt
      Lake
      City, Utah


March
      21,
      2007


F-2




**SHENGDATECH,
                  INC. AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEETS**
  **December
                  31,****2006**
              
              **2005****ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              34,684,142
              
              $
              10,749,300Trade
                  accounts receivable
              
              
              5,588,676
              
              
              3,929,082Other
                  non-trade receivables
              
              
              157,352
              
              
              4,014,861Advances
                  to suppliers
              
              
              872,289
              
              
              262,591Inventory
              
              
              2,151,612
              
              
              1,478,510Receivable
                  from related parties
              
              
              1,601
              
              
              943,308**Total
                  Current Assets**
              
              
              43,455,672
              
              
              21,377,652**Property
                  and Equipment**,
                  net of accumulated depreciation of$3,674,605
                  and $2,545,460, respectively
              
              
              23,573,680
              
              
              8,579,676**Total
                  Assets**
              
              $
              67,029,352
              
              $
              29,957,328**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  Liabilities**Trade
                  accounts payable
              
              $
              2,957,413
              
              $
              1,618,492Other
                  payables and accrued expenses
              
              
              2,235,758
              
              
              1,936,971Income
                  and other taxes payable
              
              
              1,237,180
              
              
              1,282,059Advances
                  from customers
              
              
              119,923
              
              
              -Payable
                  to related parties
              
              
              3,349,814
              
              
              347,218**Total
                  Current Liabilities**
              
              
              9,900,088
              
              
              5,184,740**Shareholders'
                  Equity**Preferred
                  stock - $0.00001 par value; 10,000,000 shares authorized;none
                  outstanding
              
              
              -
              
              
              -Common
                  stock - $0.00001 par value; 100,000,000 shares authorized;54,095,103
                  shares and 45,120,000 shares outstanding, respectively
              
              
              540
              
              
              451Additional
                  paid-in capital
              
              
              21,824,121
              
              
              8,608,864Statutory
                  reserves
              
              
              3,301,379
              
              
              2,394,371Retained
                  earnings
              
              
              30,187,740
              
              
              13,568,100Accumulated
                  other comprehensive income
              
              
              1,815,484
              
              
              200,802**Total
                  Shareholders' Equity**
              
              
              57,129,264
              
              
              24,772,588**Total
                  Liabilities and Shareholders' Equity**
              
              $
              67,029,352
              
              $
              29,957,328
  See
        the Accompanying Notes to the Consolidated
        Financial Statements




F-3




**SHENGDATECH,
                  INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF INCOME AND COMPREHENSIVE
                  INCOME**
  **For
                  the Years Ended December 31,****2006**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)****Sale
                  of Products**
              
              $
              72,600,031
              
              $
              58,599,329
              
              $
              50,110,447**Cost
                  of Products Sold**
              
              
              51,222,569
              
              
              41,016,439
              
              
              36,650,707**Gross
                  Profit**
              
              
              21,377,462
              
              
              17,582,890
              
              
              13,459,740**Operating
                  Expenses**Selling
                  expense
              
              
              1,260,647
              
              
              865,338
              
              
              763,186General
                  and administrative expense
              
              
              2,641,474
              
              
              967,357
              
              
              926,174Impairment
                  of property and equipment
              
              
              -
              
              
              -
              
              
              230,846**Total
                  Operating Expenses**
              
              
              3,902,121
              
              
              1,832,695
              
              
              1,920,206**Income
                  from Operations**
              
              
              17,475,341
              
              
              15,750,195
              
              
              11,539,534**Other
                  Income (Expense)**Interest
                  income
              
              
              140,375
              
              
              82,611
              
              
              22,848Non-operating
                  income (expense)
              
              
              (89,068
              )
              
              129,665
              
              
              (5,331
              )**Net
                  Other Income (Expense)**
              
              
              51,307
              
              
              212,276
              
              
              17,517**Income
                  Before Income Taxes**
              
              
              17,526,648
              
              
              15,962,471
              
              
              11,557,051**Provision
                  for Income Taxes**
              
              
              -
              
              
              -
              
              
              4,144,713**Net
                  Income**
              
              $
              17,526,648
              
              $
              15,962,471
              
              $
              7,412,338**Basic
                  Earnings Per Share**
              
              $
              0.34
              
              $
              0.25
              
              $
              0.08**Diluted
                  Earnings Per Share**
              
              $
              0.34
              
              $
              0.25
              
              $
              0.08**Basic
                  Weighted-Average Shares Outstanding**
              
              
              51,900,641
              
              
              64,455,210
              
              
              87,305,912**Diluted
                  Weighted-Average Shares Outstanding**
              
              
              52,022,801
              
              
              64,455,210
              
              
              87,305,912**Net
                  Income**
              
              $
              17,526,648
              
              $
              15,962,471
              
              $
              7,412,338**Other
                  Comprehensive Income:**Foreign
                  currency translation adjustment
              
              
              1,614,682
              
              
              200,271
              
              
              1,528**Comprehensive
                  Income**
              
              $
              19,141,330
              
              $
              16,162,742
              
              $
              7,413,866




See
        the Accompanying Notes to the Consolidated
        Financial Statements


F-4




**SHENGDATECH,
                  INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF SHAREHOLDERS' EQUITY****FOR
                  THE YEARS ENDED DECEMBER 31, 2004, 2005 AND
                  2006**
  **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, 2003**
              
              
              87,305,912
              
              $
              873
              
              $
              16,657,514
              
              $
              -
              
              $
              218,977
              
              $
              3,958,770
              
              $
              (997
              )
              $
              20,835,137Net
                  income for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              972,101
              
              
              6,440,237
              
              
              -
              
              
              7,412,338Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,528
              
              
              1,528**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 equipmentfrom
                  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
              
              $
              57,129,264




See
        the Accompanying Notes to the Consolidated
        Financial Statements


F-5




**SHENGDATECH,
                  INC. AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**
  **For
                  the Years Ended December 31,****2006**
              
              **2005**
              
              **2004****Cash
                  Flows from Operating Activities:**Net
                  income
              
              $
              17,526,648
              
              $
              15,962,471
              
              $
              7,412,338Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities:Depreciation
              
              
              1,031,387
              
              
              1,009,577
              
              
              903,930Amortization
              
              
              -
              
              
              69,249
              
              
              188,367Impairment
                  of property and equipment
              
              
              -
              
              
              -
              
              
              230,838Loss
                  on disposal of property and equipment
              
              
              16,377
              
              
              -
              
              
              -Compensation
                  paid with warrants
              
              
              153,619
              
              
              -
              
              
              -Change
                  in current assets and liabilities:Trade
                  accounts receivable
              
              
              (1,635,713
              )
              
              (71,561
              )
              
              (212,347
              )Other
                  receivables
              
              
              4,040,220
              
              
              -
              
              
              -Advances
                  to suppliers
              
              
              (588,722
              )
              
              (258,433
              )
              
              51,530Inventory
              
              
              (611,842
              )
              
              (179,322
              )
              
              324,660Accounts
                  payable
              
              
              1,468,602
              
              
              (662,437
              )
              
              (206,783
              )Other
                  payables and accrued expenses
              
              
              230,538
              
              
              238,137
              
              
              (72,376
              )Income
                  and other taxes payable
              
              
              (85,055
              )
              
              1,261,756
              
              
              1,358,419Advances
                  from customers
              
              
              117,453
              
              
              (76,189
              )
              
              (11,538
              )**Net
                  Cash Provided by Operating Activities**
              
              
              21,663,512
              
              
              17,293,248
              
              
              9,967,038**Cash
                  Flows from Investing Activities:**Purchases
                  of property and equipment
              
              
              (15,365,898
              )
              
              (2,517,152
              )
              
              (701,619
              )Construction
                  in progress
              
              
              (92,020
              )
              
              -
              
              
              -**Net
                  Cash (Used in) Investing Activities**
              
              
              (15,457,918
              )
              
              (2,517,152
              )
              
              (701,619
              )**Cash
                  Flows from Financing Activities:**Net
                  change in short-term loans
              
              
              -
              
              
              -
              
              
              (1,208,196
              )Net
                  change in short-term notes payable
              
              
              -
              
              
              -
              
              
              (96,656
              )Other
                  non-trade receivables
              
              
              -
              
              
              (5,181,418
              )
              
              1,344,821Change
                  in accounts payable - related parties
              
              
              2,929,625
              
              
              (1,570,946
              )
              
              (1,288,190
              )Distribution
                  to shareholders
              
              
              (971,496
              )
              
              (7,822,477
              )
              
              -Change
                  in accounts receivable - related parties
              
              
              952,552
              
              
              -
              
              
              -Proceeds
                  from issuance of common stock
              
              
              13,969,714
              
              
              -
              
              
              -**Net
                  Cash Provided by (Used in) Financing Activities**
              
              
              16,880,395
              
              
              (14,574,841
              )
              
              (1,248,221
              )**Effect
                  of Exchange Rate Changes on Cash**
              
              
              848,853
              
              
              138,154
              
              
              413Net
                  Increase in Cash and Cash Equivalents
              
              
              23,934,842
              
              
              339,409
              
              
              8,017,611Cash
                  and Cash Equivalents at Beginning of Period
              
              
              10,749,300
              
              
              10,409,891
              
              
              2,392,280**Cash
                  and Cash Equivalents at End of Period**
              
              $
              34,684,142
              
              $
              10,749,300
              
              $
              10,409,891**Supplemental
                  Cash Flow Information:**Taxes
                  paid
              
              $
              872,156
              
              $
              3,485,546
              
              $
              2,675,371Interest
                  paid
              
              
              -
              
              
              -
              
              
              5,346**Schedule
                  of Noncash Investing and Financing Activities****Distribution
                  paid by owner directly to investors**
              
              $
              -
              
              $
              5,164,922
              
              $
              -**Noncash
                  capital investment into Eastern Nano by the
                  investors**
              
              
              -
              
              
              8,609,846
              
              
              -**Shares
                  issued for net assets of Shengdatech, Inc.**
              
              
              63,509
              
              
              -
              
              
              -**Noncash
                  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-6
 
  **SHENGDATECH,
          INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL
          STATEMENTS**
 FOR
          THE YEARS ENDED DECEMBER 31, 2006 AND
          2005




**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 in the PRC for use in the production
      of automobile tires.





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 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:




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  F-7


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.





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.





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





***Restatement
      of financial statements*** - During
      September 2006, the Company realized that the December 31, 2005 and 2004
      consolidated financial statements needed to be revised to correct an
      overstatement of revenues and selling expenses for rebates paid to customers
      in
      the amounts of $723,442 and $513,021, respectively. The correction of these
      balances had no effect on the previously reported net income. The effects of
      the
      restatements were as follows.




As
                  Previously
              
              Effect
                  of
              
              AsReported
              
              Restatement
              
              RestatedFor
                  the Year Ended December 31, 2005Sale
                  of Products (revenue)
              
              $
              59,322,771
              
              $
              (723,442
              )
              $
              58,599,329Selling
                  expenses
              
              
              1,588,780
              
              
              (723,442
              )
              
              865,338
  As
                  Previously
              
              Effect
                  of
              
              AsReported
              
              Restatement
              
              RestatedFor
                  the Year Ended December 31, 2004Sale
                  of Products (revenue)
              
              $
              50,623,468
              
              $
              (513,021
              )
              $
              50,110,447Selling
                  expenses
              
              
              1,276,207
              
              
              (513,021
              )
              
              763,186
 **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  F-8


exchange
      rates prevailing at each balance sheet date. The accompanying consolidated
      statements of operations have been translated using the average exchange rates
      prevailing during the periods of each statement. See Note 11.





***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 10, 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, 2006 and
      2005.





***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.





In
      connection with the agreement between Eastern Nano and Shengda Nano and Shengda
      Chemical in November 2004, an appraisal of the assets transferred indicated
      that
      long-lived assets of the Nano-Materials and Chemical segments were impaired.
      The
      book value of the long-lived assets exceeded their appraised value by $230,846,
      which impairment loss was recognized against the Nano-Materials and the Chemical
      segments during November 2004 in the amounts of $63,765 and $167,081,
      respectively.





***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-9


***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, or receive advance payments from customers. Advances
      to suppliers were $872,289 and $262,591 as of December 31, 2006 and 2005,
      respectively. Advances from customers were $119,923 and $0 as of December 31,
      2006 and 2005, respectively.





***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 is 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, 2006, 2005,
      and 2004, such expenses were $340,771, $103,617, and $2,413,
      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.





***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 period 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 for the years ended December 31, 2006, 2005 and
      2004:


**For
                  the Years Ended December 31,****2006**
              
              **2005**
              
              **2004**Net
                  income
              
              $
              17,526,648
              
              $
              15,962,471
              
              $
              7,412,338Basic
                  weighted-average common sharesoutstanding
              
              
              51,900,641
              
              
              64,455,210
              
              
              87,305,912Effect
                  of dilutive securities:Warrants
              
              
              122,160
              
              
              -
              
              
              -Diluted
                  weighted-average common sharesoutstanding
              
              
              52,022,801
              
              
              64,455,210
              
              
              87,305,912Basic
                  earnings per share
              
              $
              0.34
              
              $
              0.25
              
              $
              0.08Diluted
                  earnings per share
              
              $
              0.34
              
              $
              0.25
              
              $
              0.08




F-10


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




***Credit
      Risk*** - 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*** - On
      January 1, 2006, the Company adopted SFAS No. 151, *Inventory
      Costs - An Amendment of ARB No. 43, Chapter 4* (“SFAS
      151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4,
      Inventory Pricing, to clarify the accounting for abnormal amounts of idle
      facility expense, freight, handling costs, and wasted material (spoilage).
      Among
      other provisions, the new rule requires that items such as idle facility
      expense, excessive spoilage, double freight, and re-handling costs be recognized
      as current-period charges. Additionally, SFAS 151 requires that the
      allocation of fixed production overhead to the costs of conversion be based
      on
      the normal capacity of the production facilities. The effects of adoption of
      SFAS 151 were not material.





On
      January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), *Share-Based
      Payment* (“SFAS 123R”), which revises SFAS No. 123, Accounting for Stock-Based
      Compensation. SFAS 123R also superseded APB 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends SFAS No. 95, *Statement
      of Cash Flows* .
      Under
      SFAS 123R, share-based payments to employees, including the fair value of grants
      of employee stock options, are recognized in the statement of income at their
      fair value, generally over the option vesting period. The effects of adoption
      of
      SFAS 123R were not material.





The
      Company has adopted FASB issued SFAS No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans, an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)* (“SFAS
      158”). Under SFAS 158, companies must recognize a net liability or asset to
      report the funded status of their defined benefit pension and other
      postretirement benefit plans on their balance sheets. The effects of adoption
      of
      SFAS 158 were not material.





In
      February 2006, the FASB issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments — an amendment of FASB Statements
      No. 133 and 140* (SFAS 155). SFAS 155 amends SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* and
      SFAS No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* and
      related interpretations. SFAS 155
      permits fair value remeasurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation and
      clarifies which interest-only strips and principal-only strips are not subject
      to recognition as liabilities. SFAS 155 eliminates the prohibition on a
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. SFAS 155 is effective for the Company for all financial
      instruments acquired or issued beginning January 1, 2007. The impact of
      adoption of this statement on the Company’s consolidated financial statements,
      if any, has not yet been determined.





In
      March
      2006, the FASB issued SFAS No. 156, *Accounting
      for Servicing of Financial Assets - an amendment of FASB Statement No. 140* (SFAS
      156). SFAS 156 amends SFAS 140 requires an entity to recognize a servicing
      asset
      or servicing liability each time it undertakes an obligation to service a
      financial asset. It also requires all separately recognized servicing assets
      and
      servicing liabilities to be initially measured at fair value, if practicable.
      SFAS 156 permits an entity to use either the amortization method or the fair
      value measurement method for each class of separately recognized servicing
      assets and servicing liabilities. SFAS 156 is effective for the Company as
      of
      January 1, 2007. The impact of adoption of this statement on the Company’s
      consolidated financial statements, if any, has not yet been
      determined.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring
      fair value, and expands disclosures about fair value measurements; however,
      it
      does not require any new fair value measurements. SFAS 157 will be applied
      prospectively and is effective for fiscal years beginning after November 15,
      2007, and interim  F-11


periods
      within those fiscal years. SFAS 157 is not expected to have a material impact
      on
      the Company’s consolidated financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ,
      including an amendment of FASB Statement No. 115 (“SFAS 159”). This
      pronouncement permits entities to choose to measure many financial instruments
      and certain other items at fair value that are not currently required to be
      measured at fair value and to recognize the resulting gains and losses in the
      results of operations. SFAS 159 is effective as of the beginning of an entity’s
      first fiscal year that begins after November 15, 2007. The impact of adopting
      SFAS 159 on the Company’s consolidated financial statements, if any, has not yet
      been determined.




**NOTE
      3 - OTHER NON-TRADE RECEIVABLES**





Other
      non-trade receivables consisted of the following:




December
                  31,2006
              
              2005Income
                  tax refund
              
              $
              -
              
              $
              3,981,037Other
                  receivables
              
              
              157,352
              
              
              33,824**Total
                  Other Non-trade Receivables**
              
              $
              157,352
              
              $
              4,014,861




**NOTE
      4 - INVENTORY**




Inventory
      consisted of the following:




December
                  31,2006
              
              2005Raw
                  materials
              
              $
              1,806,312
              
              $
              820,025Finished
                  goods
              
              
              345,300
              
              
              658,485**Total
                  Inventory**
              
              $
              2,151,612
              
              $
              1,478,510


**NOTE
      5 - PROPERTY AND EQUIPMENT**





Property
      and equipment consisted of the following:


December
                  31,2006
              
              2005Building
              
              $
              1,854,717
              
              $
              70,262Plant,
                  machinery and equipment
              
              
              25,106,521
              
              
              10,982,828Motor
                  vehicle
              
              
              108,851
              
              
              -Office
                  equipment
              
              
              84,241
              
              
              72,046Construction
                  in progress
              
              
              93,955
              
              
              -**Total
                  Property and Equipment**
              
              
              27,248,285
              
              
              11,125,136Less:
                  accumulated depreciation
              
              
              (3,674,605
              )
              
              (2,545,460
              )**Total
                  Property and Equipment, net**
              
              $
              23,573,680
              
              $
              8,579,676
 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  F-12




Company
      constructed and put into operations a new plant in Shaanxi, China at a cost
      of
      approximately $14 million.
      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, 2006, 2005 and 2004, was $1,031,387,
      $1,009,577, and $903,930, respectively.




**NOTE
      6 - OTHER PAYABLES AND ACCRUED EXPENSES**




Other
      payables and accrued expenses consisted of the following:




December
                  31,2006
              
              2005Other
                  payables
              
              $
              583,594
              
              $
              608,133Accrued
                  payroll
              
              
              423,280
              
              
              484,568Utility
                  payments
              
              
              1,228,884
              
              
              844,270**Total
                  Other Payables and Accrued Expenses**
              
              $
              2,235,758
              
              $
              1,936,971


**NOTE
      7 - INCOME TAXES**





To
      date
      the Company has not been subject to any income taxes in the United States or
      the
      British Virgin Islands. The Company’s pre-tax income is comprised entirely from
      operations in the PRC. 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 was granted a “tax holiday” that
      allows the Company to be exempt from both federal and local income taxes for
      the
      first two profitable years. The “tax holiday” allows the Company to be exempt
      from 50% of both federal and local income taxes during the third through the
      fifth years. The reduced federal and local rates for 2007 through 2009 will
      be
      15% and 1.5%, respectively.





Income
      and other taxes payable consisted of:




December
                  31,2006
              
              2005Value
                  added tax
              
              $
              710,981
              
              $
              384,054Income
                  taxes for the year ended December 31, 2004
              
              
              -
              
              
              862,223Surtax,
                  insurance and other
              
              
              526,199
              
              
              35,782**Total
                  Income and Other Taxes Payable**
              
              $
              1,237,180
              
              $
              1,282,059


During
      the year ended December 31, 2005 the company paid $3,981,037 of income taxes
      prior to being granted the tax holiday for the year ended December 31, 2005.
      The
      income tax refund receivable was collected during the year ended December 31,
      2006.





The
      provision for income taxes
      consisted of the following:




For
                  the Years Ended December 31,2006
              
              2005
              
              2004Provision
                  for current income taxes
              
              $
              -
              
              $
              -
              
              $
              4,144,713


F-13




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 31,2006
              
              2005
              
              2004Income
                    tax calculation at the federal and localstatutory
                    rates (30% and 3%, respectively)
              
              $
              5,783,794
              
              $
              5,267,615
              
              $
              3,813,827Non-refundable
                    monthly overpayments basedon
                    preliminary estimates
              
              
              -
              
              
              -
              
              
              330,886Tax
                  holiday
              
              
              (5,783,794
              )
              
              (5,267,615
              )
              
              -**Actual
                  Income Tax Expense**
              
              $
              -
              
              $
              -
              
              $
              4,144,713


If
      the
      Company had not been in a “tax holiday” for the years ended December 31, 2006
      and 2005, the provision for income taxes would have been $5,783,794 and
      $5,267,615, respectively, net income after income tax would have been
      $11,742,854 and $10,694,856, respectively, and basic earnings per share would
      have been $0.23 and $0.17, and diluted earnings per share would have been $0.23
      and $0.17, respectively.





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




**NOTE
      8 - 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, $0.0001 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.





***Receivable
      from Shareholder*** - Since
      Eastern Nano was not incorporated in the PRC, approval was obtained from the
      PRC
      government to organize Haize Nano and Bangsheng Chemical in the PRC. Capital
      contributions totaling $8,609,846 were approved, and Haize Nano and Bangsheng
      Chemical initially received 60% of the approved contributions, or $3,382,507
      and
      $1,782,416, respectively. Upon the reorganization described in Note 1, the
      remaining 40%, or $3,444,924, was recorded as a receivable from a shareholder
      until such amount was received at the end of December 31, 2005.





***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
      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 $971,496.





***Warrant*** - On
      April 1, 2006, the Company issued a warrant to purchase 162,285 shares of common
      stock to a vendor for services provided. The exercise price was $2.39 per share
      and the warrant has a term of two years. The services were recognized as an
      expense based upon the fair value of the warrant of $153,619. The fair value
      of
      the warrant was calculated using the Black-Scholes option pricing model with
      the
      following assumptions:


F-14




Expected
                Life
            2
                yearsExpected
                volatility
            66.97%Risk
                Free interest rate
            4.82%Dividend
                yield
            0%




**NOTE
      9 - SEGMENT INFORMATION**





The
      Company operates in the following segments:





***Nano-Materials*** - The
      Company is engaged in the d evelopment,
      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.





***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
      segment information as of and for the years ended December 31, 2006, 2005 and
      2004 follows:




**Nano-****For
                  the Year Ended December 31, 2004**
              
              **Chemical**
              
              **Materials**
              
              **Total**Sale
                  of products
              
              $
              37,369,278
              
              $
              12,741,169
              
              $
              50,110,447Cost
                  of products sold
              
              
              28,526,258
              
              
              8,124,449
              
              
              36,650,707Selling
                  expenses
              
              
              48,562
              
              
              714,624
              
              
              763,186General
                  and administrative expenses
              
              
              499,624
              
              
              426,550
              
              
              926,174Impairment
                  of property and equipment
              
              
              167,081
              
              
              63,765
              
              
              230,846Depreciation
                  and amortization
              
              
              537,710
              
              
              554,587
              
              
              1,092,297Segment
                  income
              
              
              5,328,403
              
              
              2,083,935
              
              
              7,412,338Segment
                  assets
              
              
              23,096,848
              
              
              12,683,458
              
              
              35,780,306Expenditures
                  for segment assets
              
              
              701,619
              
              
              -
              
              
              701,619




**Nano-****For
                the Year Ended December 31, 2005**
            
            **Chemical**
            
            **Materials**
            
            **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
                expenses
            
            
            69,264
            
            
            796,074
            
            
            865,338General
                and administrative expenses
            
            
            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




F-15




**Nano-****For
                the Year Ended December 31, 2006**
            
            **Chemical**
            
            **Materials**
            
            **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
                expenses
            
            
            79,306
            
            
            1,181,341
            
            
            1,260,647General
                and administrative expenses
            
            
            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
            
            
            14,251,163
            
            
            15,365,898




**NOTE
      10 - COMMITMENTS AND CONTINGENCIES**




***Economic
      environment*** - Since
      all of the Company’s operations are conducted in the PRC, 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.




***Foreign
      currency remittance*** - All 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*** - After
      the reorganization of Haize Nano and Bangsheng Chemical into Eastern Nano,
      Haize
      Nano and Bangsheng Chemical entered into agreements to lease land, land use
      rights, buildings and certain equipment from the Lessors. Remaining future
      minimum lease payments under these agreements total $1,348,026, of which
      $1,145,167 was for land and buildings and $202,859 was for equipment. The
      Company incurred rental expense of, $720,490, $593,811, and $0 during the years
      ended December 31, 2006, 2005 and 2004, respectively.




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


2007
              
              2008
              
              2009Future
                  minimum lease payments
              
              $
              886,945
              
              $
              276,664
              
              $
              184,417




F-16




**NOTE
      11 - RELATED PARTIES**




***Receivable
      from related parties*** - At
      December 31, 2006, the Company had a $1,601 receivable from Shengda
      Nanomaterials Company, which was used primarily for the purchase of equipment
      and machinery and was recorded at the cost of the assets purchased. At December
      31, 2005, the Company had a $943,308 receivable from Shandong Shengda Chemical
      Machinery Co. Ltd. due to an overpayment by the Company.





***Payable
      to related parties*** - At
      December 31, 2006, the Company owed related parties $3,349,814, which consisted
      of $2,951,357 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. As of December 31, 2005, the Company owed related parties
      $347,218, of which $193,150 was due to Shengda Haize, $135,948 was due to
      Shangdong Shengda Chemical Machinery Co., Ltd., and $18,121 was due to Shengda
      Installation.





During
      March 2006, the Company paid HFG International, Limited, a Hong Kong
      Corporation, $450,000 for consulting and advisory services. The principal
      stockholder and executive officer of HFG International, Ltd. is a former officer
      and shareholder of Zeolite





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




Quarterly
      financial information is presented in the following summary:




**2004****Three
                  Months Ended****March
                  31**
              
              **June
                  30**
              
              **September
                  30**
              
              **December
                  31**Revenues
              
              $
              9,906,539
              
              $
              12,183,355
              
              $
              14,371,613
              
              $
              13,648,940Gross
                  Profit
              
              
              1,873,652
              
              
              3,061,945
              
              
              4,416,202
              
              
              4,107,941Net
                  Income from continuing operations
              
              
              1,040,291
              
              
              1,830,481
              
              
              2,552,588
              
              
              1,988,980Net
                  income per share - basic from continuing operations
              
              
              0.01
              
              
              0.02
              
              
              0.03
              
              
              0.02Net
                  income per share - diluted from continuing operations
              
              
              0.01
              
              
              0.02
              
              
              0.03
              
              
              0.02
  **2005****Three
                  Months Ended****March
                  31**
              
              **June
                  30**
              
              **September
                  30**
              
              **December
                  31**Revenues
              
              $
              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 from continuing operations
              
              
              3,671,996
              
              
              3,304,508
              
              
              4,857,724
              
              
              4,128,243Net
                  income per share - basic from continuing operations
              
              
              0.08
              
              
              0.04
              
              
              0.06
              
              
              0.07Net
                  income per share - diluted from continuing operations
              
              
              0.08
              
              
              0.04
              
              
              0.06
              
              
              0.07
  **2006****Three
                  Months Ended****March
                  31**
              
              **June
                  30**
              
              **September
                  30**
              
              **December
                  31**Revenues
              
              $
              16,464,196
              
              $
              14,473,279
              
              $
              18,818,207
              
              $
              22,844,349Gross
                  Profit
              
              
              4,266,532
              
              
              4,183,431
              
              
              5,580,864
              
              
              7,346,635Net
                  Income from continuing operations
              
              
              3,492,859
              
              
              3,157,860
              
              
              4,820,317
              
              
              6,055,612Net
                  income per share - basic from continuing operations
              
              
              0.08
              
              
              0.06
              
              
              0.09
              
              
              0.11Net
                  income per share - diluted from continuing operations
              
              
              0.08
              
              
              0.06
              
              
              0.09
              
              
              0.11




**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).


F-17




**SHENGDATECH,
                  INC.****CONDENSED
                  BALANCE SHEETS**
  **December
                  31,****2006**
              
              **2005****ASSETS****Current
                  Assets:**Cash
              
              $
              10,580
              
              $
              -Other
                  receivable
              
              
              136,257
              
              
              -**Total
                  Current Assets**
              
              
              146,837
              
              
              -**Investment
                  in unconsolidated subsidiaries**
              
              
              56,982,427
              
              
              24,772,588**Total
                  Assets**
              
              $
              57,129,264
              
              $
              24,772,588**LIABILITIES
                  AND SHAREHOLDERS' EQUITY****Current
                  Liabilities:**Accounts
                  payable
              
              $
              -
              
              $
              -**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;54,095,103
                  shares and 45,120,000 shares outstanding, respectively
              
              
              540
              
              
              451Additional
                  paid-in capital
              
              
              21,824,121
              
              
              8,608,864Statutory
                  reserves
              
              
              3,301,379
              
              
              2,394,371Retained
                  earnings
              
              
              30,187,740
              
              
              13,568,100Accumulated
                  other comprehensive income
              
              
              1,815,484
              
              
              200,802**Total
                  Shareholders' Equity**
              
              $
              57,129,264
              
              $
              24,772,588**Total
                  Liabilities and Shareholders' Equity**
              
              $
              57,129,264
              
              $
              24,772,588






**SHENGDATECH,
                  INC.****CONDENSED
                  STATEMENTS OF OPERATIONS**
  **For
                  the Years Ended December 31,****2006**
              
              **2005**
              
              **2004**Equity
                  in earnings of unconsolidated subsidiaries
              
              $
              18,045,364
              
              $
              15,962,471
              
              $
              7,412,338Operating
                  Expenses
              
              
              518,716
              
              
              -
              
              
              -**Net
                  Income**
              
              $
              17,526,648
              
              $
              15,962,471
              
              $
              7,412,338




F-18




**SHENGDATECH,
                  INC.****CONDENSED
                  STATEMENTS OF CASH FLOWS**
  **For
                  the Years Ended December 31,****2006**
              
              **2005**
              
              **2004****Cash
                  Flows from Operating Activities:**Net
                  income
              
              $
              17,526,648
              
              $
              15,962,471
              
              $
              7,412,338Adjustment
                  to reconcile net income to cash used:Equity
                  in earnings of unconsolidated subsidiaries
              
              
              (18,045,364
              )
              
              (15,962,471
              )
              
              (7,412,338
              )**Net
                  Cash Used in Operating Activities**
              
              
              (518,716
              )
              
              -
              
              
              -**Cash
                  Flows from Investing Activities:**Other
                  receivables
              
              
              (136,257
              )
              
              -
              
              
              -Investment
                  in subsidiaries
              
              
              (13,304,161
              )
              
              -
              
              
              -**Net
                  Cash (Used in) Investing Activities**
              
              
              (13,440,418
              )
              
              -
              
              
              -**Cash
                  Flows from Financing Activities:**Proceeds
                  from issuance of common stock
              
              
              13,969,714
              
              
              -
              
              
              -**Net
                  Cash Provided by Financing Activities**
              
              
              13,969,714
              
              
              -
              
              
              -**Net
                  Increase in Cash**
              
              
              10,580
              
              
              -
              
              
              -**Cash
                  and Cash Equivalents at Beginning of Period**
              
              
              -
              
              
              -
              
              
              -**Cash
                  and Cash Equivalents at End of Period**
              
              $
              10,580
              
              $
              -
              
              $
              -




F-19




**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: March
              30, 2007
            By:
            /s/ XIANGZHI
              CHENName: 
                Xiangzhi Chen
              Title:
                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
            
            March
                30, 2007(Xiangzhi
                Chen)
            
            (Principal
                Executive Officer)/s/
                Anhui Guo
            
            Director
                and Chief Financial Officer
            
            March
                30, 2007(Anhui
                Guo)/s/
                Dongquan Zhang
            
            Director
            
            March
                30, 2007(Dongquan
                Zhang)/s/
                Carl Mudd
            
            Director
            
            March
                30, 2007(Carl
                Mudd)/s/
                Sheldon Saidman
            
            Director
            
            March
                30, 2007(Sheldon
                Saidman)








**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.





3.2
            Bylaws
                of the Registrant incorporated by reference to Exhibit 3.2 to the
                Registrant’s Registration Statement on Form SB-2 (SEC File No. 333-74670)
                filed on December 6, 2001.




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).





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).




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).




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).











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).





14.1
            Officers’
                and Directors’ Code of Ethics (incorporated by reference to Exhibit 14.1
                to the Registrant’s Current Report on Form 8-K filed on March 1,
                2007)





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


***
            Management
                contract