UNITEDSTATES


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**Form
      10-K**




(Mark
                One)x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934
                (“EXCHANGE ACT”)For
                the fiscal year ended December 31, 2007o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor
                the transition period from __________ to __________Commission
                file number 333-85306.




**PUDA
                COAL, INC.**(Name
                of small business issuer in its
                charter)




Florida
            
            65-1129912(State
                or other jurisdiction of incorporation or
              organization)
            
            (I.R.S.
                Employer Identification No.)426
                Xuefu Street, Taiyuan, Shanxi Province,
              The
                People’s Republic of China
            
            030006(Address
                of principal executive offices)
            
            (Zip
                Code)




Issuer’s
      Telephone Number: 011 86 351 228 1302




Securities
      registered under Section 12(b) of the Exchange Act:





Title
                of each class: N/A
            
            Name
                of each exchange on which registered:
                N/A




Securities
      registered under Section 12(g) of the Exchange Act:




Title
      of
      Class: N/A




Indicate
                by check mark if the registrant is a well-known seasoned issuer,
                as
                defined in Rule 405 of the Securities Act.
            oYes
            xNoIndicate
                by check mark if the registrant is not required to file reports pursuant
                to Section 13 or Section 15(d) of the Act.
            oYes
            x     No










Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 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 x * No




(*
      Before
      the registrant’s registration statement on Form S-1 became effective on March
      31, 2008,  the registrant, as a voluntary filer, was not subject to the
      filing requirements under Section 13 or 15(d) of the Securities Exchange
      Act of 1934 but had filed all reports required to be filed by those sections
      for
      the past 12 months.)





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§ 229.405 of this chapter) 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. x




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.




Large
                accelerated filero
            Accelerated
                fileroNon-accelerated
                filerx
            (Do
                not check if a smaller reporting company)
            Smaller
                reporting companyo





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


Yes o No x




As
      of
      June 29, 2007, the last business day of the registrant’s most recently completed
      second fiscal quarter, the aggregate market value of the the registrant’s voting
      and non-voting common equity held by non-affiliates, computed by reference
      to
      the price at which the common equity was last sold, was approximately
      $71,002,260. **** Solely
      for the purposes of this calculation, “affiliate” has the meaning defined in
      Rule 12b-2 of the Exchange Act.





The
      total
      number of shares of common stock of the registrant that were outstanding on
      March 18, 2008 was 105,252,176 . ****




2


**TABLE
      OF CONTENTS**




PagePART
                IItem
                1. Business
            4Item
                1A. Risk Factors
            15Item
                2. Properties
            24Item
                3. Legal Proceedings
            25Item
                4. Submission of Matters to a Vote of Security Holders
            25PART
                IIItem
                5. Market for Registrant’s Common Equity, Related Stockholder Matters and
                Issuer Purchases of Equity Securities
            26Item
                6. Selected Financial Data
            27Item
                7. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            28Item
                7A. Quantitative and Qualitative Disclosures About Market
                Risk
            34Item
                8. Financial Statements and Supplementary Data
            F-1 to F-37Item
                9. Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            36Item
                9A(T). Controls and Procedures
            36Item
                9B. Other Information
            38PART
                IIIItem
                10. Directors, Executive Officers and Corporate Governance
            39Item
                11. Executive Compensation
            40Item
                12. Security Ownership of Certain Beneficial Owners and Management
                and
                Related Stockholder Matters
            45Item
                13. Certain Relationships and Related Transactions and Director
                Independence
            46Item
                14. Principal Accountant Fees and Services
            49PART
                IVItem
                15. Exhibits, Financial Statement Schedules
            49Signatures
            52Certifications




3





**PART
      I**





**Item
      1. Business**




**BUSINESS**




**Overview**




We
      are a
      supplier of high-grade metallurgical coking coal to the industrial sector in
      the
      People’s Republic of China (the “PRC” or “China”). Our processed coking coal is
      primarily purchased by coke and steel producers for the purpose of making the
      coke required for the steel manufacturing process. Our operations are conducted
      exclusively by an entity in China, Shanxi Coal, which we control through 90%
      indirect equity ownership.




We
      clean
      raw coking coal sourced from third-party coal mines primarily located in Liulin
      County, Shanxi Province and market the cleaned, high quality coking coal to
      coke
      and steel makers in our geographic market. Our current primary geographic
      markets include:




·
            Shanxi
                Province




·
            Inner
                Mongolia Autonomous Region




·
            Hebei
                Province




·
            Beijing




·
            Tianjin




We
      focus
      on value-added coal washing processes and specialize in providing the high
      quality, cleaned coking coal, which is the quality level required to produce
      steel. The demand for the form of high quality coking which we produce is
      primarily driven by China’s industrial expansion and advancement, which depends
      on the availability of large amounts of steel for building infrastructure.
      We
      are not a coal mining operation and do not own any coal mines. We currently
      purchase raw coal from a diversified pool of local coal mines in Shanxi
      Province, including a number of mines in Liulin County.




Located
      in Liulin County, Shanxi Province, an area known as the “King of Coal” for its
      high quality coking coal reserves, we are strategically located in proximity
      to
      some of the highest quality coking coal reserves suitable for steel making.
      We
      expanded our coal washing capacity to 3.5 million MT per year through the
      acquisition in 2005 of two new coal washing facilities, which became operational
      in December 2005 and April 2006, respectively and through the acquisition of
      another new facility in June 2007 through an assets exchange. As a large-volume
      supplier, we expect to continue to enjoy certain advantages as we believe our
      primary customer base of coke and steel makers will continue to focus on
      suppliers that can deliver large volume, consistently high-quality coking coal.
      We also expect to be well positioned to serve the demand for steel production
      in
      China - mostly, coking companies that supply the steel mills and steel mills
      with their own coking facilities. These customers are mostly located in Shanxi
      Province, Inner Mongolia Autonomous Region, Hebei Province, Beijing and Tianjin,
      all of which are accessible by railroad which is the most cost effective method
      for coal transport.




Prior
      to
      our expansion we had two cleaning facilities located in Liulin County, Shanxi
      Province with an annual cleaned coal washing capacity of 500,000MT. Liulin
      County and Zhongyang County are neighbor counties and are located
      approximately 120 miles southwest of Shanxi Coal’s executive offices in Taiyuan
      City. Shanxi Coal obtained approximately 2.3 million MT of annual clean coal
      capacity in late 2005 as the result of the acquisition of the New Shanxi Liulin
      Plant in Liulin County and acquisition of our New Zhongyang Plant in Zhongyang
      County, Shanxi Province. Both new plants are now fully operational. Shanxi
      Coal
      purchased the above two facilities from Resources Group, a related party, with
      a
      $13,000,000 secured loan amortized over 10 years and to be paid out of Shanxi
      Coal’s expected revenues.





We
      have a
      facility, which is located in Linshi County, which has an annual coal washing
      capacity of 1.2 million MT. We purchased this facility through an asset exchange
      with Linshi Jinliao Coal & Chemical Co. Ltd. (“Linshi Coal & Chemical”)
      on June 22, 2007. Upon the closing of the assets exchange, Shanxi Coal acquired
      all the assets of a coal washing plant of Linshi Coal & Chemical, which has
      an annual coal washing capacity of 1.2 million tons and a book value of RMB
      57
      million (approximately $7.4 million). In exchange, Linshi Coal & Chemical
      received RMB 45.5 million (approximately $5.9 million) in cash from Shanxi
      Coal
      and all the assets of a coal washing plant of Shanxi Coal located in Liulin
      County of the same province, which has an annual coal washing capacity of
      400,000 tons and a book value of RMB 11.5 million (approximately $1.5
      million).


4




We
      believe we should be well positioned to participate in the early stages of
      China’s modernization of the coal, coking and steel making industries. At this
      time, Shanxi provincial authorities are not approving new mines that produce
      less than 300,000MT output per year, are closing mines that produce less than
      90,000MT per year and are consolidating existing mines into larger mines with
      outputs between 300,000MT and 900,000MT, in an effort to streamline coal mining
      and processing facilities around fewer and larger operations for safety and
      environmental reasons as well as industry economics. By acquiring modern
      facilities and adhering to Shanxi Province’s emissions standards, we have
      adopted a business strategy that we believe fits the industry’s development
      path, and should make us a leader in Shanxi Province’s future coal sector. With
      the additional cleaning capacity and the increased annual production of
      high-quality coking coal from Jucai Coal, we hope to achieve continued growth
      in
      our business.




Our
      principal executive office is located at 426 Xuefu Street, Taiyuan City, Shanxi
      Province, China. Our telephone number is +86 (351) 2281302 and our facsimile
      number is +86 (351) 7034404.




**History
      and Background of the Company**





Puda
      Coal, Inc. (formerly Purezza Group, Inc.) (the “Company” or “Puda”) is a
      corporation organized under Florida Law and headquartered in Shanxi Province,
      China. The Company was incorporated on August 9, 2001 to market a product called
      Phoslock. Phoslock is a patented product for the removal of phosphorus and
      other
      oxyanions in natural and industrial waters and wastewater streams. Prior to
      April 22, 2004, the Company's activities consisted of capital transactions,
      organization and development of the Company's Phoslock product
      line.




On
      April
      23, 2004, the Company transferred all of its assets, including cash on hand,
      the
      Phoslock product line and all of the Company's rights under a license agreement
      for the use of the Phoslock product line, to Purezza Marketing, Inc. ("PMI"),
      a
      wholly owned subsidiary of the Company, a corporation organized in Florida.
      The
      Company's license agreement was with Integrated Mineral Technology Limited
      ("Integrated"), an Australian entity, and provided for certain fixed royalty
      payments by the Company. As part of the Company's asset transfer to PMI, PMI
      assumed all liabilities under the license agreement, which assumption was
      consented to by Integrated.




Concurrently
      with the asset transfer to PMI, the Company distributed on a pro rata basis
      all
      of its stock ownership in PMI to the holders of its common stock (the
      "Distribution"). After of this transfer and the Distribution, PMI operated
      independently from the Company and as a successor to the Company's Phoslock
      business and operations and the Company no longer had any meaningful business
      assets, operations or sources of revenue, but remained a public reporting
      company traded on the OTC Bulletin Board.





On
      July
      15, 2005, the Company acquired all the outstanding capital stock and ownership
      interests of Puda Investment Holding Limited (“BVI”), an International Business
      Company organized in the British Virgin Islands, through a reverse merger and
      BVI became a wholly-owned subsidiary of the Company. In exchange, Puda issued
      to
      the BVI Members (Ming Zhao, Yao Zhao and Worldwide Gateway Co. Ltd.) 1,000,000
      shares of Series A convertible preferred stock, par value $0.01 per share,
      of
      the Company, which are convertible into 678,500,000 shares of Puda’s common
      stock. The purchase agreement provided that the preferred shares would
      immediately and automatically be converted into shares of Puda’s common stock
      (the “Mandatory Conversion”), following an increase in the number of authorized
      shares of Puda’s common stock from 100,000,000 to 150,000,000, and a 1-for-10
      reverse stock split of Puda’s outstanding common stock (the “Reverse Split”).
      The share data has been retroactively adjusted for the Reverse
      Split.




On
      August
      2, 2005, the authorized number of shares of common stock of the Company was
      increased from 100,000,000 shares to 150,000,000 shares. On September 8, 2005,
      Puda completed the Reverse Split. Following the Mandatory Conversion of
      preferred shares and the Reverse Split, the BVI Members received, in the
      aggregate, approximately 67,850,000 shares of the total of 73,750,000 of Puda’s
      common stock, representing 92% of the outstanding shares of Puda’s common
      stock.





BVI
      is an
      International Business Company incorporated in the British Virgin Islands on
      August 19, 2004 and it has a registered capital of $50,000. BVI did not have any
      operating activities from August 19, 2004 (inception) to December 31,
      2006.





BVI,
      in
      turn, owns all of the registered capital of Shanxi Putai Resources Limited
      (formerly, Taiyuan Putai Business Consulting Co., Ltd.) (“Putai”), a wholly
      foreign owned enterprise (“WFOE”) registered under the wholly foreign-owned
      enterprises laws of the People’s Republic of China (“PRC”). Putai was
      incorporated on November 5, 2004 and has a registered capital of $20,000. Putai
      did not have any operating activities from November 5, 2004 (inception) until
      June 24, 2005 when it entered into certain operating agreements with Shanxi
      Puda
      Coal Group Co., Ltd. (formerly, Shanxi Puda Resources Co. Ltd.) (“Shanxi Coal”),
      a company with limited liability established under the laws of the
      PRC.





Shanxi
      Coal was established on June 7, 1995. Shanxi Coal mainly processes and washes
      raw coal and sells from its plants in Shanxi Province, high-quality, low sulfur
      refined coal for industrial clients mainly in Central and Northern China. Shanxi
      Coal has a registered capital of RMB22,500,000 ($2,717,000) which is fully
      paid.
      Prior to our acquisition of 90% of the capital stock of Shanxi Coal on November
      8, 2007, the owners of Shanxi Coal were Mr. Ming Zhao (80%) and Mr. Yao Zhao
      (20%). Ming Zhao is the chairman and chief executive officer of Puda. Yao Zhao
      was the chief operating officer of Puda until his resignation became effective
      on November 20, 2006. Ming Zhao and Yao Zhao are brothers.




5




On
      June
      24, 2005, Putai and Shanxi Coal entered into an Exclusive Consulting Agreement,
      an Operating Agreement, and a Technology License Agreement (collectively, these
      agreements are referred to herein as the “Operating Agreements”). Under the
      Operating Agreements, Putai agreed to advise, consult, manage and operate Shanxi
      Coal’s business, to provide certain financial accommodations to Shanxi Coal, and
      to license certain technology to Shanxi Coal for use in its business, in
      exchange for Shanxi Coal’s payment of all of its operating cash flow to Putai.
      Under the Exclusive Option Agreement dated June 24, 2005, each of the holders
      of
      the registered capital of Shanxi Coal granted Putai the exclusive right and
      option (the “Option”) to acquire all of their registered capital of Shanxi Coal
      at Putai’s sole and absolute discretion for a purchase price equal to the actual
      capital contributions paid in by the holders of the registered capital of Shanxi
      Coal for their respective purchase of the shares at the time of original
      issuance of the registered capital by Shanxi Coal. The amount of the registered
      capital of Shanxi Coal as of the date of the Exclusive Option Agreement totaled
      RMB22,500,000 ($2,717,000). The Option purchase price which equals the
      registered capital of Shanxi Coal was recorded as temporary equity under the
      caption “Option to buy-out Shanxi Coal”. The exercise of the Option was
      analogous to creating a second class of common stock, which was referred to
      as
“Option holder preference” on the consolidated statements of operations. Putai
      was further authorized to exercise the voting rights of the holders of the
      registered capital of Shanxi Coal and to act as the representative for such
      holders in all matters respecting Shanxi Coal’s registered capital. Prior to
      Putai’s exercise of the Option on September 13, 2007 and the acquisition of 90%
      of the total capital stock of Shanxi Coal on November 8, 2007, although Puda
      owned none of the outstanding equity interests in Shanxi Coal, the Operating
      Agreements provided Puda control over Shanxi Coal and the risks and rewards
      associated with equity ownership.





Immediately
      after the Mandatory Conversion and Reverse Split, the percentages owned by
      Mr.
      Ming Zhao and Mr. Yao Zhao in the Group companies are as follows:




·
            Puda
                Coal, Inc.: Mr. Ming Zhao (approximately 74%) and Mr. Yao Zhao
                (approximately 18%), held directly.




·
            Puda
                Investment Holding Limited: Mr. Ming Zhao (approximately 74%) and
                Mr. Yao
                Zhao (approximately 18%), held indirectly through
                Puda.




·
            Taiyuan
                Putai Business Consulting Co., Ltd (now known as Shanxi Putai Resources
                Limited): Mr. Ming Zhao (approximately 74%) and Mr. Yao Zhao
                (approximately 18%), held indirectly through Puda and
                BVI.




·
            Shanxi
                Puda Coal Group Co., Ltd.: Mr. Ming Zhao (80%) and Mr. Yao Zhao (20%),
                held directly.





On
      September 13, 2007, Putai exercised the Option to acquire 90% of the total
      capital stock of Shanxi Coal pursuant to a Share Transfer Agreement between
      Putai and the owners of Shanxi Coal, the Zhoo brothers. Upon the closing of
      the
      acquisition on November 8, 2005, the Operating Agreement and the Authorization
      Agreement entered into on June 24, 2005 among Putai, Shanxi coal and the owners
      of Shanxi Coal were terminated and, our control over Shanxi coal was changed
      from contractual control to equity ownership control.





**Corporate
      Structure**





Our
      company has an offshore holding structure commonly used by foreign investors
      with operations in China. We are a Florida corporation which owns Puda
      Investment Holding Limited or BVI, an International Business Company
      incorporated in the British Virgin Islands; BVI owns Putai, a wholly
      foreign-owned enterprise established under the laws of the PRC.




Our
      operations are conducted exclusively through Shanxi Coal, a PRC limited
      liability company. Prior to November 8, 2007, when our indirect wholly owned
      subsidiary Putai acquired 90% of the total capital stock of Shanxi Coal, Shanxi
      Coal was wholly owned by our Chief Executive Officer, Ming Zhao (80%) and his
      brother Yao Zhao (20%), who is a manger of the coal washing plants of Shanxi
      Coal. Both Ming Zhao and Yao Zhao are PRC citizens. Prior to the acquisition
      of
      Shanxi Coal by Putai effective on November 8, 2007, Puda did not have a direct
      equity interest in Shanxi Coal; however, through the Operating Agreements,
      our
      wholly owned subsidiary Putai managed and controlled the operations of Shanxi
      Coal and received all of the economic benefits of Shanxi Coal and bore all
      of
      the risks derived from Shanxi Coal’s operations. Through the Operating
      Agreements, Putai was entitled to receive 100% of the net income of Shanxi
      Coal,
      and Putai guaranteed the performance of all contracts, agreements and
      transactions executed by Shanxi Coal and related to Shanxi Coal’s business. The
      Operating Agreements consisted of the (i) Exclusive Consulting Agreement, (ii)
      Operating Agreement, (iii) Technology License Agreement, and (iv) Exclusive
      Option Agreement, each entered into on June 24, 2005. These agreements were
      filed with the SEC on July 18, 2005 as exhibits to a Form 8-K and are
      incorporated by reference as exhibits into the registration statements that
      contains this prospectus. Putai is a wholly foreign owned enterprise (“WFOE”)
      under Chinese laws. Putai’s capital stock is 100% directly owned by BVI, an
      International Business Company incorporated in the British Virgin Islands.
      BVI
      is a wholly-owned subsidiary of Puda Coal.


6





(i)
      Exclusive Consulting Agreement.





Under
      the
      Exclusive Consulting Agreement between Putai and Shanxi Coal, Putai agreed
      to
      provide business consulting services to Shanxi Coal as its exclusive business
      consulting services provider and in turn, received 30% of Shanxi Coal’s net
      income for each fiscal year. The business consulting services included (1)
      providing consulting services on Shanxi Coal’s businesses, (2) providing
      business consulting on management, marketing, and business planning, (3)
      training of management personnel, and (4) providing other business consultation
      and services that Shanxi Coal may reasonably request. Any intellectual property
      developed under this arrangement would become the property of Putai. This
      agreement had a term of 10 years and could be automatically renewed for an
      additional 10 years or any other renewal term unless terminated. During the
      initial or renewal term, this agreement could not be terminated by Shanxi Coal.
      It could be terminated by Putai at any time with a 30-day notice.





(ii)
      Operating Agreement.





Under
      the
      Operating Agreement among Putai, Shanxi Coal, Ming Zhao and Yao Zhao, Putai
      agreed to guarantee the performance of contracts, agreements and transactions
      executed by Shanxi Coal and in return, Putai received 50% of Shanxi Coal’s net
      income for each fiscal year. Net income was calculated in accordance with U.S.
      GAAP based on Shanxi Coal’s financial statements as reviewed or audited by the
      Company’s auditors. Pursuant to the Operating Agreement, Shanxi Coal, together
      with Ming Zhao and Yao Zhao, agreed to not conduct any transaction which may
      materially affect Shanxi Coal’s assets, obligations, rights or business without
      prior written consent of Putai and agreed to appoint personnel recommended
      by
      Putai as the management of Shanxi Coal. This agreement had a term of 10 years
      and could be automatically renewed for an additional 10 years or any other
      renewal term unless terminated. During the initial or renewal term of the
      agreement, the agreement could not be terminated by Shanxi Coal or by Ming
      Zhao
      or Yao Zhao in their individual capacities as parties to the agreement. It
      could
      be terminated by Putai at any time with a 30-day notice. The option was
      exercised by Putai on September 13, 2007 and on November 8, 2007 Putai acquired
      90% of the registered capital of Shanxi Coal.




(iii) Technology License Agreement.





Under
      the
      Technology License Agreement between Putai and Shanxi Coal, Putai granted to
      Shanxi Coal a non-exclusive, world-wide, revocable license to the water
      supported jig washing methods for the purpose of using, designing, developing
      and manufacturing derivative products, providing services by applying derivative
      products, or selling or otherwise distributing derivative products in the coal
      crushing, preparation and cleaning markets. Shanxi Coal was authorized to
      sub-license to any third party, provided that a prior written approval from
      Putai was obtained and a royalty sharing agreement was reached between Shanxi
      Coal and Putai for such sub-license. As royalty payments, Shanxi Coal agreed
      to
      pay Putai $50,000 within 30 days after the execution of this agreement and
      20%
      of Shanxi Coal’s net income for each fiscal year. Net income was calculated in
      accordance with U.S. GAAP based on Shanxi Coal’s financial statements as
      reviewed or audited by the Company’s auditors. This agreement did not have a
      fixed term. Shanxi Coal could not terminate this agreement and Putai had the
      right to terminate the agreement at any time with a 30-day notice.





(iv)
      Exclusive Option Agreement





Under
      the
      Exclusive Option Agreement among Putai, Shanxi Coal, Ming Zhao and Yao Zhao,
      Ming Zhao and Yao Zhao, then holders of all of the registered capital of Shanxi
      Coal, granted Putai an irrevocable, exclusive right and option to acquire all
      of
      the registered capital of Shanxi Coal at Putai’s sole and absolute discretion
      for a purchase price equal to the actual capital contributions paid in by the
      holders of the registered capital of Shanxi Coal. The amount of the registered
      capital of Shanxi Coal as of the date of the Exclusive Option Agreement totaled
      RMB22,500,000 ($2,717,000). This agreement had a term of 10 years and could
      be
      automatically renewed at Putai’s election for an additional 10 years or any
      other renewal term. During the original or renewal term, Shanxi Coal and the
      Zhaos in their individual capacities as parties to the agreement could not
      terminate the agreement, but Putai had the right to terminate the agreement
      at
      any time with a 30-day notice.





Putai
      was
      further authorized by an Authorization from Ming Zhao and Yao Zhao dated June
      24, 2005 to exercise all of the voting rights of the holders of the registered
      capital of Shanxi Coal and to act as the representative for such holders in
      all
      matters respecting Shanxi Coal’s registered capital, including but not limited
      to, (i) appointment of Putai as the duly authorized representative of such
      holders, (ii) participation in the meeting of the holders and voting of the
      registered capital of Shanxi Coal, (iii) appointment of Shanxi Coal’s directors,
      and (iv) audit of the financial information of Shanxi Coal. This authorization
      had a term of 20 years, and within 3 months prior to the expiration of the
      original term, Putai could elect to renew the authorization for an additional
      20
      years or any other renewal term.





Prior
      to
      the acquisition of Shanxi Coal by Puda through Putai, although Puda did not
      own
      Shanxi Coal, under accounting principles generally accepted in the United States
      of America, or U.S. GAAP, Shanxi Coal was included in Puda’s consolidated
      financial statements because its contractual arrangements with Puda provided
      Puda with the risks and rewards associated with equity ownership and granted
      Puda control over Shanxi Coal.


7





The
      Operating Agreements appointed China International Economic and Trade
      Arbitration (“CIETAC”) as the dispute resolution mechanism and these agreements
      were governed by PRC law. In the event of a breach of the agreements, the
      Company would have remedies under PRC Contract Law and Company Law. According
      to
      Chapter VII of PRC Contract Law, remedies for breach of contract include
      specific performance, payment for damage, and corrective measures. In addition,
      under the Technology License Agreement, Shanxi Coal expressly acknowledged
      that
      the licensed technology was a trade secret of Putai, the disclosure of which
      would cause substantial harm to Putai that could not be remedied by payment
      of
      damages alone and Putai will be entitled to preliminary and permanent injunctive
      relief and other equitable relief for any breach of this agreement. If the
      Company brought an arbitration petition to CIETAC, CIETAC would be able to
      render an arbitration award that grants one or more forms of relief discussed
      above. If the breaching party did not voluntarily comply with the arbitration
      award, the other party could seek enforcement of the award in a Chinese
      court.





Ming
      Zhao
      and Yao Zhao are brothers and significant shareholders of Puda Coal. As of
      December 31, 2007 Ming Zhao owns 50.45% and Yao Zhao owns 12.61% of total
      outstanding shares of common stock of Puda Coal and assuming conversion of
      all
      of the notes and exercise of all outstanding warrants (the “Conversion”), they
      will own 42.1% and 10.5% of total outstanding shares of common
      stock, respectively. ****





Our
      company was initially structured in this way because our acquisition of Shanxi
      Coal would have to have been paid in cash, not stock. Chinese law would not
      have
      permitted us to acquire Shanxi Coal in exchange for stock in our company. This
      would have required a large influx of cash, which was not readily available
      to
      us at the time the contractual structure was designed. Structured in this way,
      our Company was able to accumulate funds prior to exercising our option to
      purchase Shanxi Coal. We established Putai as a WFOE. There are no restrictions
      on paying dividends from China to a WFOE.





On
      September 13, 2007, Putai exercised its option to acquire capital stock of
      Shanxi Coal and entered into a Share Transfer Agreement with the owners of
      Shanxi Coal, the Zhao brothers, to acquire 90% of the total registered capital
      of Shanxi Coal and to terminate the Operating Agreements entered into on June
      24, 2005 among Putai, Shanxi Coal and the owners of Shanxi Coal. On November
      8,
      2007 upon the receipt of an approval of the acquisition from the Chinese
      government, the acquisition became effective and Putai became a 90% owner of
      Shanxi Coal. The Operating Agreements were terminated on the same
      date.




The
      following chart depicts our organizational structure as of December 31,
      2007:





Puda




8




**Our
      Business**




**Coal
      Cleaning**




Coal
      cleaning is the physical process and the stage in coal production when the
      raw
“run-of-mine” coal is processed into a range of cleaned, graded and uniform coal
      products suitable for the commercial market. Shanxi Coal specializes in
      providing cleaned coking coal for the steel making industry and is located
      in
      Shanxi Province - the heartland of China’s raw coal and coke production.
      High-quality, cleaned coking coal is best suited for making coke for purposes
      such as steel manufacturing.




Cleaned
      coking coal contains fewer impurities, and the cleaning process can reduce
      the
      ash content of raw coal by 50% and lower emissions of carbon dioxide (CO2)
      and
      sulfur dioxide (SO2). High-quality, cleaned coking coal provides increased
      commercial value, reduced ash content, reduced SO2 and CO2 emissions, and
      reduced transportation requirements compared to raw coking coal. Depending
      on
      customers’ specifications and requirements, we purchase different qualities of
      raw coking coal as inputs, mix them together and prepare them into a consistent
      quality, cleaned coking coal. With Shanxi Coal’s over ten years experience in
      mixing coal and our raw coal supply sources, we consistently provide cleaned
      coking coal with an external, or total, ash content of less than 9.5% and
      maximum 0.6% sulfur content, the industry specification for coking coal, which
      can be further processed (through a coking process) into coke - a primary
      feedstock for iron and steel making. We consistently meet or exceed these
      industry specifications for cleaned coking, although most steel and coke makers
      are forced to accept off-specification coking coal (external ash content
      exceeding 9.5%) due to the limited supply of specification grade coking
      coal.





To
      produce consistent quality clean coking coal meeting steel makers specifications
      (less than 9.5% external ash content and 0.6% maximum sulfur content), we mix
      about 55% to 60% of high quality raw coking coal by weight with 40% to 45%
      lower
      quality raw coking coal by weight. Although the supply of high quality raw
      coking coal is limited even in Shanxi Province, we currently have direct access
      to an adequate supply of the high quality raw coking coal through Jucai Coal,
      two related party mines and two non-related party mines. Meanwhile, the lower
      quality raw coking coal is available in more supply and is less difficult to
      source.




Two
      coal
      cleaning processes predominate in the industry: dense medium (“DM”) separation
      and jig washing. Both processes are widely applied throughout the world. Jig
      washing is perceived as a simpler, lower-cost option than DM separation and
      a
      range of improved jigs has continued to find wide application in Germany, India,
      and China. During the coal cleaning process, either water (for wet washing
      method) or air (dry washing method) can be used as the medium for the cleaning
      and beneficiation. The dry coal beneficiation process was widely used in Europe
      and the United States during the period 1930-1965, but was later abandoned
      largely because separation was not accurate, available technology severely
      restricted feed size and throughput and moisture presented a major inhibiting
      factor on performance. There remain a small number of dry coal beneficiation
      units in operation, particularly in some areas of China where water is
      scarce.




Our
      cleaning facilities use a proprietary, water supported jig washing technology
      that management believes gives it a competitive advantage in providing high
      quality, cleaned coking coal for China’s steel making industry.




We
      also
      have our own wells as a water source for our coal cleaning process and, together
      with the recycling of water from the coal cleaning system, our plants have
      a
      sufficient and reliable supply of water for our existing
      operations.




**Coal
      Washing Industry in China; Competition**




Coal
      plays a fundamental role in the global economy. China is both one of the largest
      consumers and producers of coal in the world. Based on China’s official
      statistics in 2005 China’s raw coal production reached 2.19 billion MT, a 15%
      increase over 2004. In 2006, the raw coal production was 2.38 billion MT, a
      9%
      increase over 2005. In 2007, the raw coal production was 2.52 billion MT, a
      6%
      increase over 2005. **** Coal,
      in
      its raw or processed forms, is mainly used in four major
      industries:




·
            Coal-fired
                power plants




·
            Steel
                manufacturing




·
            Metallurgy
                of non-ferrous metals




·
            Cement
                production




Steel
      production is highly dependent on high quality coking coal feedstock. Based
      on
      the statistics of International Iron and Steel Institute, China was the largest
      steel producer in the world producing 349 million MT and 423 million MT in
      2005
      and 2006, respectively, representing 31% and 34% of the world’s total steel
      production in 2005 and 2006, respectively. The next two largest steel producers
      in the world - Japan and the United States - produced a combined 207.4 million
      MT and 214.8 million MT in 2005 and 2006, or 18% and 17% of global production
      in
      2005 and 2006, respectively.




9





Steel
      is
      a key component of the rail systems, bridges, ports, airports, construction
      projects and car production spearheading China’s economic growth. Based on the
      statistics of International Iron and Steel Institute, China’s steel consumption
      totaled 384.4 million MT in 2006, or 31% global steel consumption. Imports
      of
      steel fell 18% in 2005 to 27.3 million MT, from 33.2 million MT in 2004. Exports
      grew 36% in 2005 to reach 27 million MT from 33.2 million MT in 2004, a 25%
      increase.





We
      expect
      that China’s growing appetite for steel production will not slow down for some
      time. Real estate construction in China continues to boom, and the Beijing
      2008
      Olympics, the 2010 Shanghai World Expo and the Three Gorges Dam projects are
      expected to help fuel the growth. However, as China’s demand for steel grows,
      government authorities have taken the initial steps to modernize the coal,
      coking and steel making industries. At this time, the Shanxi provincial
      authorities are not approving new mines that produce less than 300,000MT output
      per year, are closing mines that produce less than 90,000MT per year and are
      consolidating existing mines into larger mines with outputs between 300,000MT
      and 900,000MT, in an effort to stream line coal mining and processing facilities
      around fewer and larger operations for safety and environmental reasons, as
      well
      as industry economics.




By
      acquiring modern cleaning facilities and adhering to Shanxi Province’s emissions
      standards, we believe we have adopted a business strategy that fits the
      industry’s development path. And with Jucai Coal’s mining improvement and
      expansion plans and our long-standing relations with our customers - mostly,
      coking companies that supply the steel mills and steel mills with their own
      coking facilities - we may in the future increase our market share of cleaned
      coking coal sold in Shanxi Province.




In
      China,
      many coal mines do not have their own coal cleaning facilities or have
      inadequate cleaning capacities. Coal cleaning companies, such as Shanxi Coal,
      were established to meet the demand for cleaned coal. With our capacity of
      3.5
      million MT of annual cleaned coal, we believe that we should be able to
      participate in the early stages of China’s modernization of the coal, coking and
      steel making industries.




Although
      there are many coal cleaning plants located in the northeast China, the lower
      quality of the raw coal in this region makes these plants less competitive
      in
      the cleaned coal market, especially in the coking coal market which serves
      the
      steel making industry and coal-fired electric utilities. Lower quality coal
      markets include metallurgy of non-ferrous metals and cement production - neither
      of which are attractive market segments for us.




**Raw
      Coal Supply**




One
      of
      our competitive advantages is our access to the high-quality raw coking coal
      in
      Liulin County, Shanxi Province - an area known as China’s “King of Coal”, which
      has the highest processing yield and the lowest processing cost of any coking
      coal in China. We are not a coal mining operation and do not own any coal mines.
      However, our coal cleaning facilities are located in Liulin County, Shanxi
      Province, where high quality of coking coal reserves exists. Proximity to this
      high quality raw coking coal is critical to us for many reasons,
      including:




·
            High-quality
                raw coking coal is needed to consistently meet our customer specifications
                for cleaned coking coal, with our larger customers insisting on even
                greater levels of quality consistency to improve the operating efficiency,
                pollution control and profits of our own
                operations.





·
            If
                we are required to use a lower quality of raw coking coal, the yield,
                or
                the volume of cleaned coking coal produced from a MT of raw coking
                coal,
                will be reduced and adversely affect our gross
                margins.




·
            The
                further the cleaning facilities are from the mines, the higher the
                cost to
                transport raw coal from the mines to the cleaning facilities, a cost
                typically absorbed by the coal cleaning facility. Our current and
                new
                cleaning facilities are all located in close proximity to our major
                raw
                coking coal sources, especially Jucai Coal and the other two related
                party
                mines.




Liulin
      County has the largest reserves of high-quality raw coking coal in China. Raw
      coking coal, which has a range of quality characteristics, has a maximum sulfur
      content of 0.6%, an internal ash content of 4% to 7%, and an external ash
      content of 10% to 14%. External ash content is the measure of the total ash
      content of the coal. The process of coal washing is applied to raw coking coal
      in order to reduce the amount of its external ash content, or total ash content,
      so that it can be used by steel manufacturers. Steel and coke makers generally
      require, although they do not always receive, cleaned coking coal to meet a
      minimum specification of maximum 0.6% sulfur content and 9.5% external, or
      total, ash content. Since the coal cleaning process does not reduce the internal
      ash content, higher quality raw coking coal is preferred for producing a
      consistent quality, cleaned coking coal meeting the steel and coke makers’
specifications.




10





We
      are
      supplied raw coking coal by a number of mines in Liulin County as well as other
      mines in Shanxi Province. The high-quality raw coking coal we need to source
      and
      process to meet the quality level required by steel makers is more difficult
      to
      access in China than medium and low quality raw coal, which is a commodity
      and
      more readily available. Our primary supplier of high quality raw coking coal
      is
      Jucai Coal, a coal mine that is owned 75% by Yao Zhao, a manager at the
      coal washing plants of Shanxi Coal and brother of our CEO, Ming Zhao, and a
      12.61% (10.5% after the Conversion) stockholder of Puda. In addition to us,
      Jucai Coal also supplies high grade coal to other unrelated parties.




Jucai
      Coal has committed to supply us with our high-quality raw coking coal
      requirements, and as a result, we believe that we will have access to sufficient
      high quality coking coal to meet our needs for the foreseeable future, even
      as
      we increased our cleaned coking coal washing capacity. Jucai Coal sold us
      135,273MT, 375,177MT and 343,758MT in 2005, 2006 and 2007,
      respectively. ****




We
      currently have a preferred supply arrangement with Jucai Coal. This agreement
      gives us priority over its other customers and subject to its output capacity,
      has agreed to supply us with our entire high quality raw coking coal
      requirements pursuant to a coal supply agreement. We receive favorable pricing
      terms which are at a RMB30 to RMB50 discount per MT from the price Jucai Coal
      sells its high quality raw coking coal to its other customers. Payment terms
      are
      based on industry standards of 75% of the total purchase price is paid by us
      to
      Jucai Coal at delivery with the balance due within 30 days after delivery.
      Furthermore, Jucai Coal is required to maintain the quality of the coking coal
      at high quality which requires that such coking coal shall have a maximum 4%
      internal ash content, maximum 0.6% sulfur content, and external ash content
      of
      less than 10%. This preferred supply agreement expires by its terms on November
      17, 2015 and may be terminated sooner if both parties agree to do
      so.




We
      also
      source raw coking coal from two major coal mines located in Liulin County near
      our cleaning facilities. These mines produce quality coking coal, although
      not
      at the quality level which Jucai Coal produces. These suppliers provide raw
      coking coal with maximum 0.6% sulfur content, 7% internal ash content, and
      12 to
      14% external ash content. These suppliers are:




·
            **Liujiazhuang
                Coal Mine**-
                Shanxi Coal purchased about $2,522,655, $6,270,458 and $8,065,596
                of raw
                coal from this mine in 2005, 2006 and 2007, respectively.





·
            **Liulin
                Dadongzhuang Coal Mine**-
                Shanxi Coal purchased about $4,443,774, $5,995,774 and $7,880,949
                of raw
                coal from this mine in 2005, 2006 and 2007, respectively.




In
      addition, we have access to quality raw coking coal through Resources Group,
      which is also controlled by Ming Zhao (80%) and by Yao Zhao (10%). Ming Zhao
      is
      CEO and Chairman of the board of directors of Puda, Yao Zhao is Ming Zhao’s
      brother and a manager of the coal washing plants of Shanxi Coal. They are also
      significant shareholders of Puda, owning 50.45% and 12.61% of our common stock,
      respectively (42.1% and 10.5% respectively after the Conversion). **** Resources Group has raw coking coal available from Miao Wan Coal Mine in Liulin
      County and Zhongyang Coal Mine in Zhongyang County, Shanxi Province. These
      two
      mines produce raw coking coal with maximum 0.6% sulfur content, 7% internal
      ash
      content, and 12 to 14% external ash content. Miao Wan Coal Mine and Zhongyang
      Coal Mine each have current annual production of 400,000MT, while Zhongyang
      Coal
      Mine is expected to increase its output due to upgrades and additions to their
      mining machinery. ****




We
      are
      supplied and have access to lower quality coking coal from a number of other
      coal mines in Shanxi Province which produce raw coking coal with an internal
      ash
      content in excess of 7%. Sources of lower quality coking coal are plentiful
      around our cleaning facilities, and this lower quality coking coal typically
      sells at a discount to the prevailing high quality raw coking coal.








In
      each
      of 2007 and 2006, we had 16 raw coal suppliers and only one of them, Jucai
      Coal,
      counted for more than 10% of our total raw coal supply for that year (10.9%
      in
      2007 and 14.3% in 2006). In 2005, we had 13 raw coal suppliers and two of them,
      Jucai Coal and Liulin Dadong Zhaong Coal Mine, counted for more than 10% of
      our
      total raw coal supply for that year (13.6% and 11.0%,
      respectively).





Prices
      for raw coking coal are generally negotiated by the parties. Jucai Coal
      typically sells its high quality coal to third parties at the higher end of
      the
      guided price range. However, sales of its high quality coal to us are priced
      at
      the lower end of the guided price range and we currently receive a discount
      equal to RMB30 to RMB50 per MT from the price charged by Jucai Coal to its
      other
      customers. This favorable raw coal pricing, coupled with the high coal quality
      from Jucai Coal, allows us to be price competitive to obtain new
      business.





**Operations**




Prior
      to
      our recent expansion we operated two coal cleaning facilities in Liulin County,
      Shanxi Province. These two facilities are located in Liulin County.




11





·
            **Shanxi
                Liulin Jucai Plant**-
                This facility, which we ceased operating on December 31, 2005, has
                an
                annual clean coal washing capacity of 100,000MT. It is located in
                Liulin
                County and was leased to us by Jucai Coal. The leasing agreement
                was
                entered into on December 2, 2001 for a term of 5 years. The cost
                for the
                leased capacity was approximately $604,000 annually with four quarterly
                payments per year. This plant is located about 5 miles from the cleaned
                coal storage facility used by us to store clean coal until customer
                pick
                up. The lease for this plant expired in December 31, 2005 and was
                not
                renewed.·
            **Shanxi
                Liulin Dongqiang Plant**-
                This facility has an annual clean coal washing capacity of 400,000MT.
                This
                facility is owned by Shanxi Coal, has a land area of approximately
                1.5
                hectares, and is located about 15 miles from Jucai Coal. This plant
                is
                located about 1⁄2 miles from the cleaned coal storage facility used by
                Shanxi Coal. Shanxi Coal significantly increased its coal cleaning
                capacity through its acquisition of a new facility in Liulin County,
                which
                has an annual capacity of 1.1 million MT, as well as through its
                acquisition of a new facility and related land use rights in Zhongyang
                County, Shanxi Province which has an annual capacity of 1.2 million
                MT.
                The Shanxi Liulin Dongqiang facility was exchanged for the new facilities
                in Liulin County and Zhongyang
                County.




Shanxi
      Coal, our operating company, has over 10 years of experience in sourcing and
      mixing different quality of raw coals. Since 1995, Shanxi Coal has processed
      about 3 million MT of different quality raw coals and we believe that because
      of
      this experience we can produce the optimum raw coking coal mix which typically
      results in lower effective cost per MT of raw coking coal blended input. An
      optimum raw coal blended input also is a primary determinate in achieving high
      processing yield. Processing yield is measured by the metric tons of cleaned
      coking coal produced per MT of raw coal blend inputs. A lower quality raw coal
      blend input will generally reduce the yield, which typically is about .70MT
      of
      cleaned coal per 1 MT of raw coal, although this yield is expected to increase
      with the new facilities. Optimizing raw coal mixing to achieve the desired
      clean
      coal specification not only allows Shanxi Coal to extend its high quality raw
      coal supply, but also allows it to capture a greater gross profit
      margin.




On
      the
      other hand, if high quality raw coals are not available, our gross margins
      will
      be adversely affected if we are required to use a greater volume of lower
      quality raw coal input and still produce the clean coal specification required
      by our customers. Two primary factors contribute to this reduced gross profit
      margin. First, with a higher volume of lower quality raw coal, our processing
      yield falls. Second, the increased lower quality raw coal content increases
      our
      processing costs per ton.





As
      substantially all of our business operations are conducted in China, our results
      of operations, financial condition and prospects are subject to economic,
      political and legal developments in China, currency fluctuations and other
      risks
      relating to doing business in China. For a detailed description of these risks,
      see risk factors sections under the sub-heading “Risks Relating to Doing
      Business in China”, starting from page 19.




**Expansion**





We
      have
      significantly expanded our coal cleaning capacity through the acquisition of
      our
      New Shanxi Liulin Jucai Plant and the New Zhongyang Plant in 2005 and the assets
      exchange with Linshi Coal & Chemical regarding the Linshi
      Plant.




l
            **New
                Shanxi Liulin Jucai Plant**-
                This facility, which is adjacent to the formerly leased Shanxi Liulin
                Jucai Plant in Liulin County and located in Liulin County about 2
                miles
                away from Jucai Coal, has an annual cleaning capacity of 1.1 million
                MT.
                After completing its testing phase, the New Shanxi Liulin Jucai Plant
                became fully operational in December 2005. This new facility has
                separate
                land use rights owned by Shanxi Coal. Shanxi Coal purchased New Shanxi
                Liulin Jucai Plant from Resources Group, a related party, at cost
                for
                approximately $5,800,000 of which $900,000 is for the 50-year land
                use
                rights, $1,000,000 is for the plant and $3,900,000 is for the equipment.
                Resources Group financed the new facility under a loan.·
            **New
                Linshi Plant**-
                This facility, which is located in Linshi County, has an annual coal
                washing capacity of 1.2 million MT. We purchased this facility through
                an
                asset exchange with Linshi Jinliao Coal & Chemical Co. on June 22,
                2007. Upon the closing of the assets exchange, Shanxi Coal acquired
                all
                the assets of a coal washing plant of Linshi Coal & Chemical, which
                has an annual coal washing capacity of 1.2 million tons and a book
                value
                of RMB 57 million (approximately $7.4 million). In exchange, Linshi
                Coal
                & Chemical received RMB 45.5 million (approximately $5.9 million) in
                cash from Shanxi Coal and all the assets of a coal washing plant
                of Shanxi
                Coal located in Liulin County of the same province, which has an
                annual
                coal washing capacity of 400,000 tons and a book value of RMB 11.5
                million
                (approximately $1.5 million).




12





We
      have a
      total annual cleaned coking coal capacity of approximately 3.5 million MT.
      These
      new facilities incorporate state-of-the-art processes and systems, including
      a
      new recycling process capable of recycling the lost raw coal volume and
      producing higher yield. Management expects that these new facilities will
      increase the yield realized on 1 MT of raw coal blend input from .69-.76 MT
      of
      cleaned coking coal to .83 MT of cleaned coking coal. The addition of this
      new
      cleaning capacity is the cornerstone of our strategic growth plan.




The
      New
      Shanxi Liulin Jucai Plant and the New Zhongyang Plant were acquired at an
      aggregate cost of approximately $13 million, paid through a 6% secured loan
      payable to Resources Group that will be amortized over 10 years. The loan is
      secured by the assets which were purchased.




Resources
      Group also has a large storage facility in Liulin County near our Shanxi Liuling
      Dongqiang Plant which holds cleaned coal processed in our cleaning facilities.
      The storage facility has a railway dock and spur with access to local rail.
      Resources Group also owns a coal mining equipment manufacturer and distributor.
      The assets held by Resources Group, owned by the Zhaos, provide us with
      potential access to coking coal supply, a large storage facility and
      machinery.




With
      our
      significant expansion of coking coal cleaning capacity, we believe that we
      should be well positioned to participate in the early stages of China’s
      modernization of the coal, coking and steel making industries. At this time,
      Shanxi provincial authorities are not approving new mines that produce less
      than
      300,000MT output per year, are closing mines that produce less than 90,000MT
      per
      year and are consolidating existing mines with outputs between 300,000 and
      900,000 into larger mines, in an effort to stream line coal mining and
      processing facilities around fewer and larger operations for safety and
      environmental reasons, as well as industry economics. By acquiring modern
      facilities and adhering to Shanxi Province’s emissions standards, we have
      adopted a business strategy that we believe should fit the industry’s
      development path and should make us a leader in Shanxi Province’s coal
      industry.




As
      we
      strengthen our market position and increase our capacity with state-of-art,
      highly-efficient processing facilities and equipment, we believe we will be
      more
      competitively positioned to gain market share at the expense of small coal
      cleaning facilities that have less efficient processing and lack economies
      of
      scale.





**Customers**




Most
      of
      our current customers are China coke producers (who then sell their coke to
      major steel makers) and steel mills that have their own coking facilities.
      In
      2005 we sold 677,654 MT of cleaned coking coal to 12 different customers, with
      no customer accounting for more than 15.3% of total tonnage sales. In 2006
      we
      sold 1,758,062 MT of cleaned coking coal to 16 different customers, with no
      customer accounting for more than 20.0% of total tonnage sales. This represents
      an increase of 159% from 2005, due primarily to continued strong demand from
      existing and new customers, and increased production capacity because of the
      new
      Liulin Jucai Plant and Zhongyang Plant. In 2007, we sold 2,012,701 MT of cleaned
      coking coal to 18 different customers, with no customer accounting for more
      than
      13.1% of total sales. This represents an increase of 14% from 2006, due
      primarily to increased demand from existing and new customers, and increased
      production capacity because of the new Linshi Plant.





In
      each
      of 2007 and 2006, we had 18 and 16 customers, respectively, and only one of
      them
      counted for more than 10% of our sales for that year, Baotou Steel Group (13.1%
      for 2007 and 19.9% for 2006). In 2005, we had 12 customers, only two of which
      counted for more than 10% of our sales for that year (Baotou Steel Group, 15.2%
      and Liulin Coal Clean Plant, 12.8%).





With
      rail
      line access to Shanxi Province, Inner Mongolia Antonomous Region, Hebei
      Province, Beijing and Tianjin, we can readily service the growing appetite
      for
      steel production among its long-standing coke producing and steel mill
      customers. Our current primary geographic markets include:




·
            **Shanxi
                Province**




·
            **Inner
                Mongolia Autonomous Region**




·
            **Hebei
                Province**




·
            **Beijing**




·
            **Tianjin**




13





In
      Shanxi
      Province alone, the independent coke producers supply 50% of China’s coke and
      80% of China’s exported coke. We believe that much of the demand for coking coal
      is currently satisfied by off-specification grade coking coal of a lower quality
      since the specification grade coking coal supply is so limited. If we are
      correct, this gap between market demand and supply presents an opportunity for
      us. This is the market which we intend to continue to pursue aggressively as
      we
      believe steel makers will continue to focus on suppliers that can deliver large
      volume, consistent quality, and specification grade coking coal at competitive
      prices.




We
      believe that the outlook for China’s steel making industry also remains
      promising due to China’s construction boom, policies designed to boost
      development of the country’s western provinces, huge infrastructure projects
      such as the construction of the largest dam in the world (the Three Gorges
      Dam),
      the 2008 Beijing Olympic Games and the 2010 Shanghai World Expo. We further
      believe that coal exports will be another developing sales channel for us in
      the
      next few years. ****




**Employees**




We
      had
      approximately 245 employees as of December 31, 2007, all of whom are full-time
      employees. The following table shows the breakdown of the number of employees
      by
      department.




**Department**
            
            **Job
                Title / Responsibility**
            
            **Number
                of**
              **Employees**Corporate
            
            President,
                Vice Presidents, Managers
            
            9Finance
            
            Finance
                and Accounting
            
            10Supply;
                Marketing and Sales
            
            Purchase
                raw coal and maintain relationship with suppliers; Sell cleaned coal,
                maintain relationship with customers, and acquire new
                customers
            
            34Transportation
            
            Short-range
                truck drivers (within plant)
            
            8Production
            
            Produce
                cleaned coal
            
            155Quality
                Control
            
            Quality
                check on input (raw coal) and output (cleaned coal)
            
            17Reception
                and Security
            
            Administrative
                matters on reception and security
            
            12Total
            
            
            
            245





**Distribution**




We
      sell
      our clean coking coal through a direct sales force of approximately 25 full-time
      employees who market directly to our customers, who are mostly coking companies
      that supply steel mills and steel mills with their own coking facilities. We
      do
      not have any agreements with any third-party distributors or wholesalers. While
      individual sales might be made to a customer who is not subject to a supply
      agreement if requested and we had adequate capacity at the time, most of our
      sales are pursuant to agreements which are signed for one-year terms, with
      annual renewals. Our customers are mostly located in Shanxi Province, Inner
      Mongolia Autonomous Region, Hebei Province, Beijing and Tianjin, all of which
      are accessible by rail lines, which is the most cost effective method for coal
      transport.




**Intellectual
      Property**




Our
      cleaning facilities use a proprietary, water supported jig washing technology
      that management believes gives it a competitive advantage in providing high
      quality, cleaned coking coal for China’s steel making industry.




We
      have
      no patents, trademarks, other licenses, franchises, concessions or royalty
      agreements. In 2007, 2006 and 2005, we did not incur any expenditure on research
      and development activities.




**Governmental
      Approvals**




We
      are
      not required to obtain any governmental approvals for our products and we do
      not
      expect any probable government regulations on our products in the foreseeable
      future.




14




**Available
      Information**





We
      file
      electronically with the Securities and Exchange Commission, or SEC, our annual
      reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
      Form
      8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
      The SEC maintains an Internet site that contains reports, proxy information
      and
      information statements, and other information regarding issuers that file
      electronically with the SEC. The address of that website is http: www.sec.gov . The
      materials are also available at the SEC’s public Reference Room, located at 100
      F Street, Washington, D.C. 20549. The public may obtain information through
      the
      public reference room by calling the SEC at 1-800-SEC-0330.




**Item
      1A. Risk Factors**





We
      are
      subject to a number of risks, including those enumerated below. An investment
      in
      our common stock is speculative and involves a high degree of risk. You should
      carefully consider the following important risks and uncertainties in connection
      with any investment in our common stock. If the damages threatened by any of
      the
      following risks actually occur, our business, financial condition or results
      of
      operations, and cash flows would likely suffer significantly. In any of those
      cases, the value of our common stock could decline significantly, and you may
      lose all of part of your investment.




**Risks
      Relating to Our Business**




**We
      are primarily a holding company and depend on distributions from our
      subsidiaries to meet our financial obligations.**




Our
      company has an offshore holding structure commonly used by foreign investors
      with operations in China. We are a corporation which owns BVI, and BVI owns
      Putai. Our operations are conducted exclusively through Shanxi Coal, in which
      we
      own 90% of the equity interest. The operations of Shanxi Coal are our sole
      source of revenues. We have no operations independent of those of Putai and
      its
      subsidiaries. As a result, we are dependent upon the performance of Putai and
      its subsidiaries and will be subject to the financial, business and other
      factors affecting such subsidiaries as well as general economic and financial
      conditions. As substantially all of our operations are conducted through our
      subsidiaries, we are dependent on the cash flow of our subsidiaries to meet
      our
      obligations.





Because
      virtually all of our assets are held by our operating subsidiaries, the claims
      of our shareholders will be structurally subordinate to all existing and future
      liabilities and obligations, and trade payables of such subsidiaries. In the
      event of a bankruptcy, liquidation or reorganization of the Company, our assets
      and those of our subsidiaries’ will be available to satisfy the claims of our
      shareholders only after all of Putai and its subsidiaries’ liabilities and
      obligations have been paid in full.




**We
      rely on a few major customers and the loss of one of these customers could
      adversely affect our revenues.**




A
      significant portion of our sales are dependent on a few major customers and
      the
      loss of, or significant reduction in, purchases by some or all of those largest
      customers could adversely affect our revenues. In 2005, a total of 55.5% of
      our
      sales in U.S. dollars were to our top five major customers, Baotou Steel Group
      (15.2%), Liulin Coal Cleaning Plant (12.8%), Liulin Jinmei Corp. (9.6%), Jiangsu
      Yueda (9.3%) and Xiaoyi Jinyan Electricity (8.6%). In 2006, a total of 52.0%
      of
      our sales in U.S. dollars were to our top five major customers, Baotou Steel
      Group (19.9%), Xuanhua Steel Group (9.6%), Wulin Coke (8.6%), Liulin Coal
      Cleaning Plant (7.2%) and Liulin Jinmei Coal (6.7%). In 2007, a total of 41.5%
      of our sales in U.S. dollars were to our top five major customers, Baotou Steel
      Group (13.1%), Xuanhua Steel Group (9.5%), Wulin Coke (7.2%), Liulin Coal
      Cleaning Plant (5.9%) and Xiaoyi Jinyan Electricity (5.8%). Our ability to
      conclude favorable terms of sale with our major customers may be substantially
      impaired by our reliance on these major customers. Given the large percentage
      of
      revenues derived from the sale of cleaned coking coal to these customers, any
      adverse developments in their respective operations could have an adverse impact
      on our results of operations. Our coal sales contracts with our customers are
      generally for one-year terms, which may be renewed at the end of the term for
      an
      additional one year. These agreements may not be renewed or extended and those
      customers may not continue to purchase cleaned coking coal from us. If purchases
      from these customers are significantly reduced or not renewed, our financial
      condition and results of operations could suffer materially.




**Our
      future operating results may be affected by fluctuations in raw material prices.
      We may not be able to pass on cost increases to customers.**




Our
      operating profits may be negatively affected by fluctuations in the price of
      raw
      coking coal. We are subject to short-term coal price volatility and may be
      forced to purchase raw coking coal at higher prices and may be unable to pass
      the cost increase of raw coal on to customers. This may adversely affect gross
      margins and profitability. Our sales agreements with customers generally contain
      provisions that permit the parties to adjust the contract price of the cleaned
      coking coal upward or downward at specified times. For example, we may adjust
      these contract prices because of increases or decreases in the price of raw
      coal
      from our mining suppliers, general inflation or deflation, or changes in the
      cost of producing raw or cleaned coking coal caused by such things as changes
      in
      taxes, fees, royalties or the laws regulating the mining, production, sale
      or
      use of coal. However, if we fail to agree on a price with our customer under
      these provisions, many agreements permit customers to terminate the contract
      or
      refuse to buy all of the quantities contracted for. Market prices for raw coking
      coal generally increased in most regions in China in 2005. In 2006, the price
      of
      raw coking coal rose slightly in the first two quarters and then remained steady
      in the last two quarters. In 2007, the price of raw coking coal rose slightly
      from 2006. We are not able to fully pass these cost increases on to our
      customers and may not be able to do so with any future increases in the cost
      of
      raw materials. Top quality raw coking coal is critical to our maintaining
      operating efficiencies and delivering cleaned coal to our customers which meets
      their specifications. Since top quality raw coking coal is more limited in
      supply, its price tends to be more volatile. A general rise in coking coal
      prices also may adversely affect the price of, and demand for, coke and products
      made with coke such as pig iron, steel and concrete. This may in turn lead
      to a
      fall in demand for our products.




15





**The
      demand for our product is cyclical and is affected by industrial economic
      conditions. Downturns in the economy may reduce demand for our product and
      our
      revenues could decline.**




Because
      we do not export our product out of China, our business and operating results
      are primarily dependent upon China’s domestic demand for cleaned coking coal.
      However, because the domestic demand for coal in China is impacted by the
      international demand for coal, we are also susceptible to fluctuations in the
      international markets. The domestic and international coking coal markets are
      cyclical and exhibit fluctuation in supply and demand from year to year and
      are
      subject to numerous factors beyond our control, including, but not limited
      to,
      the economic conditions in China, the global economic conditions and
      fluctuations in industries with high demand for coal, such as the steel and
      power industries. A significant decline in demand or excess supply for cleaned
      coking coal may have a material adverse effect on our business and results
      of
      operations.




In
      addition, nearly all of our sales are concentrated in the central and northern
      area of China. Accordingly, we are susceptible to fluctuations in business
      caused by adverse economic conditions in those regions. Difficult economic
      conditions in other geographic areas into which we may expand may also adversely
      affect our business, operations and finances.




**If
      any of Shanxi Coal’s coal sales agreements terminates or expires, our revenues
      and operating profits could suffer.**




A
      substantial portion of our sales are made under coal sales agreements, which
      are
      important to the stability and profitability of our operations. It is common
      business practice in China that coal purchase and sale agreements are signed
      for
      one year terms, with annual renewals. This practice makes it difficult for
      us to
      forecast long-term purchase and sale quantities and can negatively affect our
      ability to manage inventory. These agreements may expire or be terminated.
      Coal
      sales agreements also typically contain force majeure provisions allowing
      temporary suspension of performance by us or the customer during the duration
      of
      specified events beyond the control of the affected party. Moreover, even if
      sales agreements are in force, buyers are generally not obligated to take the
      quantities specified in the contracts.




**Increases
      in transportation costs could make our operations less competitive and result
      in
      the loss of customers.**




Coal
      producers and processors depend upon rail, barge, trucking, overland conveyor
      and other systems to deliver coal to markets. While our customers typically
      arrange and pay for transportation of cleaned coking coal from our facilities
      to
      the point of use, any disruption of these transportation services because of
      weather-related problems, strikes, lock-outs or other events could temporarily
      impair our ability to supply coal to customers and thus could adversely affect
      our results of operations. For example, the high volume of raw coal shipped
      from
      all Shanxi Province mines could create temporary congestion on the rail systems
      servicing that region. If transportation for our cleaned coking coal becomes
      unavailable or uneconomic for our customers, our ability to sell cleaned coking
      coal could suffer. Transportation costs can represent a significant portion
      of
      the total cost of cleaned coal. Since our customers typically pay that cost,
      it
      is a critical factor in a distant customer’s purchasing decision. If
      transportation costs from our facilities to the customer’s are not competitive,
      the customer may elect to purchase from another company. Moreover, certain
      coal
      sales agreements permit the customer to terminate the contract if the cost
      of
      transportation increases by specified amounts in any given 12-month
      period.




**We
      rely on a few major suppliers and the loss of one of these suppliers could
      adversely affect our revenues.**




In
      2005, 2006 and 2007, with our effort to diversify supply, only four of thirteen,
      one of sixteen and one of eighteen suppliers, respectively, provided 10% or
      more
      of our total raw coal purchases in tonnage. Jucai Coal, the coal mine owned
      75%
      by Yao Zhao, supplies us with top quality coking coal. Jucai Coal also sells
      top
      quality coking coal to other customers. Jucai Coal sold
      approximately **** 38%,
      33%
      and 17% of its top quality raw coal production in 2007, 2006 and 2005,
      respectively, to us at discounted prices. In 2005 we purchased approximately
      13.7% of our raw coal from Jucai Coal, in 2006 we purchased 375,177.50MT raw
      coal from Jucai Coal, which represented approximately 15.3% of our total raw
      coal purchases in tonnage in 2006 and in 2007 we purchased 343,758.10MT raw
      coal
      from Jucai Coal, which represented approximately 11.5% of our total raw coal
      purchases in tonnage in 2007. Jucai Coal is an important source of top quality
      coking coal to Shanxi Coal. If for any reason, Jucai Coal is unable or to supply
      its top quality coking coal to us in sufficient quantities or to provide coal
      supply to us under terms comparable to the current terms, our business will
      be
      adversely affected, as there are very few large top quality coking coal
      suppliers in reasonable proximity to our cleaning facilities. Because of our
      relationship with Jucai Coal, other top quality coking coal suppliers may be
      unwilling to supply us. In the event top quality raw coking coal is not
      available or is available in reduced quantities, we may incur additional
      processing costs and may suffer reduced processing yield if we are forced to
      substitute a lower grade coal, both of which will adversely impact
      profitability. In addition, we may not be able to acquire lower grade coal
      at
      all. The Shanxi provincial authorities have recently instituted a program to
      streamline the Province’s coal mining and processing facilities. Mines where we
      obtain coal could be shut down. Further, the closing of other mines is likely
      to
      increase demand on those remaining open, potentially creating shortages and
      driving up prices, all of which could adversely affect our bottom
      line.


16





**We
      may not be able to meet quality specifications required by our customers and
      as
      a result could incur economic penalties or cancelled agreements which would
      reduce our sales and profitability.**




Most
      of
      our coal sales agreements contain provisions requiring us to deliver coking
      coal
      meeting quality thresholds for certain characteristics such as BTUs, sulfur
      content, ash content, grindability and ash fusion temperature. If we are not
      able to meet these specifications, because, for example, we are not able to
      source coal of the proper quality, we may incur economic penalties, including
      price adjustments, the rejection of deliveries or termination of the
      contracts.




**Our
      business is highly competitive and increased competition could reduce our sales,
      earnings and profitability.**




The
      coal
      crushing, washing and processing business is highly competitive in China and
      we
      face substantial competition in connection with the marketing and sale of our
      products. Most of our competitors are well established, have greater financial,
      marketing, personnel and other resources, have been in business for longer
      periods of time than we have, and have products that have gained wide customer
      acceptance in the marketplace. The greater financial resources of our
      competitors will permit them to implement extensive marketing and promotional
      programs. We could fail to expand our market share, and could fail to maintain
      our current share.




Increased
      competition could also result in overcapacity in the Chinese coal industry
      in
      general. The coal industry in China has experienced overcapacity in the past.
      During the mid-1970s and early 1980s, a growing coal market and increased demand
      for coal in China attracted new investors to the coal industry, spurred the
      development of new mines and resulted in added production capacity throughout
      the industry, all of which led to increased competition and lower processed
      coal
      prices. Similarly, an increase in future processed coal prices could encourage
      the development of expanded capacity by new or existing coal processors. Any
      overcapacity could reduce processed coal prices in the future and our
      profitability would be impaired.




**We
      depend on our senior management team and the loss of any member could adversely
      affect our operations.**




We
      and
      our operating company, Shanxi Coal are highly dependent on the services of
      Ming
      Zhao and the loss of his services would have a material and adverse impact
      on
      our operations. We are also dependent upon our relationship with Ming Zhao
      and
      his brother, Yao Zhao’s other controlled businesses. Ming Zhao has been
      primarily responsible for the development of Shanxi Coal and the development
      and
      marketing of our products. None of the executive officers of our companies
      including Ming Zhao currently have formal employment agreements with Puda or
      Shanxi Coal. None of our companies have applied for key-man life insurance
      on
      the lives of our executives. If we were to lose the services of Ming Zhao,
      our
      ability to operate would be impaired.





**We
      do not have any registered patents or other intellectual property and we may
      not
      be able to maintain the confidentiality of our processes.**




We
      have
      no patents covering our cleaning processes and we rely on the confidentiality
      of
      our cleaning processes in producing a competitive product. The confidentiality
      of our know-how may not be maintained and we may lose any meaningful competitive
      advantage which might arise through our proprietary processes.




**Our
      insurance coverage may not be adequate. Any material loss to our properties
      or
      assets may have a material adverse effect on our financial condition and
      operations.**




We
      and
      our subsidiaries and operating company are insured in amounts that may not
      adequately cover the risks of our business operations. As a result, any material
      loss or damage to our properties or other assets, or personal injuries arising
      from our business operations in excess of our insurance coverage may have a
      material adverse affect on our financial condition and
      operations.


17




**Significant
      assets are subject to a lien held by a company controlled by the Zhaos and
      their
      family. If we default on the payment of the obligations secured by the lien
      we
      could lose title to assets which are necessary for the operation of our
      business.**




We
      financed the acquisition of the New Shanxi Liulin Jucai Plant and the New
      Zhongyang Plant through Resources Group, an entity owned 80% by Ming Zhao,
      10%
      by Yao Zhao, 5% by Xue Ning, Ming Zhao’s wife, and 5% by Xue Yue, a
      second-generation cousin of Xue Ning, for an aggregate cost of $13 million
      paid
      through a 6% secured Facilities Loan amortized over 10 years. The note is
      secured by the assets purchased. If we default on the loan, the security could
      be enforced and title to the assets could be lost, having a significant negative
      impact on our ability to produce our products.




Since
      the
      Zhaos are equity owners of Resources Group they may have a conflict of interest
      with the Company. If the lien is enforced after a default, the secured assets
      would be transferred to an entity which is owned by them. Ming Zhao and Yao
      Zhao
      may have, or may develop in the future, conflicts of interest with us. As the
      equity owners of 10% of the registered capital of Shanxi Coal, they might
      personally profit if Shanxi Coal’s benefits of operation are not directed to us.
      In addition, the loan used to finance our recent facility expansions are held
      by
      Resources Group, a company which is owned by the Zhaos and their family. It
      could be in their economic interest to cause us to default on the payment of
      the
      loan with Resources Group since Resources Group could acquire the assets which
      are subject to the lien as a result of enforcement of the lien after a default.
      With their combined ownership of us (currently 63.06% and 52.6% **** upon
      the
      Conversion), they can control the actions which we take. Ming Zhao is our CEO
      and Chairman of the board of directors. In addition, the Zhao brothers also
      control the mines from which we get most of our coal. By limiting or eliminating
      our supply, they could materially adversely impact our production and revenue,
      which in turn could cause us to default on our loan to Resources Group. See
      also
      the risk below, “Our principal stockholders have significant control over the
      company and may have conflicts of interest with the company.”




**Because
      we are expanding capacity, we may be forced to make sales to customers with
      inadequate or unknown creditworthiness. We may not be able to collect
      receivables which are incurred by these customers.**




Our
      ability to receive payment for cleaned coal depends on the continued
      creditworthiness of our customers. In order to pay our expansion costs, we
      may
      be required to make sales to customers who are less creditworthy than our
      historical customers. Our customer base may change if our sales increase because
      of our added cleaning capacity. If we are not able to collect our receivables,
      our profitability will be negatively affected.





**We
      may not be able to integrate our new expanded operations, which may result
      in
      diminished capacity and decreased sales revenues.**




We
      have
      recently significantly expanded our production capacity through the acquisition
      of three new facilities, the New Shanxi Liulin Jucai Plant, the New Zhongyang
      Plant and the new Shanxi Linshi Plant. These facilities have completed testing
      and are now fully operational. We may not be able to successfully integrate
      these new operations and capitalize on any of the opportunities from these
      new
      facilities. We will be required to add and train personnel, expand management
      information systems, deal with any engineering and technical problems which
      may
      arise and control expenses. We have also incurred new debt of $13 million in
      the
      form of a 6% secured loan amortized over 10 years in order to finance the two
      new facilities. If we do not successfully address our increased management
      needs
      or we are otherwise unable to manage growth effectively, our operating results
      could be materially and adversely affected and our ability to repay the secured
      loan could be impaired, possibly resulting in a default and a loss of the new
      facilities, which are pledged as collateral. Moreover, we may not be able to
      sell any or all of the cleaned coal that any newly-constructed capacity could
      produce, and there is no assurance that we will be able to source sufficient
      raw
      coal to allow it to utilize such additional processing capacity.




**Terrorist
      attacks or military conflict could result in disruption of our
      business.**




Terrorist
      attacks and threats, escalation of military activity in response to such attacks
      or acts of war may negatively affect our business, financial condition and
      results of operations. Our business is affected by general economic conditions,
      fluctuations in consumer confidence and spending, and market liquidity, which
      can decline as a result of numerous factors outside of our control, such as
      terrorist attacks and acts of war. Future terrorist attacks, rumors or threats
      of war, actual conflicts involving China or its allies, or military or trade
      disruptions affecting our customers may materially adversely affect our
      operations. As a result, there could be delays or losses in transportation
      and
      deliveries of processed coal to our customers, decreased sales of coal and
      extensions of time for payment of accounts receivable from customers. Strategic
      targets such as energy-related assets may be at greater risk of terrorist
      attacks than other targets. In addition, disruption or significant increases
      in
      energy prices could result in government-imposed price controls. Any, or a
      combination, of these occurrences could have a material adverse effect on Shanxi
      Coal’s business, financial condition and results of operations.




18





**Risks
      Relating to Doing Business in China**




**Our
      Chinese operations pose certain risks because of the evolving state of the
      Chinese economy, political, and legislative and regulatory systems. Changes
      in
      the interpretations of existing laws and the enactment of new laws may
      negatively impact our business and results of operation.**




Substantially
      all of our business operations are conducted in China. Accordingly, our results
      of operations, financial condition and prospects are subject to economic,
      political and legal developments in China. China’s economy differs from the
      economies of most developed countries in many respects, including its levels
      of
      government involvement, level of development, growth rate, control of foreign
      exchange and allocation of resources. Doing business in China involves various
      risks including internal and international political risks, evolving national
      economic policies as well as financial accounting standards, expropriation
      and
      the potential for a reversal in economic conditions. Since the late 1970s,
      the
      Chinese government has been reforming its economic system. These policies and
      measures may from time to time be modified or revised. While the Chinese economy
      has experienced significant growth in the past 20 years, growth has been uneven
      across different regions and among various economic sectors of China.
      Furthermore, while the Chinese government has implemented various measures
      to
      encourage economic development and guide the allocation of resources, some
      of
      these measures may also have a negative effect on us. For example, our financial
      condition and results of operations may be adversely affected by government
      control over capital investments or changes in tax regulations that are
      applicable to us. Also, since early 2004, the Chinese government has implemented
      certain measures to control the pace of economic growth including certain levels
      of price controls on raw coking coal. Such controls could cause our margins
      to
      be decreased. In addition, such measures may cause a decrease in the level of
      economic activity in China, which in turn could adversely affect our results
      of
      operations and financial condition. Adverse changes in economic policies of
      the
      Chinese government or in the laws and regulations, if any, could have a material
      and adverse effect on the overall economic growth of China, and could adversely
      affect our business operations.




There
      are
      substantial uncertainties regarding the application of Chinese laws, especially
      with respect to existing and future foreign investments in China. The
      interpretation and application of existing Chinese laws, regulations and
      policies, and the stated positions of the Chinese authorities may change and
      possible new laws, regulations or policies will impact our business and
      operations. For example, due to the uncertainties surrounding the interpretation
      of the transfer pricing rules relating to related party transactions in China,
      it is possible that tax authorities in China may challenge the transfer prices
      that we have used for related party transactions among our entities in China
      in
      the future. Because of the evolving nature of the law, it will be difficult
      for
      us to manage and plan for changes that may arise. Our business is and will
      continue to be subject central, provincial, local and municipal regulation
      and
      licensing in China. Compliance with such regulations and licensing can be
      expected to be a time-consuming, expensive process. Compliance with foreign
      country laws and regulations affecting foreign investment, business operations,
      currency exchange, repatriation of profits, and taxation, will increase the
      risk
      of investing in our stock.




**We
      may be forced to incur unanticipated costs because of the unpredictability
      of
      the Chinese legal system.**




The
      Chinese legal system has many uncertainties. The Chinese legal system is based
      on written statutes. Prior court decisions may be cited for reference but have
      limited precedential value. Since 1979, Chinese legislation and regulations
      have
      enhanced the protections afforded to various forms of foreign investments in
      China. However, China has not developed a fully integrated legal system and
      recently-enacted laws and regulations may not sufficiently cover all aspects
      of
      economic activities in China. In particular, because these laws and regulations
      are relatively new, and because of the limited volume of published decisions
      and
      their nonbinding nature, the interpretation and enforcement of these laws and
      regulations involve uncertainties. In addition, the Chinese legal system is
      based in part on government policies and internal rules (some of which are
      not
      published on a timely basis or at all) that may have a retroactive effect.
      As a
      result, we may not be aware of our violation of these policies and rules until
      some time after the violation. In addition, any litigation in China may be
      protracted and result in substantial costs and diversion of resources and
      management attention.




**Our
      industry is heavily regulated and we may not be able to remain in compliance
      with all such regulations and we may be required to incur substantial costs
      in
      complying with such regulation.**




We
      are
      subject to extensive regulation by China’s Mining Ministry, and by other
      provincial, county and local authorities in jurisdictions in which our products
      are processed or sold, regarding the processing, storage, and distribution
      of
      our product. Our processing facilities are subject to periodic inspection by
      national, province, county and local authorities. We may not be able to comply
      with current laws and regulations, or any future laws and regulations. To the
      extent that new regulations are adopted, we will be required to adjust our
      activities in order to comply with such regulations. We may be required to
      incur
      substantial costs in order to comply. Our failure to comply with applicable
      laws
      and regulations could subject us to civil remedies, including fines,
      injunctions, recalls or seizures, as well as potential criminal sanctions,
      which
      could have a material and adverse effect on our business, operations and
      finances. Changes in applicable laws and regulations may also have a negative
      impact on our sales. Certain of our contracts with customers permit the
      customers to terminate the contract in the event of changes in regulations
      affecting the industry that increase the price of coal beyond specified
      limits.


19




The
      government regulation of our coal processing operations imposes additional
      costs
      on us, and future regulations could increase those costs or limit our ability
      to
      crush, clean and process coking coal. China’s central, provincial and local
      authorities regulate the coal mining industry with respect to matters such
      as
      employee health and safety, permitting and licensing requirements, air quality
      standards, water pollution, plant and wildlife protection, reclamation and
      restoration of mining properties after mining is completed, the discharge of
      materials into the environment, surface subsidence from underground mining
      and
      the effects that mining has on groundwater quality and availability. We are
      required to prepare and present to China’s central, provincial and local
      authorities data pertaining to the effect or impact that any proposed processing
      of coal may have upon the environment. The costs, liabilities and requirements
      associated with these regulations may be costly and time-consuming and may
      delay
      commencement, expansion or continuation of our coal processing operations.
      The
      possibility exists that new legislation and/or regulations and orders may be
      adopted that may materially and adversely affect our operations, our cost
      structure and/or our customers’ ability to use coal. New legislation or
      administrative regulations (or judicial interpretations of existing laws and
      regulations), including proposals related to the protection of the environment
      that would further regulate and tax the coal industry, may also require us
      and
      our customers to change operations significantly or incur increased costs.
      Certain sales agreements contain provisions that allow a purchaser to terminate
      its contract if legislation is passed that either restricts the use or type
      of
      coal permissible at the purchaser’s plant or results in specified increases in
      the cost of coal or its use. These factors and legislation, if enacted, could
      have a material adverse effect on our financial condition and results of
      operations.




**It
      will be difficult for any shareholder of our company to commence a legal action
      against our executives. Other than the stock of our subsidiaries, we have no
      assets in the United States.**




We
      conduct substantially all of our operations through our control of Shanxi Coal.
      Shanxi Coal and substantially all of Shanxi Coal’s assets are located in Shanxi
      Province, China. Other than our stock in our direct subsidiary, Puda Investments
      Holding Limited, an International Business Company incorporated in the British
      Virgin Islands, we have no assets in the United States. In addition, all of
      our
      executive officers reside within China. As a result, it may not be possible
      to
      effect service of process within the United States or elsewhere outside of
      China
      upon our senior executive officers, including with respect to matters arising
      under U.S. federal securities laws or applicable state securities laws.
      Moreover, our Chinese counsel has advised us that China does not have treaties
      with the United States or many other countries providing for the reciprocal
      recognition and enforcement of judgments of courts.




**Restrictions
      on Chinese currency may limit our ability to obtain operating capital and could
      restrict our ability to move funds out of China and to pay
      dividends.**




The
      Chinese currency, “Renminbi”, or “RMB”, is not a freely convertible currency,
      which could limit our ability to obtain sufficient foreign currency to support
      Shanxi Coal’s business operations in the future and could impair the ability of
      Shanxi Coal to pay dividends or other distributions to Puda. We rely on the
      Chinese government’s foreign currency conversion policies, which may change at
      any time, in regard to our currency exchange needs. Shanxi Coal receives all
      of
      its revenues in Renminbi, which is not freely convertible into other foreign
      currencies. Under our current structure, our income is derived from payments
      from Shanxi Coal through Putai and BVI. In China, the government has control
      over Renminbi reserves through, among other things, direct regulation of the
      conversion of Renminbi into other foreign currencies and restrictions on foreign
      imports. Although foreign currencies which are required for “current account”
transactions can be bought freely at authorized Chinese banks, the proper
      procedural requirements prescribed by Chinese law must be met. Current account
      items, including profit distributions, interest payments and expenditures from
      trade-related transactions, can be made in foreign currencies without prior
      approval from the Chinese State Administration of Foreign Exchange by complying
      with certain procedural requirements. However, approval from appropriate
      government authorities is required where RMB is to be converted into foreign
      currency and remitted out of China to pay capital expenses such as the repayment
      of bank loans denominated in foreign currencies. At the same time, Chinese
      companies are also required to sell their foreign exchange earnings to
      authorized Chinese banks and the purchase of foreign currencies for capital
      account transactions still requires prior approval of the Chinese government.
      This type of heavy regulation by the Chinese government of foreign currency
      exchange restricts certain of our business operations and a change in any of
      these government policies, or any other, could further negatively impact our
      operations.





In
      order
      to pay dividends, a conversion of Renminbi into U.S. dollar is required. Under
      current Chinese law, the conversion of Renminbi into foreign currency generally
      requires government consent. Government authorities may impose restrictions
      that
      could have a negative impact in the future on the conversion process and upon
      the ability of Shanxi Coal to meet its cash needs, and to pay dividends to
      Puda.
      However, Putai is presently classified as a wholly-owned foreign enterprise,
      or
      WFOE, in China that has verifiable foreign investment in China, funding having
      been made through an official Chinese banking channel. Because Putai qualifies
      for treatment as a WFOE, it can convert Renminbi, declare dividends and its
      funds can be repatriated to Puda in the United States under current laws and
      regulations in China, subject to limitations and restrictions imposed by Chinese
      laws, such as the SAFE notices issued by the State Administration of Foreign
      Exchange. However, the Chinese laws governing foreign currency exchange are
      evolving, and changes in such laws or their interpretation or application may
      adversely affect the ability to convert Renminbi, declare dividends and
      repatriate funds to the United States. Because our cash flow is dependent on
      dividend distributions from our subsidiaries in China, we may be restricted
      from
      distributing dividends to stockholders if we do not receive distributions of
      dividends from our subsidiaries.


20





**Our
      ownership structure is subject to regulatory controls which could cause our
      subsidiaries to be subject to penalties or which may restrict our ability to
      repatriate and distribute profits.**




The
      State
      Administration of Foreign Exchange (“SAFE”) in China issued public Circular No.
      75 on October 21, 2005 concerning foreign exchange regulations on financings
      and
      returns on investments made by PRC residents through off-shore investment
      vehicles. The circular went into effect November 1, 2005 and replaces Circular
      No. 11 issued January 24, 2005 and Circular No. 29 issued April 8, 2005
      concerning foreign investment regulations on mergers and acquisitions in China.
      Circular No. 75 eliminates the requirement under the prior two circulars for
      the
      China Ministry of Commerce (“MOFCOM”) to approve offshore investments made by
      PRC individual residents. This change effectively enables PRC individual
      residents to set up, control or otherwise invest into China through an offshore
      vehicle for the purposes of attracting overseas financing and facilitating
      an
      offshore public listing or offshore merger and acquisition exit, so long as
      such
      individuals comply with the SAFE registration procedures contained in Circular
      No. 75.




Putai,
      which is held by an offshore vehicle, BVI, received its SAFE approval prior
      to
      the issuance of the initial January 24, 2005 notice. However, Putai has not
      notified SAFE of the recent ownership changes of BVI in connection with the
      Exchange Agreement in the reverse merger. Further, to our knowledge, none of
      the
      shareholders of Puda who are Chinese residents has complied with the new SAFE
      registration requirements under Circular No. 75 with respect to their ownership
      in an offshore enterprise. Under Circular No. 75, previously established
      offshore structures for which registrations have not yet been made with SAFE
      are
      required to be completed by March 31, 2006. Puda has not complied with the
      SAFE
      No. 75 and is working on the compliance process. **** Penalties for non-compliance which may be issued by SAFE can impact the PRC
      resident investors as well as the onshore subsidiary. However, certain matters
      related to implementation of Circular No. 75 remain unclear or untested. As
      a
      result, Putai may be impacted by potential penalties which may be issued by
      SAFE. For instance, remedial action for violation of the SAFE requirements
      may
      be to restrict the ability of Putai to repatriate and distribute its profits
      to
      BVI and ultimately, to Puda in the United States. The results of non-compliance
      are uncertain, and there is no assurance that such penalties and other remedial
      measures will not have a material adverse impact upon our financial condition
      and results of operations. In addition, now that Puda recently caused Putai
      to
      exercise its option to acquire 90% of the capital stock of Shanxi Coal pursuant
      to the Exclusive Option Agreement dated June 24, 2005, Puda and the equity
      owners of Shanxi Coal have not been and may not be able to complete all the
      necessary filings and obtain the necessary registrations required by Circular
      No. 75. Although Circular No. 75 has removed the requirement for MOFCOM
      approval, the burdens that remain under the SAFE registration process may still
      restrict our ability to control and manage Shanxi Coal and could adversely
      affect our business and prospects.





**We
      are subject to currency fluctuations from our Chinese operations and
      fluctuations in the exchange rate may negatively affect our expenses and results
      of operations, as well as the value of our assets and
      liabilities.**




Effective
      July 21, 2005, The People’s Bank of China announced that the Renminbi exchange
      rate regime is reformed by moving from a fixed rate of exchange based upon
      the
      U.S. dollar to a managed floating exchange rate regime based upon market supply
      and demand of a basket of currencies. As of July 26, 2005, the exchange rate
      against the Renminbi was adjusted to 8.11 Renminbi per U.S. dollar from 8.28
      Renminbi per U.S. dollar, which represents an adjustment of approximately two
      percent. As of December 31, 2007, the last trading day in 2007, Renminbi
      appreciated to approximately 7.3046 Renminbi per U.S. Dollar. It is expected
      that the revaluation of the Renminbi and the exchange rate of the Renminbi
      may
      continue to change in the future. Fluctuations in the exchange rate between
      the
      Chinese RMB and the United States dollar could adversely affect our operating
      results. Results of Shanxi Coal’s operations are translated at average exchange
      rates into United States Dollars for purposes of reporting results. As a result,
      fluctuations in exchange rates may adversely affect our expenses and results
      of
      operations as well as the value of our assets and liabilities. Fluctuations
      may
      adversely affect the comparability of period-to-period results. We do not use
      hedging techniques to eliminate the effects of currency fluctuations. Thus,
      exchange rate fluctuations could have a material adverse impact on our operating
      results and stock prices.




**Because
      our operations are located in China, information about our operations are not
      readily available from independent third-party sources.**




Because
      our sole operating company, Shanxi Coal, is based in China, shareholders may
      have greater difficulty in obtaining information about Shanxi Coal on a timely
      basis than would shareholders of an entirely U.S.-based company. Shanxi Coal’s
      operations will continue to be conducted in China and shareholders may have
      difficulty in obtaining information about Shanxi Coal from sources other than
      Shanxi Coal itself. Information available from newspapers, trade journals,
      or
      local, regional or national regulatory agencies such as issuance of construction
      permits and contract awards for development projects will not be readily
      available to shareholders. Shareholders will be dependent upon Shanxi Coal’s
      management for reports of Shanxi Coal’s progress, development, activities and
      expenditure of proceeds.


21




**Risks
      Associated with Our Common Stock**




**Our
      stock is thinly traded and stockholders may not be able to liquidate their
      investment at all, or may only be able to liquidate the investment at a price
      less than the company’s value.**




Our
      common stock is very thinly traded, and the price if traded may not reflect
      the
      value of our company. Consequently, investors may not be able to liquidate
      their
      investment at all, or if they are able to liquidate it may only be at a price
      that does not reflect the value of the business. Even if a more active market
      should develop, the price may be highly volatile. Because the price for our
      stock is low, many brokerage firms may not be willing to effect transactions
      in
      the securities. Even if an investor finds a broker willing to effect a
      transaction in our stock, the combination of brokerage commissions, transfer
      fees, taxes, if any, and any other selling costs may exceed the selling price.
      Further, many lending institutions will not permit the use of common stock
      like
      ours as collateral for any loans.





We
      do not
      qualify or meet the requirements for the listing and/or quotation of our common
      stock on the NASDAQ Capital Market and the American Stock Exchange. If we
      determine that we would like to pursue such listing and attempt to meet the
      listing standards, in order to achieve the minimum required price per share,
      we
      would have to effect a reverse stock split which could reduce the overall value
      of your investment.





**Because
      we are subject to the Penny Stock Rules sale of our stock by investors may
      be
      difficult.**




We
      are
      subject to the SEC’s “penny stock” rules. Penny stocks generally are equity
      securities with a price of less than $5.00. The penny stock rules require
      broker-dealers to deliver a standardized risk disclosure document prepared
      by
      the SEC which provides information about penny stocks and the nature and level
      of risks in the penny stock market. The broker-dealer must also provide the
      customer with current bid and offer quotations for the penny stock, the
      compensation of the broker-dealer and its salesperson, and monthly account
      statements showing the market value of each penny stock held in the customer’s
      account. The bid and offer quotations, and the broker-dealer and salesperson
      compensation information must be given to the customer orally or in writing
      prior to completing the transaction and must be given to the customer in writing
      before or with the customer’s confirmation.




In
      addition, the penny stock rules require that prior to a transaction, the broker
      and/or dealer must make a special written determination that the penny stock
      is
      a suitable investment for the purchaser and receive the purchaser’s written
      agreement to the transaction. The penny stock rules are burdensome and may
      reduce purchases of any offerings and reduce the trading activity for our common
      stock. As long as our common stock is subject to the penny stock rules, the
      holders of such common stock may find it more difficult to sell their
      securities.




**Our
      stock prices could decrease if a substantial number of shares are sold under
      Rule 144.**




A
      substantial majority of Puda’s outstanding shares of common stock are
“restricted securities” within the meaning of Rule 144 under the Securities Act.
      As restricted shares, these shares may be resold only pursuant to an effective
      registration statement or under the requirements of Rule 144 or other applicable
      exemption from registration under the Act and as required under applicable
      state
      securities laws. Rule 144 provides in essence that a person who has held
      restricted securities for a period of at least one year may, under certain
      conditions, sell every three months, in brokerage transactions, a number of
      shares that does not exceed 1.0% of a our outstanding common stock. There is
      no
      limit on the amount of restricted securities that may be sold by a non-affiliate
      after the restricted securities have been held by the owner for a period of
      two
      years or more. The SEC recently amended Rule 144 and, effective February 15,
      2008, non-affiliates may sell restricted securities without volume limitations
      or other requirements after having held the securities for six months. If a
      substantial number of shares of our stock are sold under the amended Rule 144
      or
      other exemption, it could cause the price our stock to go down. The number
      of
      restricted securities that could be sold in the next 12 months under Rule 144,
      effective February 15, 2008, are (i) 15,281,661 shares of common stock,
      which includes 4,480,000 common stock issuable upon conversion of our
      outstanding convertible notes, 10,525,074 shares of common stock (excluding
      penalty shares issued to investors due to delay in making S-1 effective), and
      276,587 penalty shares, (ii) 740,460 shares of common stock issuable upon
      exercise of the warrants that were issued to placement agent or its employees
      and have a cashless exercise feature and (iii) assuming all holders of the
      warrants which do not permit a cashless exercise all exercise their warrants
      and
      pay the exercise price in full as of the date of this registration statement,
      15,600,000 shares of common stock issued upon the warrant exercise.





**Our
      principal stockholders have the ability to exert significant control in matters
      requiring stockholder vote and could delay, deter or prevent a change in control
      of our company.**




As
      of
      December 31, 2007, Ming Zhao and Yao Zhao own in total approximately 63.06%
      of
      the Company and upon the conversion of all of the outstanding convertible notes
      and the exercise of all of the outstanding warrants the underlying stock of
      which is being registered in this offering (“Conversion”), they will own in
      total approximately 52.6% of our outstanding stock and, acting together, will
      be
      able to exert a significant degree of influence over our management and affairs
      and all actions requiring stockholder approval, such as the election of
      directors and approval of significant corporate transactions. In addition,
      Florida corporate law provides that certain actions may be taken by consent
      action of stockholders holding a majority of the outstanding shares. In the
      event that the requisite approval of stockholders is obtained by consent action,
      without any meeting of stockholders, dissenting or non-participating
      stockholders generally would be bound by such vote. Through their concentration
      of voting power, the Zhao brothers could delay, deter or prevent a change in
      control of our company or other business combinations that might otherwise
      be
      beneficial to our other stockholders. Accordingly, this concentration of
      ownership may harm the market price of our common stock. In addition, the
      interest of the Zhao brothers may not always coincide with the interest of
      the
      Company’s other stockholders. In deciding how to vote on such matters, the Zhao
      brothers may be influenced by interests that conflict with yours. You should
      not
      buy our common stock unless you are willing to entrust all aspects of
      operational control to Puda’s current management team.


22





**Our
      principal stockholders have significant control over the company and may have
      conflicts of interest with the company.**




Ming
      Zhao
      and Yao Zhao may have, or may develop in the future, conflicts of interest
      with
      us. First, the loan used to finance our recent facility expansions are held
      by
      Resources Group, a company which is owned by the Zhaos. It could be in their
      economic interest to cause us to default on the payment of the loan with
      Resources Group since Resources Group could acquire the assets which are subject
      to the lien as a result of enforcement of the lien after a default. With their
      combined ownership of us (63.06%, and 52.65% **** after
      the Conversion), they can control the actions which we take. Ming Zhao is our
      CEO and Chairman of the board of directors. Second, the Zhao brothers control
      the mines from which we obtain most of our coal. We currently secure raw coal
      from local Liulin County coal mines, including Jucai Coal, a coal mine that
      is
      75% owned by Yao Zhao, Mr. Ming Zhao’s brother and a manager of the coal washing
      plants of Shanxi Coal. By limiting or eliminating our supply, the Zhao brothers,
      who control our coal mine supplies, could materially adversely impact our
      production and revenue, which in turn could cause us to default on our loan
      to
      Resources Group. In addition, the Zhao Brothers may declare dividends out of
      Shanxi Coal, in which they own 10% of the direct equity interest even though
      it
      would be in the interests of Puda for Shanxi Coal, to reinvest its profits
      into
      the business.




**The
      conversion of outstanding derivative securities could cause your ownership
      in
      the company to be diluted and may decrease the value of your
      investment.**




Outstanding
      derivative securities and current and future obligations to issue Puda’s
      securities to various parties may dilute the value of your investment. As of
      December 31, 2007, excluding warrants, there were 15,000 options exercisable
      at
      $1.00 per share which expire on October 20, 2008. The weighted average exercise
      price of these options is $1.00. For the length of time these warrants and
      options are outstanding, the holders thereof will have an opportunity to profit
      from a rise in the market price of our common stock without assuming the risks
      of ownership. This may have an adverse effect on the terms upon which we can
      obtain additional capital. It should be expected that the holders of such
      derivative securities would exercise or convert them at a time when we would
      be
      able to obtain equity capital on terms more favorable than the exercise or
      conversion prices provided by the warrants or options. There are no preemptive
      rights in connection with Puda’s common stock.





**We
      do not intend to pay dividends in the foreseeable future.**




In
      2005,
      Shanxi Coal declared dividends of $1,452,000, payable to Ming Zhao (80%) and
      Yao
      Zhao (20%), of which $460,000 was paid in 2005 and $992,000 remains unpaid.
      No
      dividend was declared in 2006 and 2007. We do not intend to pay any dividends
      in
      the foreseeable future. We do not plan on making any cash contributions in
      the
      manner of a dividend or otherwise. Our board of directors presently intends
      to
      follow a policy of retaining earnings, if any. See “Dividend” on page
      26.




**The
      Company has the right to issue additional common stock and preferred stock
      without the consent of shareholders. This would have the effect of diluting
      your
      ownership in the company and could decrease the value of your
      stock.**




There
      are
      additional authorized but unissued shares of our common stock that may be later
      issued by our management for any purpose without the consent or vote of the
      stockholders that would dilute a stockholder’s percentage ownership of the
      company.




In
      addition, our articles of incorporation authorize the issuance of shares of
      preferred stock, the rights, preferences, designations and limitations of which
      may be set by the board of directors. While no preferred stock is currently
      outstanding or subject to be issued, the articles of incorporation have
      authorized issuance of up to 5,000,000 shares of preferred stock in the
      discretion of the board of directors. Such preferred stock may be issued upon
      filing of amended Articles of Incorporation and the payment of required fees;
      no
      further shareholder action is required. If issued, the rights, preferences,
      designations and limitations of such preferred stock would be set by the board
      of directors and could operate to the disadvantage of the outstanding common
      stock. Such terms could include, among others, preferences as to dividends
      and
      distributions on liquidation.




23




**We
        could incur costs from liabilities related to our operations before our reverse
        merger.**
  We
        were
        formerly known as Purezza Group, Inc., and were originally formed to market
        Phoslock, a patented product to remove phosphorus and other oxyanions in
        natural
        and industrial waters and wastewater streams. On April 23, 2004, we transferred
        all of our assets including, cash on hand, the Phoslock product line, and
        all of
        our rights under a license agreement for the use of the Phoslock product
        line,
        to Purezza Marketing, Inc. However, such transfer did not eliminate any
        liabilities which we might have had while operating as the Purezza Group,
        Inc.
        or our operations relating to the Phoslock product line. For example, we
        could
        be held responsible for the cost of environmental clean-up of a contaminated
        site, if, while we were operating as the Purezza Group, Inc. we contaminated
        some real property in connection with our operations, even though the current
        management of our company was not involved with the operations at that time.
        Other potential liabilities could be based upon a product liability claim
        based
        upon an allegation that the Phoslock product caused personal injury or property
        damage, or a breach of contract.




**We
      may be subject to regulatory scrutiny and sustain a loss of public confidence
      if
      we are unable to satisfy regulatory requirements relating to our internal
      controls over financial reporting and/or we have material internal control
      weaknesses which may result in material financial reporting
      errors.**





Section 404
      of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our
      internal controls over financial reporting beginning with our annual report
      filed for a fiscal year ending on or after December 15, 2007 and have our
      independent registered public accounting firm attest to such evaluation for
      fiscal years ending on or after December 15, 2008. Compliance with these
      requirements can be expensive and time-consuming. While we believe that we
      met
      and will continue to be able to meet the applicable deadlines, no assurance
      can
      be given that we will meet the required deadlines in future years. If we fail
      to
      timely complete this evaluation, or if our auditors cannot timely attest to
      our
      evaluation when we are required to have such attestation, we may be subject
      to
      regulatory scrutiny and a loss of public confidence in our internal
      controls.




**If
      we fail to maintain an effective system of internal control over financial
      reporting, we may not be able to accurately report our financial results. As
      a
      result, current and potential shareholders could lose confidence in our
      financial reporting, which would harm our business and the trading price of
      our
      stock.**




Our
      management has determined that as of December 31, 2007, we did not maintain
      effective internal controls over financial reporting based on criteria set
      forth
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
      in Internal Control-Integrated Framework **** as
      a
      result of identified material weaknesses in our internal control over financial
      reporting. A material weakness is a deficiency, or a combination of
      deficiencies, in internal control over financial reporting, such that there
      is a
      reasonable possibility that a material misstatement of the company's annual
      or
      interim financial statements will not be prevented or detected on a timely
      basis. For a detailed description of these material weaknesses and our
      remediation efforts and plans, see Part II - Item 9A(T) – “Controls and
      Procedures.” If the result of our remediation of the identified material
      weaknesses is not successful, or if additional material weaknesses are
      identified in our internal control over financial reporting, our management
      will
      be unable to report favorably as to the effectiveness of our internal control
      over financial reporting and/or our disclosure controls and procedures, and
      we
      could be required to further implement expensive and time-consuming remedial
      measures and potentially lose investor confidence in the accuracy and
      completeness of our financial reports which could have an adverse effect on
      our
      stock price and potentially subject us to litigation.





**Item
      2. Properties**




Shanxi
      Coal has the following facilities for the production of cleaned coking
      coal:





The
      lease
      for the Shanxi Liulin Jucai Plant, which Shanxi Coal leased from Jucai Coal,
      expired on December 31, 2005 and was not renewed. Shanxi Coal has significantly
      increasing its coal cleaning capacity through its acquisition of a new facility
      in Liulin County, which has an annual capacity of 1.1 million MT, as well as
      through its acquisition of a new facility and related land use rights in
      Zhongyang County, Shanxi Province which has an annual capacity of 1.2 million
      MT.




The
      two
      new plants, related land-use rights and coal washing equipment were acquired
      by
      Shanxi Coal from Resources Group on November 17, 2005, which is controlled
      by
      Ming Zhao (80%) and by Yao Zhao (10%). The New Shanxi Liulin County Plant,
      which
      is located in Liulin County, Shanxi province, started production in December
      of
      2005. The New Shanxi Liulin County Plant, land-use rights and related equipment
      were purchased for a cost of $5.8 million. The New Zhongyang County Plant,
      which
      is located in Zhongyang County, Shanxi province, started production in April
      of
      2006. The New Zhongyang County Plant, land-use rights and related equipment
      were
      purchased for a cost of $7.2 million. The purchase price paid by Shanxi Coal
      to
      Resources Group, which totals $13 million, is amortized over 10 years and bears
      interest at a rate of 6% per annum payable quarterly. The loan is secured by
      the
      New Shanxi Liulin Jucai Plant and the New Zhongyang Plant. Shanxi Coal pledged
      the Liulin and Zhongyang coal washing plants and related equipment to Resources
      Group until such time when the purchase price and interest thereon is fully
      paid
      by Shanxi Coal to Resources Group. The annual purchase price payment made by
      Shanxi Coal to Resources Group in 2006 and 2007 were $1,300,000.




Our
      new
      Linshi Plant, which is located in Linshi County, has an annual coal washing
      capacity of 1.2 million MT. We purchased this facility through an asset exchange
      with Linshi Coal & Chemical on June 22, 2007. Upon the closing of the asset
      exchange, Shanxi Coal acquired all the assets of a coal washing plant of Linshi
      Coal & Chemical, which has an annual coal washing capacity of 1.2 million
      tons and a book value of RMB 57 million (approximately $7.4 million). In
      exchange, Linshi Coal & Chemical received RMB 45.5 million (approximately
      $5.9 million) in cash from Shanxi Coal and all the assets of a coal washing
      plant of Shanxi Coal located in Liulin County of the same province, which has
      an
      annual coal washing capacity of 400,000 ton and a book value of RMB 11.5 million
      (approximately $1.5 million).


24





The
      management believes that the above facilities are in good condition and suitable
      for the cleaned coking coal production.





Shanxi
      Coal entered into agreements with Resources Group in 2001 to lease an office
      as
      headquarters office of Shanxi Coal, which is in Taiyuan, Shanxi, and certain
      equipment. In 2005, the rents paid were approximately $24,000. In 2006, the
      rents expense paid to Resource Group was $6,000. This lease expired at the
      end
      of 2006 and has been renewed for another five years. In 2007, the rents paid
      to
      Resource Group was $6,000. ****





We
      do not
      own or lease any undeveloped property, and all the above facilities are
      currently in good working condition. We do not have any plan for property
      improvement or development in the foreseeable future.




As
      of
      December 31, 2007, Shanxi Coal maintained insurance coverage in the amount
      of
      $32,474,213 (RMB246,200,000) through The People’s Insurance Company of China as
      follows:




**Risk
                Covered**
            
            **Insured**
              **Amount**
              **(RMB)**
            
            **Insured**
              **Amount**
              **($)**
            
            **Premium**
              **(RMB)**
            
            **Premium**
              **($)**Risk
                of Loss of New Equipment
            
            
            18,000,000
            
            
            2,374,232
            
            
            64,800
            
            
            8,547Third
                Party Liability
            
            
            200,000
            
            
            26,380
            
            
            1,774
            
            
            234Risk
                of Theft and RobberyIrrespective
                of Percentage *
            
            
            110,000,000
            
            
            14,509,194
            
            
            396,000
            
            
            52,233Risk
                of Spontaneous Combustion
            
            
            43,000,000
            
            
            5,671,776
            
            
            154,800
            
            
            20,418Risk
                of Malicious Damage
            
            
            75,000,000
            
            
            9,892,632
            
            
            270,000
            
            
            35,613**Total**
            
            
            **246,200,000**
            
            
            **32,474,213**
            
            
            **887,374**
            
            
            **117,046**





The
      Company is reviewing its insurance requirements to determine the appropriate
      level of coverage.





*Losses
      by insured perils are paid regardless of percentage.





**Item
      3. Legal Proceedings**




There
      is
      currently no material, pending legal proceedings against us or with respect
      to
      any of our property.





**Item
      4. Submission of Matters to a Vote of Security Holders**





None.





25




**PART
      II**





**Item
      5. Market for Registrant’s Common Equity and Related Stockholder
      Matters and Issuer Purchases of Equity Securities**




**Market
      Information**




Our
      common stock is quoted under the symbol, “PUDC.OB” on the OTC Bulletin Board,
      Trading in the common stock in the over-the-counter market has been limited
      and
      sporadic and the quotations set forth below are not necessarily indicative
      of
      actual market conditions. Further, all prices reflect inter-dealer prices
      without retail mark-up, mark-down, or commission and may not necessarily reflect
      actual transactions. The high and low sales prices for the periods presented
      have been adjusted to reflect stock splits:





**High****
            
            **Low****2006March
                31, 2006
            
            
            4.700
            
            
            1.950June
                30, 2006
            
            
            6.35
            
            
            3.00September
                30, 2006
            
            
            3.80
            
            
            2.54December
                31, 2006
            
            
            4.95
            
            
            1.302007March
                31, 2007
            
            
            1.340
            
            
            0.770June
                30, 2007
            
            
            0.83
            
            
            2.59September
                30, 2007
            
            
            1.24
            
            
            2.36December
                31, 2007
            
            
            2.11
            
            
            0.78





*
            10-for-1
                stock split occurred September 8, 2005; the high price of $3.90 occurred
                prior to the split; the post-split high for the quarter was $2.300;
                the
                low of $1.000 occurred before the split; the post-split low was
                $1.05**
            Source:
                Yahoo! Finance





**Holders**




As
      of
      December 31, 2007 there were 105,252,176 **** shares
      outstanding and approximately **** 137 **** holders
      of record of our common stock. See “Security Ownership of Certain Beneficial
      Owners and Management.”




**Dividend**




In
      2005,
      Shanxi Coal declared dividends of $1,452,000, payable to Ming Zhao (80%) and
      Yao
      Zhao (20%), of which $460,000 was paid in 2005 and $992,000 remains unpaid.
      No
      dividend was declared in 2006 and 2007.





Any
      future determination as to the declaration and payment of dividends on Puda’s
      common stock will be made at the discretion of Puda’s board of directors out of
      funds legally available for such purpose. Puda is under no contractual
      obligations or restrictions to declare or pay dividends on its common stock.
      In
      addition we currently have no plans to pay such dividends. However, even if
      we
      wish to pay dividends, because our cash flow is dependent on dividend
      distributions from our subsidiaries, we may be restricted from distributing
      dividends to our holders of common stock in the future if at the time we were
      unable to obtain sufficient dividend distributions from Shanxi Coal or Putai.
      We
      acquired 90% of the total capital stock of Shanxi Coal. Under current law there
      is no restriction on a PRC company’s ability to pay dividends to its
      shareholders because its shareholders are not Chinese, however, various factors
      could limit the ability of Shanxi Coal and Putai to distribute dividends to
      their shareholders, including the obligations of Shanxi Coal and Putai under
      the
      laws of China to maintain and continuously fund certain Chinese government
      mandated reserve accounts and foreign currency exchange regulations. The board
      of directors currently intends to retain all earnings for use in the business
      for the foreseeable future. See “Risk Factors.”


26





**Securities
      Authorized for Issuance under Equity Compensation Plans**




We
      have
      not reserved any securities for issuance under any equity compensation plan,
      as
      we currently have not adopted any equity compensation plan.





**Recent
      Sales of Unregistered Securities**




None.




**Purchases
      of Equity Securities by Issuer**





We
      did
      not purchase any of our equity securities in 2007.





**Item
      6. Selected Financial Data**




The
      following selected financial data for the five years ended December 31, 2007
      are
      derived from the audited consolidated financial statements of Puda Coal, Inc.
      The data should be read in conjunction with the consolidated financial
      statements, related notes, and other financial information.




27




**S** **EL****ECTED
        FINANCIAL DATA**
  Year
                  ended December 31,2007
              
              2006
              
              2005
              
              2004
              
              2003$’000
              
              $’000
              
              $’000
              
              $’000
              
              $’000OPERATIONS
                  DATARevenues
              
              $
              165,267
              
              $
              137,771
              
              $
              51,710
              
              $
              19,735
              
              $
              13,397Net
                  income
              
              
              10,874
              
              
              1,354
              
              
              965
              
              
              3,693
              
              
              2,402Option
                  holder preference dividend
              
              
              —
              
              
              (2,717
              )
              
              (2,717
              )
              
              —
              
              
              —(Loss)/income
                  applicable to common Shares
              
              $
              10,874
              
              $
              (1,363
              )
              $
              (1,752
              )
              $
              3,693
              
              
              2,402Income/(loss)
                  per common share (basic and diluted)
              
              $
              0.11
              
              $
              (0.02
              )
              $
              (0.03
              )
              $
              0.05
              
              $
              0.03Cash
                  dividends declared per common Share
              
              $
              —
              
              $
              —
              
              $
              0.02
              
              $
              0.03
              
              $
              0.02BALANCE
                  SHEET DATATotal
                  assets
              
              $
              81,264
              
              $
              62,984
              
              $
              46,701
              
              $
              11,344
              
              $
              11,707Convertible
                  notes and warrants
              
              $
              7,421
              
              $
              13,894
              
              $
              18,925
              
              $
              —
              
              $
              —Other
                  Long-term debt
              
              $
              9,100
              
              $
              10,400
              
              $
              11,700
              
              $
              —
              
              $
              —Shareholders'
                  equity
              
              $
              48,581
              
              $
              23,037
              
              $
              6,082
              
              $
              7,149
              
              $
              5,849


**Q** **UA****RTERLY
      FINANCIAL DATA**




Unaudited
      quarterly results of operations for the years ended December 31, 2007 and 2006
      should be read in conjunction with the consolidated financial statements,
      related notes and other financial information and the Company's quarterly
      reports on Forms 10-Q and 10-QSB for the fiscal years 2007 and
      2006.




First
            
            Second
            
            Third
            
            FourthQuarter
            
            Quarter
            
            Quarter
            
            Quarter
            
            YearYear
                Ended December 31, 2007Revenues
            
            $
            37,415
            
            
            38,097
            
            
            40,536
            
            $
            49,219
            
            $
            165,267Gross
                profit
            
            $
            7,505
            
            
            6,628
            
            
            6.655
            
            $
            7,827
            
            $
            28,615Net
                income/(loss)
            
            $
            3,847
            
            
            (670
            )
            
            3,365
            
            $
            4,332
            
            $
            10,874Option
                holder preference dividend
            
            $
            —
            
            
            —
            
            
            —
            
            $
            —
            
            $
            —Income/(loss)
                applicable to common shares
            
            $
            3,847
            
            
            (670
            )
            
            3,365
            
            $
            4,332
            
            $
            10,874Income/(loss)
                per common share - basic and diluted
            
            $
            0.04
            
            
            (0.00
            )
            
            0.03
            
            $
            0.04
            
            $
            0.11Year
                Ended December 31, 2006Revenues
            
            $
            20,771
            
            $
            30,943
            
            $
            42,650
            
            $
            43,407
            
            $
            137,771Gross
                profit
            
            $
            4,513
            
            $
            6,027
            
            $
            8,925
            
            $
            8,925
            
            $
            28,390Net
                (loss)/income
            
            $
            (6,445
            )
            $
            (363
            )
            $
            2,166
            
            $
            5,996
            
            $
            1,354Option
                holder preference dividend
            
            $
            (2,717
            )
            $
            —
            
            $
            —
            
            $
            —
            
            $
            (2,717
            )(Loss)/income
                applicable to common shares
            
            $
            (9,162
            )
            $
            (363
            )
            $
            2,166
            
            $
            5,996
            
            $
            (1,363
            )(Loss)/income
                per common share -basic
            
            $
            (0.13
            )
            $
            (0.00
            )
            $
            0.03
            
            $
            0.08
            
            $
            (0.02
            )(Loss)/income
                per common share -diluted
            
            $
            (0.13
            )
            $
            (0.00
            )
            $
            0.02
            
            $
            0.09
            
            $
            (0.02
            )




**Item
      7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





You
      should read the following description of our results of operations and financial
      condition in conjunction with the audited financial statements contained herein.
      Unless otherwise specified, all dollar amounts are in U.S. dollars.





**Forward-Looking
      Statements**





The
      following discussion may contain certain forward-looking statements. These
      statements include the plans and objectives of management for the future growth
      of Puda Coal, Inc., formerly Purezza Group, Inc. (“Puda” or the “Company”) and
      its subsidiaries, including plans and objectives related to the consummation
      of
      acquisitions and future private and public issuances of Puda’s equity and debt
      securities. The forward-looking statements included herein are based on current
      expectations that involve numerous risks and uncertainties. Assumptions relating
      to the foregoing involve judgments with respect to, among other things, future
      economic, competitive and market conditions and future business decisions,
      all
      of which are difficult or impossible to predict accurately and many of which
      are
      beyond the control of Puda. Although Puda believes that the assumptions
      underlying the forward-looking statements are reasonable, any of the assumptions
      could be inaccurate and, therefore, there can be no assurance that the
      forward-looking statements included in this Form 10-K will prove to be accurate.
      In light of the significant uncertainties inherent in the forward-looking
      statements included herein, the inclusion of such information should not be
      regarded as a representation by Puda or any other person that the objectives
      and
      plans of Puda will be achieved.


28





The
      words
“we,” “us”, “our” and Puda” refer to Puda Coal, Inc. and its subsidiaries. The
      words or phrases “would be,” “will allow,” “intends to,” “will likely result,”
“are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or
      similar expressions are intended to identify forward-looking statements. Actual
      results could differ materially from those projected in the forward-looking
      statements as a result of a number of risks and uncertainties, including but
      not
      limited to: (a) limited amount of resources devoted to expanding our business
      plan; (b) our failure to implement our business plan within the time period
      we
      originally planned to accomplish; (c) our ability to remediate or otherwise
      mitigate any material weakness in internal control over financial reporting
      or
      significant deficiencies that have been and may be further identified; and
      (d)
      other risks that are discussed in this Form 10-K and incorporated herein by
      reference or included in our previous filings with the SEC.





***Overview***




We
      process high-grade metallurgical coking coal and supply it to coke and steel
      manufacturers. High-grade, cleaned coking coal is an important input in the
      steel manufacturing process. We source raw coal from third-party coal mines
      located in Shanxi Province, China and after we process it to a quality which
      is
      required to produce steel, we sell it to our customers in and around Shanxi
      Province.





**Results
      of Operations**





***Year
      Ended December 31, 2007 Compared to Year Ended December 31,
      2006***





Net
      Revenue. Net revenue was $165,267,000 for the year ended December 31, 2007,
      compared to $137,771,000 for the year ended December 31, 2006, an increase
      of
      $27,496,000, or 20%. The tonnage sales of cleaned coal increased approximately
      255,000 MT, or 15%, from approximately 1,758,000 MT for the year ended December
      31, 2006 to approximately 2,013,000 MT for the year ended December 31, 2007.
      The
      increase in the tonnage sales of cleaned coal was the primary reason for the
      increase in our net revenue. The increase in tonnage sales accounted for
      approximately 15% of the total 20% increase in net revenue and the remaining
      5%
      was attributable to currency exchange rate differences. The increase in tonnage
      sales was primarily due to increased purchases of cleaned coal from existing
      and
      new customers for the year ended December 31, 2007 as a result of the increase
      in the general demand for high-grade coking coal in China, which was largely
      driven by the economic growth that China continued to experience for the year
      ended December 31, 2007. Steel is a key component of rail systems, bridges,
      ports, airports, construction projects and car production spearheading China's
      economic growth and the increased demand for steel directly causes the increased
      demand for the cleaned high-grade metallurgical coking coal, which we sell.
      The
      average selling price was approximately $82 and $82 (after adjusting for RMB
      appreciation against USD over this period) per ton for the years ended December
      31, 2007 and 2006, respectively.





In
      response to this increase in general demand, we have significantly expanded
      our
      capacity to 3.5 million MT per year through the purchase of three new coal
      washing facilities in November 2005 and June 2007. The Liulin County plant
      (annual clean coal washing capacity of 1.1 million MT) became operational in
      December 2005, the Zhongyang County plant (annual clean coal washing capacity
      of
      1.2 million MT) became operational by the end of March 2006 and the Lingshi
      County Chongjie plant (annual clean coal washing capacity of 1.2 million MT)
      became operational in August 2007. In June 2007, we exchanged all assets of
      our 400,000
      MT Liulin Dongqiang coal washing plant for all assets of the Lingshi County
      Chongjie plant. Management
      anticipates that China's strong economic growth will continue in 2008 and
      believes that this will drive the demand for steel and high-grade metallurgical
      coking coal. However, in response to this strong demand in the market, it is
      expected that there will be more supply in the market from competitors and
      due
      to increased supply. As a result, notwithstanding the expected strong demand,
      our average selling price per ton is not expected to increase.





Cost
      of
      Revenue. Cost of revenue was $136,652,000 for the year ended December 31, 2007,
      compared to $109,381,000 for the year ended December 31, 2006, an increase
      of
      $27,271,000, or 25%. This was primarily due to an increase in the average
      purchase price of raw coal from approximately $48 (after adjusting for RMB
      appreciation against USD over this period) per ton for the year ended December
      31, 2006 to approximately $50 per ton for the year ended December 31,
      2007.





Gross
      Profit. Gross profit was $28,615,000 for the year ended December 31, 2007,
      compared to $28,390,000 for the year ended December 31, 2006, an increase of
      $225,000, or 1% due to an increase in sales volume. Gross profit margins for
      the
      years ended December 31, 2007 and 2006 were 17% and 21%, respectively. Such
      decrease in gross profit margins was primarily due to an increase in average
      purchase price of raw coal during the fiscal year ended December 31,
      2007.


29





Selling
      Expenses. Selling expenses were $2,975,000 for the year ended December 31,
      2007,
      compared to $3,231,000 for the year ended December 31, 2006. This represents
      a
      decrease of $256,000, or 8%, primarily due to decrease in shipping charges
      because of decreased tonnage sales to customers outside Shanxi Province for
      the
      year ended December 31, 2007.





General
      and Administrative Expenses. General and administrative expenses were $2,215,000
      for the year ended December 31, 2007, compared to $2,387,000 for the year ended
      December 31, 2006. This represents a decrease of $172,000, or 7%, primarily
      due
      to a decrease in legal and professional fees and investor relation expenses.





Income
      from Operations. Operating profit was $23,425,000 for the year ended December
      31, 2007, compared to $22,772,000 for the year ended December 31, 2006. The
      increase of $653,000, or 3%, was primarily the result of a decrease in operating
      expenses of $428,000 and an increase in gross profit of $225,000.





Interest
      Expense. Interest expense was $1,577,000 for the year ended December 31, 2007,
      compared to $4,441,000 for the year ended December 31, 2006. This represents
      a
      decrease of $2,864,000, or 64%, and such decrease was primarily due to a
      decrease of $2,235,000 for the expensed portion of the discount on the
      conversion feature and warrants related to converted notes and exercised
      warrants, a decrease in interest payments of $553,000 for the 8% convertible
      notes, and a decrease in interest payments of $76,000 for the 6% loan from
      Resources Group for the purchase of the Liulin and Zhongyang
      plants.





Debt
      Financing Costs. Debt financing costs were $2,422,000 for the year ended
      December 31, 2007, compared to $10,669,000 for the year ended December 31,
      2006.
      This represents a decrease of $8,247,000, or 77%, primarily due to a decrease
      in
      amortization of discount on convertible notes and warrants of $7,732,000, a
      decrease in amortization of debt issue costs of $832,000, which was offset
      by an
      increase in penalty payment of $317,000 for not having the registration
      statement effective by March 17, 2006.





Derivative
      Unrealized Fair Value Loss. Derivative unrealized fair value loss of $343,000
      for the year ended December 31, 2007 and derivative unrealized fair value gain
      of $1,237,000 for the year ended December 31, 2006 represented a change in
      fair
      value of the warrants issued to the placement agent.





Income
      Before Income Taxes. Income before income taxes was $19,166,000 for the year
      ended December 31, 2007, compared to $8,958,000 for the year ended December
      31,
      2006. The increase of $10,208,000, or 114%, was primarily the result of a
      decrease in debt financing costs of $8,247,000, a decrease in interest expenses
      of $2,864,000, an increase in operating profit of $653,000, which was offset
      by
      an increase in derivative unrealized fair value loss of $1,580,000 for the
      year
      ended December 31, 2007.





Income
      Taxes. Income taxes were $8,292,000 for the year ended December 31, 2007,
      compared to $7,604,000 for the year ended December 31, 2006, an increase of
      $688,000, or 9%, due to an increase in the operating profit of Shanxi Coal
      from
      $23,402,000 for the year ended December 31, 2006 to $23,980,000 for the year
      ended December 31, 2007. Income tax was imposed by the China Tax Bureau on
      income of Shanxi Coal, as calculated under Chinese GAAP and tax rules The income
      tax rate was 33% for the years ended December 31, 2007 and 2006 and was reduced
      to 25% effective on January 1, 2008.





Net
      Income. Net income was $10,874,000 for the year ended December 31, 2007,
      compared to $1,354,000 for the year ended December 31, 2006, an increase of
      $9,520,000, or 703%, mainly due to a decrease in debt financing costs of
      $8,247,000, a decrease in interest expenses of $2,864,000, an increase in
      operating profit of $653,000, which was offset by an increase in derivative
      unrealized fair value loss of $1,580,000, and an increase in income taxes of
      $688,000 for the year ended December 31, 2007.





Inflation
      have no significant impact on our res ults
      of
      operations for the years ended December 31, 2007 and 2006. ****





**Liquidity
      and Capital Resources**





Net
      cash
      used in operating activities was $3,120,000 for the year ended December 31,
      2007, compared to net cash provided by operating activities of $11,296,000
      for
      the year ended December 31, 2006, a change of $14,416,000. This was primarily
      due to an increase in working capital needs resulting from increased
      inventory.





Net
      cash
      used in investing activities of $7,910,000 for the year ended December 31,
      2007
      was related to the payment of $1,799,000 to Ming Zhao and Yao Zhao for the
      purchase of equity interest in Shanxi Coal, the cash paid to acquire a new
      coal
      washing facility of $5,977,000 in an assets exchange in June 2007, and the
      cash
      paid to acquire fixed assets of $134,000 in October 2007. The facility has
      a
      clean coal washing capacity of 1.2 million MT and started formal production
      in
      August 2007. ****





Net
      cash
      provided by financing activities of $501,000 for the year ended December 31,
      2007 was related to cash received from the exercise of warrants of $3,600,000,
      which was offset by the repayment of long-term debt of $1,300,000. Net cash
      provided by financing activities of $560,000 for the year ended December 31,
      2006 was related to cash received from the exercise of warrants of $1,860,000,
      which was offset by the repayment of long-term debt of $1,300,000.


30




On
      November 17, 2005, Shanxi Coal entered into two conveyance agreements with
      Resources Group, pursuant to which Shanxi Coal acquired two new coal washing
      plants, related land-use rights and coal washing equipment in Liulin County
      and
      Zhongyang County, Shanxi Province. The Liulin County plant with an annual clean
      coal washing capacity of 1.1 million MT started full production in December
      2005. The Liulin County plant, land-use rights and related equipment were
      purchased for a cost of $5,800,000. The Zhongyang County plant with an annual
      clean coal washing capacity of 1.2 million MT started full production at the
      end
      of March 2006. The Zhongyang County plant, land-use rights and related equipment
      were purchased for a cost of $7,200,000. Each conveyance agreement provides
      that
      the purchase price paid by Shanxi Coal to Resources Group, which totals
      $13,000,000, will be amortized over 10 years from December 31, 2005 and bears
      interest at a rate of 6% per annum payable quarterly. On
      June
      6, 2007, Shanxi Coal entered into an Asset Exchange Agreement with Lingshi
      Jinliao Coal & Chemical Co. Ltd. Pursuant to the Asset Exchange Agreement,
      Shanxi Coal agreed to exchange all assets of its 400,000 MT Liulin Dongqiang
      coal washing plant, with a book value of RMB11.5 million ($1,511,000), plus
      RMB45.5 million ($5,977,000) in cash, for all assets of Lingshi County Chongjie
      coal washing plant, with a book value of RMB57 million ($7,488,000).  The
      Lingshi County Chongjie plant with an annual clean coal washing capacity of
      1.2
      million MT started production in August 2007.





On
      September 6, 2007, Shanxi Coal entered into an agreement with Xin Kai Yuan
      Hotel
      and Restaurant Co. Limited, pursuant to which, Shanxi Coal will purchase the
      coal mining right with respect to a coal mine located in Duanjia Village, Jingle
      County, Shanxi Province of China. As consideration, Shanxi Coal will pay an
      aggregate purchase price of RMB460 million (approximately $60.7 million) in
      cash. Under the agreement, Shanxi Coal will pay a first installment in the
      amount of RMB200 million ($26.5 million) within 10 business days after the
      receipt of the mining permit by the seller and a second installment in the
      amount of RMB150 million ($19.9 million) within ten business days after the
      receipt of the mining commencement report by the seller. Shanxi Coal will pay
      the remaining purchase price, RMB110 million ($14.6 million) within one year
      after the receipt of the mining commencement permit. Shanxi Coal plans to
      finance the purchase through a debt facility which it is currently negotiating.
      If the seller does not obtain the mining permit for the benefit of Shanxi Coal
      within two months of the agreement date, Shanxi Coal may terminate the
      agreement. As of the date of purchase, the coal mine was not operating and
      Shanxi Coal will construct the coal mine after the commencement permit has
      been
      obtained. Shanxi Coal has to
      get external financing to facilitate the acquisition.





As
      of
      April 3, 2008, Xin Kai Yuan Hotel and Restaurant Co. Ltd., had not obtained
      the
      mining permit for the benefit of us. According to the agreement, we have the
      right to unilaterally terminate the agreement, and our management has not
      decided whether to terminate the agreement. If our management decides not to
      terminate the agreement but to proceed with the acquisition once the mining
      permit is obtained by the seller, the large cash payment for the coal mine
      will
      have a material impact on the liquidity. If we do not obtain sufficient external
      financing, our cash at hand and internally generated cash will not be sufficient
      to fund the acquisition. If we are not able to timely obtain external financing,
      we may decide not to proceed with the acquisition. If we obtain the outside
      financing, the funds generated from our operations may not be sufficient to
      pay
      for the interest and principal on the financing.





Putai,
      a
      wholly-owned indirect subsidiary of Puda, has an
      Option
      to purchase Shanxi Coal under an Exclusive Option Agreement dated June 24,
      2005
      among Putai, Shanxi Coal, and the two shareholders of Shanxi Coal, Ming Zhao
      and
      Yao Zhao, who are also the two principal shareholders of Puda. On
      September 13, 2007, Putai exercised the Option to acquire 90% of the total
      registered capital of Shanxi Coal at an acquisition price of RMB20,250,000
      (approximately $2,692,000), pursuant to the Exclusive Option Agreement. Upon
      the
      Option exercise, Putai entered into a Share Transfer Agreement with the owners
      of Shanxi Coal, Ming Zhao and Yao Zhao, respectively. Pursuant to the Share
      Transfer Agreements, Putai agrees to acquire 72% of the total registered capital
      of Shanxi Coal from Ming Zhao at a purchase price of RMB16,200,000
      (approximately $2,154,000) and 18% of the total registered capital of Shanxi
      Coal from Yao Zhao at a purchase price of RMB4,050,000 (approximately $538,000).
      As of December 31, 2007, Putai paid $1,799,000 to Ming Zhao and Yao Zhao and
      the
      balance of the purchase price of $893,000 will be paid around February 2008.
      Putai may pay the remaining Option price through existing cash resources or
      other internally generated funds or through proceeds of thirty party equity
      or
      debt financing. The
      closing of the acquisition occurred on November 8, 2007, the date a Chinese
      government approval with respect to the acquisition was received. After the
      acquisition, Putai became a 90% owner of Shanxi Coal. The Operating Agreements
      between Shanxi Coal and Putai were terminated upon the closing of the
      acquisition.


.


Our
      principal on-going capital requirements are to finance our coal washing
      operations and to fund the payment of the loans, with the outstanding balance
      of
      $10,400,000 as of December 31, 2007, for the acquisition of the new Liulin
      County plant and the new Zhongyang County plant. We must also pay interest
      on
      the notes issued in our November 18, 2005 private placement which have an
      aggregate principal amount of $2,240,000, an interest rate of 8% per annum
      and a
      maturity date of October 31, 2008. Interest is payable quarterly and the
      principal amount is payable at the maturity date. These notes may be converted
      into our common stock at the conversion price of $.50 per share. The price
      of
      our stock is likely to impact our liquidity needs for payment of these notes
      on
      both a long-term and short-term basis. We believe that as our stock becomes
      more
      valuable, the note holders will be more likely to convert their notes into
      common stock, and we would not be required to pay the interest any longer or
      the
      principal at all, decreasing our need for cash.





Conversely,
      if our stock price decreases, note holders are less likely to convert their
      notes and our need for cash to pay interest and principal on the notes will
      increase. Warrants were also issued in that private placement to acquire up
      to
      15,900,000 shares of our common stock which are exercisable at price of $.60
      per
      share, or an aggregate of $9,540,000. We believe that the likelihood that these
      warrants being exercised increases as our stock price increases and decreases
      as
      our stock price decreases, with a corresponding effect on the likelihood of
      our
      realizing proceeds from their exercise.


31





Our
      business is heavily dependent on our coal inventory. Because of certain coal
      mining accidents, the Chinese government has been closing mines throughout
      China. In addition, in Shanxi Province, the authorities are not approving new
      mines that produce less than 300,000MT output per year, are closing mines that
      produce less than 90,000MT per year and are consolidating existing mines into
      larger mines with outputs between 300,000MT and 900,000MT. These activities
      may
      lead to increased competition for coal and result in higher prices for the
      raw
      coal we purchase, increasing our need for capital resources.





In
      addition, while the Chinese steel industry has been expanding, over-supply
      could
      have the effect of depressing steel prices and making the collection of our
      accounts receivable more difficult.





After
      paying RMB 45.5 million ($5,977,000) cash in the acquisition of the Lingshi
      County Chongjie coal washing plant and increasing significantly our raw coal
      inventory by $10,414,000 (in anticipation of a continuous increase in raw coal
      purchase price and increased production capacity because of the new Lingshi
      County Chongjie plant), our cash balance was $16,381,000 as of December 31,
      2007. We
      believe that our cash will be adequate to satisfy our anticipated cash
      requirements for fiscal year 2008, including requirements to maintain current
      operations, complete projects already underway and achieve stated objectives
      or
      plans, commitment for capital or other expenditure and other reasonably likely
      future needs. Cash requirements for our long-term business needs, including
      the
      funding of capital expenditures and debt service for outstanding financings,
      are
      expected to be financed by a combination of internally generated funds, the
      proceeds from the sale of our securities, borrowings and other external
      financing sources, etc. Our biggest capital project on hand is the purchase
      of
      the coal mining right of $60.7 million (as mentioned in previous paragraphs).
      If
      we decide not to terminate the contract, we must obtain large external financing
      which will have a material impact on our liquidity. Our assesment concerning
      our
      liquidity is based on current information. If the current information proves
      to
      be inaccurate, or if circumstances change, we may not be able to meet our cash
      needs.




**Significant
      Accounting Estimates and Policies**





The
      discussion and analysis of Puda’s financial condition and results of operations
      is based upon Puda’s financial statements which have been prepared in accordance
      with accounting principles generally accepted in the United States. The
      preparation of these financial statements requires Puda to make estimates and
      judgments that affect the reported amounts of assets and liabilities. On an
      on-going basis, Puda evaluates its estimates including the allowance for
      doubtful accounts, the salability and recoverability of inventory, income taxes and
      contingencies. Puda bases its estimates on historical experience and on various
      other assumptions that Puda believes to be reasonable under the circumstances,
      the results of which form Puda’s basis for making judgments about the carrying
      values of assets and liabilities that are not readily apparent from other
      sources. Actual results may differ from these estimates under different
      assumptions or conditions.





Puda
      must
      make estimates of the collectability of accounts receivable. Puda analyzes
      historical write-offs, changes in its internal credit policies and customer
      concentrations when evaluating the adequacy of its allowance for doubtful
      accounts. Differences may result in the amount and timing of expenses for any
      period if Puda makes different judgments or uses difference
      estimates.





Property
      and equipment are evaluated for impairment whenever indicators of impairment
      exist. Accounting standards require that if an impairment indicators are
      present, Puda must assess whether the carrying amount of the asset is
      unrecoverable by estimating the sum of the future cash flows expected to result
      from the asset, undiscounted and without interest charges. If the carrying
      amount is less than the recoverable amount, an impairment charge must be
      recognized, based on the fair value of the asset.





Revenue
      from sales of processed coal is generally recognized during the period when
      the
      coal is delivered and title passes to the purchaser.





Shanxi
      Coal’s functional currency is China’s Renminbi (“RMB”) and its reporting
      currency is U.S. dollars. Shanxi Coal’s r esults
      of
      operations and cash flow are translated at average exchange rates during the
      period, and assets and liabilities are translated at the end of period exchange
      rates. Translation adjustments resulting from this process are included in
      accumulated other comprehensive income in stockholders’ equity. Transaction
      gains and losses that arise from exchange rate fluctuations from transactions
      denominated in a currency other than the functional currency are included in
      the
      results of operations as incurred. Transaction gains and losses are not material
      to the consolidated financial statements for the years ended December 31, 2007, 2006 and 2005. The
      PRC
      during 2003 and 2004 fixed the exchange rate of 8.28 RMB per US$1.00. In July,
      2005, Chinese government changed its exchange rate regime to a managed floating
      exchange rate regime and appreciated Renminbi rate to 8.11 RMB per US$ 1.00.
      On
      December 31, 2006, the Renminbi rate was 7.81 RMB per US$ 1.00. On December
      31,
      2007, the Renminbi rate was 7.30 RMB per US$ 1.00.





The
      PRC
      government imposes significant exchange restrictions on fund transfers out
      of
      the PRC that are not related to business operations. These restrictions have
      not
      had a material impact on Puda because it has not previously engaged in any
      significant transactions that are subject to the restrictions.


32





In
      September 2006, the Financial Accounting Standards Board
      (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)
      No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
      value, establishes a framework and gives guidance regarding the methods used
      for
      measuring fair value, and expands disclosures about fair value measurements.
      SFAS 157 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years. The adoption of SFAS 157 is expected to have no material impact on the
      Group’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”). SFAS 159 is expected to expand the
      use of fair value accounting but does not affect existing standards which
      require certain assets or liabilities to be carried at fair value. The objective
      of SFAS 159 is to improve financial reporting by providing companies with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. Under SFAS 159, a company may choose, at specified
      election dates, to measure eligible items at fair value and report unrealized
      gains and losses on items for which the fair value option has been elected
      in
      earnings at each subsequent reporting date. SFAS 159 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, and interim periods within those fiscal years. The adoption of SFAS 159
      is
      expected to have no material impact on the Group’s consolidated financial
      statements.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), *Business
      Combinations* ,
      which
      replaces SFAS No 141. The statement retains the purchase method of accounting
      for acquisitions, but requires a number of changes, including changes in the
      way
      assets and liabilities are recognized for purchase accounting. It also changes
      the recognition of assets acquired and liabilities assumed arising from
      contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. SFAS No. 141R is effective for financial statements
      issued for fiscal years beginning January 1, 2009 and will apply prospectively
      to business combinations completed on or after that date. The adoption of SFAS
      141R is expected to have no material impact on the Group’s consolidated
      financial statements.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      51* ,
      which
      changes the accounting and reporting for minority interests. Minority interests
      will be recharacterized as noncontrolling interests and will be reported as
      a
      component of equity separate from the parent’s equity, and purchases or sales of
      equity interests that do not result in a change in control will be accounted
      for
      as equity transactions. In addition, net income attributable to the
      noncontrolling interest will be included in consolidated net income on the
      face
      of the income statement and, upon a loss of control, the interest sold, as
      well
      as any interest retained, will be recorded at fair value with any gain or loss
      recognized in earnings. SFAS No. 160 is effective for financial statements
      for fiscal years beginning January 1, 2009 and will apply prospectively, except
      for the presentation and disclosure requirements, which will apply
      retrospectively. The adoption of SFAS 160 is expected to have no material impact
      on the Group’s consolidated financial statements.




**Off
      Balance Sheet Arrangements**





None.





**Tabular
      Disclosure of Contractual Obligations**





The
      contractual obligations presented in the table below represent our estimates
      of
      future payments under fixed contractual obligations and commitments as of
      December 31, 2007.





(In
      thousand dollars)




**Obligations**
            
            **Total Ending
                Balance**
            
            **Less Than**
              **One Year**
            
            **1-3 Years**
            
            **3-5 Years**
            
            **More than 5**
              **Years**Long
                Term Debt Obligations
            
            $
            10,400
            
            $
            1,300
            
            $
            2,600
            
            $
            2,600
            
            $
            3,900Capital
                Lease Obligations
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**Operating
                Lease Obligations
            
            $
            6
            
            $
            6
            
            
            -
            
            
            -
            
            
            -Purchase
                Obligations
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**Repayment
                Obligations under Line of Credit
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-****Total**
            
            **$**
            **10,406**
            
            **$**
            **1,306**
            
            **$**
            **2,600**
            
            **$**
            **2,600**
            
            **$**
            **3,900**




33





On
      September 6, 2007, Shanxi Coal entered into an agreement with Xin Kai Yuan
      Hotel
      and Restaurant Co. Limited, pursuant to which, Shanxi Coal will purchase the
      coal mining right with respect to a coal mine located in Duanjia Village, Jingle
      County, Shanxi Province of China. As consideration, Shanxi Coal will pay an
      aggregate purchase price of RMB460 million (approximately $60.7 million) in
      cash. Under the agreement, Shanxi Coal will pay a first installment in the
      amount of RMB200 million ($26.5 million) within 10 business days after the
      receipt of the mining permit by the seller and a second installment in the
      amount of RMB150 million ($19.9 million) within ten business days after the
      receipt of the mining commencement report by the seller. Shanxi Coal will pay
      the remaining purchase price, RMB110 million ($14.6 million) within one year
      after the receipt of the mining commencement permit. Shanxi Coal plans to
      finance the purchase through a debt facility which it is currently negotiating.
      If the seller does not obtain the mining permit for the benefit of Shanxi Coal
      within two months of the agreement date, Shanxi Coal may terminate the
      agreement. As of the date of purchase, the coal mine was not operating and
      Shanxi Coal will construct the coal mine after the commencement permit has
      been
      obtained. Shanxi Coal has to
      get external financing to facilitate the acquisition .
      As of
      April 3, 2008, Xin Kai Yuan Hotel & Restaurant Co. Limited had not obtained
      a mining permit. We have the right to unilaterally terminate the agreement
      and
      our management has not decided whether to terminate the agreement.





**Item
      7A. Quantitative and Qualitative Disclosures about Market
      Risk**




Market
      risk represents the risk of loss that may impact our financial position, results
      of operations or cash flows due to adverse changes in market prices, including
      interest rate risk, foreign currency exchange rate risk, security market risk,
      commodity price risk, and other relevant market rate or price risks. We do
      not
      have any significant risks related to equity investments, security markets
      or
      derivative financial instruments as we do not have equity investments in
      privately held companies, security markets or derivative financial instruments.
      Nor do we have any significant interest rate risk, as we do not have bank loans,
      and its promissory notes and loans to related parties have fixed interest rates.
      We are exposed to foreign currency exchange rate risk, commodity price risk
      and
      credit risk.




Although
      our reporting currency is the U.S. dollar, the financial records of our
      operating subsidiaries are maintained in their local currency, the RMB, which
      is
      our functional currency. Approximately 100% of our revenues and 97% of our
      costs
      and expenses for the year ended December 31, 2007 are denominated in RMB, with
      the balance denominated in U.S. dollars. Approximately 99% of our assets were
      denominated in RMB as of December 31, 2007. Assets and liabilities of our
      operating subsidiaries are translated into U.S. dollars at the exchange rate
      at
      the balance sheet date, their equity accounts are translated at historical
      exchange rate and their income and expenses items are translated using the
      average rate for the period. Any resulting exchange differences are recorded
      in
      accumulated other comprehensive income or loss. We have not reduced our exposure
      to exchange rate fluctuations by using hedging transactions. While we may choose
      to do so in the future, the availability and effectiveness of any hedging
      transactions may be limited and we may not be able to successfully hedge our
      exchange rate risks. Accordingly, we may experience economic losses and negative
      impacts on earnings and equity as a result of foreign exchange rate
      fluctuations. If the RMB depreciates against the U.S. dollar, the value of
      our
      RMB revenues, earnings and assets as expressed in our U.S. dollar financial
      statements will decline. See “We are subject to currency fluctuations from our
      Chinese operations and fluctuations in the exchange rate may negatively affect
      our expenses and results of operations, as well as the value of our assets
      and
      liabilities” in Part I Item 1A of the annual report on Form 10-K for the
      fiscal year ended December 31, 2007 under the heading “Risk Factors.” During the
      year 2007, the foreign currency translation adjustment to our comprehensive
      income was $2.86 million, primarily as a result of the RMB appreciating against
      the U.S. dollar. An average appreciation (depreciation) of the RMB against
      the
      U.S. dollar of 5% could increase (decrease) our net income by $0.8 million
      for
      the year 2007. As of December 31, 2007, our accumulated other comprehensive
      income was $4.00 million.





**Commodity
      Price Risk**





Our
      operating profits may be negatively affected by fluctuations in the price of
      raw
      coking coal. We are subject to short-term coal price volatility and may be
      forced to purchase raw coking coal at higher prices and may be unable to pass
      the cost increase of raw coal on to customers. This may adversely affect gross
      margins and profitability. Our sales agreements with customers generally contain
      provisions that permit the parties to adjust the contract price of the cleaned
      coking coal upward or downward at specified times. For example, we may adjust
      these contract prices because of increases or decreases in the price of raw
      coal
      from our mining suppliers, general inflation or deflation, or changes in the
      cost of producing raw or cleaned coking coal caused by such things as changes
      in
      taxes, fees, royalties or the laws regulating the mining, production, sale
      or
      use of coal. However, if we fail to agree on a price with our customers under
      these provisions, many agreements permit the customers to terminate the contract
      or refuse to buy all of the quantities contracted for. In China, the purchase
      price of raw coal increased steadily from approximately RMB361 per ton
      in 2006 to approximately RMB377 per ton in 2007. Top quality raw coking
      coal is critical for us to maintain our operating efficiencies and deliver
      cleaned coal to our customers which meets their specifications. Since top
      quality raw coking coal is more limited in supply, its price tends to be more
      volatile. A general rise in coking coal prices also may adversely affect the
      price of, and demand for, coke and products made with coke such as pig iron,
      steel and concrete. This may in turn lead to a fall in demand for our products.
      An increase (decrease) in raw coal purchase price of 5% could decrease
      (increase) our income from operations by approximately $7.0 million for the
      year
      2007. We generally have not employed forward contracts or other financial
      instruments to hedge commodity price risk.


34




**Credit
      Risk**




We
      are
      exposed to credit risk from our cash at bank and contract receivables. At
      December 31, 2007, we had a credit risk exposure of cash at bank of
      approximately $16,614,000. The credit risk on cash at bank is limited because
      the bank in which our cash is deposited is a very reputable bank and it is
      not
      expected to have significant credit risk. We do not require collateral or other
      securities to support financial instruments that are subject to credit risk.
      We
      grant credit to our customers in China. Accounts receivables are subject to
      credit evaluations. We periodically record a provision for doubtful collections
      based on an evaluation of the collectibility of contract receivables by
      assessing, among other factors, the customer's willingness or ability to pay,
      repayment history, general economic conditions and our ongoing relationship
      with
      the customers. Our customers have good payment history and our accounts are
      current, and we currently do not have significant bad debt provision.


35




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





**PUDA
      COAL, INC.**





**CONSOLIDATED
      FINANCIAL STATEMENTS**


**December
      31, 2007, 2006 and 2005**


**Together
      With Report Of**


**Independent
      Registered Public Accounting Firm**




**PUDA
      COAL, INC.**




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Report
                of Independent Registered Public Accounting
                Firm
            F-2Consolidated
                Balance Sheets
            F-3 - F-4Consolidated
                Statements of Operations
            F5 - F-6Consolidated
                Statements of Changes in Stockholders’ Equity
            F 7 - F-8Consolidated
                Statements of Cash Flows
            F9 - F-10Notes
                to Consolidated Financial Statements
            F-11 - F-37




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of


Puda
      Coal, Inc.





We
      have
      audited the accompanying consolidated balance sheets of Puda Coal, Inc. and
      subsidiaries as of December 31, 2007 and 2006, and the related consolidated
      statements of operations, changes in stockholders’ equity, and cash flows for
      each of the three years in the period ended December 31, 2007. These
      consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      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 audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purposes of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      consolidated financial statements. An audit also includes assessing the
      accounting principles used and significant estimates made by management, as
      well
      as evaluating the overall financial statement presentation. 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 Puda Coal, Inc. and
      subsidiaries as of December 31, 2007 and 2006 and the results of their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2007, in conformity with accounting principles generally accepted
      in the United States of America.








Moore
      Stephens





*Certified
      Public Accountants*


*Hong
      Kong*





March
      4,
      2008




F-2




**PUDA
      COAL, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**December
      31, 2007 and 2006**


**(In
      thousands of United States dollars)**





Note(s)
            
            December 31,
              2007
            
            December 31,
              2006ASSETSCURRENT
                ASSETSCash
                and cash equivalents
            
            
            22
            
            $
            16,381
            
            $
            24,943Restricted
                cash
            
            
            3,
                22
            
            
            233
            
            
            233Accounts
                receivable, net
            
            
            4
            
            
            8,137
            
            
            7,186Other
                receivables-
                Related parties
            
            
            5
            
            
            4
            
            
            9- Third
                parties
            
            
            
            
            
            6
            
            
            40Advances
                to suppliers-
                Related parties
            
            
            5
            
            
            685
            
            
            602-
                Third parties
            
            
            
            
            
            1,363
            
            
            538Deferred
                charges
            
            
            
            
            
            -
            
            
            171Inventories
            
            
            6
            
            
            35,953
            
            
            15,663Total
                current assets
            
            
            
            
            
            62,762
            
            
            49,385PROPERTY,
                PLANT AND EQUIPMENT, NET
            
            
            7
            
            
            15,018
            
            
            9,870INTANGIBLE
                ASSETS, NET
            
            
            8
            
            
            3,484
            
            
            3,729TOTAL
                ASSETS
            
            
            
            
            $
            81,264
            
            $
            62,984**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESCurrent
                portion of long-term debt-
                Related party
            
            
            5,9
            
            $
            1,300
            
            $
            1,300Accounts
                payable-
                Related parties
            
            
            5
            
            
            182
            
            
            221-
                Third parties
            
            
            
            
            
            2,140
            
            
            2,531Other
                payables-
                Related parties
            
            
            1,5
            
            
            1,851
            
            
            901-
                Third parties
            
            
            
            
            
            2,916
            
            
            2,113Accrued
                expenses
            
            
            
            
            
            1,350
            
            
            951Income
                taxes payable
            
            
            
            
            
            2,223
            
            
            2,485VAT
                payable
            
            
            
            
            
            1,379
            
            
            1,204Distribution
                payable
            
            
            
            
            
            1,096
            
            
            1,026Convertible
                notes
            
            
            10
            
            
            1,841
            
            
            -Derivative
                conversion feature
            
            
            10
            
            
            1,100
            
            
            -Penalty
                payable
            
            
            10
            
            
            1,725
            
            
            204Total
                current liabilities
            
            
            
            
            
            19,103
            
            
            12,936LONG-TERM
                LIABILITIESLong-term
                debt-
                Related party
            
            
            5,
                9
            
            
            9,100
            
            
            10,400Derivative
                warrants
            
            
            10
            
            
            4,480
            
            
            8,380Convertible
                notes
            
            
            10
            
            
            -
            
            
            3,108Derivative
                conversion feature
            
            
            10
            
            
            -
            
            
            2,406Total
                long-term liabilities
            
            
            
            
            
            13,580
            
            
            24,294


F-3


**PUDA
      COAL, INC.**


**CONSOLIDATED
      BALANCE SHEETS (Continued)**


**December
      31, 2007 and 2006**


**(In
      thousands of United States dollars)**





Note(s)
            
            December 31,
              2007
            
            December 31,
              2006COMMITMENTS
                AND CONTINGENCIES
            
            
            11TEMPORARY
                EQUITYOption
                to buy-out Shanxi Coal
            
            
            1
            
            
            -
            
            
            2,717STOCKHOLDERS’
                EQUITYPreferred
                stock, authorized 5,000,000 shares, par value $0.01, issued and
                outstanding None
            
            
            
            
            
            -
            
            
            -Common
                stock, authorized 150,000,000 shares, par value $0.001, issued and
                outstanding 105,252,176 (2006: 92,881,301)
            
            
            
            
            
            105
            
            
            93Paid-in
                capital
            
            
            
            
            
            28,304
            
            
            16,506Statutory
                surplus reserve fund
            
            
            
            
            
            1,366
            
            
            1,366Retained
                earnings
            
            
            
            
            
            14,807
            
            
            3,933Accumulated
                other comprehensive income
            
            
            
            
            
            3,999
            
            
            1,139Total
                stockholders’ equity
            
            
            
            
            
            48,581
            
            
            23,037TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            
            
            
            $
            81,264
            
            $
            62,984





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





F-4


**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the years ended December 31, 2007, 2006 and 2005**


**(In
      thousands of United States dollars, except per share data)**





Years ended December 31,Note(s)
            
            2007
            
            2006
            
            2005NET
                REVENUE
            
            
            
            
            $
            165,267
            
            $
            137,771
            
            $
            51,710COST
                OF REVENUE
            
            
            
            
            
            (136,652
            )
            
            (109,381
            )
            
            (40,047
            )GROSS
                PROFIT
            
            
            
            
            
            28,615
            
            
            28,390
            
            
            11,663OPERATING
                EXPENSESSelling
                expenses
            
            
            
            
            
            2,975
            
            
            3,231
            
            
            791General
                and administrative expenses
            
            
            
            
            
            2,215
            
            
            2,387
            
            
            789TOTAL
                OPERATING EXPENSES
            
            
            
            
            
            5,190
            
            
            5,618
            
            
            1,580INCOME
                FROM OPERATIONS
            
            
            
            
            
            23,425
            
            
            22,772
            
            
            10,083GAIN
                ON SHORT-TERM INVESTMENTS
            
            
            
            
            
            -
            
            
            -
            
            
            6INTEREST
                INCOME
            
            
            
            
            
            83
            
            
            59
            
            
            12INTEREST
                EXPENSE
            
            
            14
            
            
            (1,577
            )
            
            (4,441
            )
            
            (531
            )DEBT
                FINANCING COSTS
            
            
            15
            
            
            (2,422
            )
            
            (10,669
            )
            
            (4,964
            )DERIVATIVE
                UNREALIZED FAIR VALUE (LOSS)/GAIN
            
            
            10(c),
                16
            
            
            (343
            )
            
            1,237
            
            
            700OTHER
                FINANCING EXPENSES
            
            
            17
            
            
            -
            
            
            -
            
            
            (902
            )INCOME
                BEFORE INCOME TAXES
            
            
            
            
            
            19,166
            
            
            8,958
            
            
            4,404INCOME
                TAXES
            
            
            18
            
            
            (8,292
            )
            
            (7,604
            )
            
            (3,439
            )NET
                INCOME
            
            
            
            
            
            10,874
            
            
            1,354
            
            
            965OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation adjustment
            
            
            
            
            
            2,860
            
            
            985
            
            
            154COMPREHENSIVE
                INCOME
            
            
            
            
            $
            13,734
            
            $
            2,339
            
            $
            1,119NET
                INCOME
            
            
            
            
            
            10,874
            
            
            1,354
            
            
            965LESS:
                DIVIDENDSOption
                holder preference dividend
            
            
            1,
                2(n)
            
            
            -
            
            
            (2,717
            )
            
            (2,717
            )Common
                dividend
            
            
            
            
            
            -
            
            
            -
            
            
            -UNDISTRIBUTED
                EARNINGS
            
            
            
            
            $
            10,874
            
            $
            (1,363
            )
            $
            (1,752
            )





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




F-5


**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS (Continued)**


**For
      the years ended December 31, 2007, 2006 and 2005**


**(In
      thousands of United States dollars, except per share data)**





Years ended December 31,Note(s)
            
            2007
            
            2006
            
            2005BASIC
                EARNINGS/(LOSS) PER SHARE-
                Option holder preference
            
            
            
            
            $
            -
            
            $
            0.04
            
            $
            0.04-
                Other common holders
            
            
            
            
            
            0.11
            
            
            (0.02
            )
            
            (0.03
            )$
            0.11
            
            $
            0.02
            
            $
            0.01DILUTED
                EARNINGS/(LOSS) PER SHARE-
                Option holder preference
            
            
            
            
            $
            -
            
            $
            0.04
            
            $
            0.04-
                Other common holders
            
            
            
            
            
            0.11
            
            
            (0.02
            )
            
            (0.03
            )$
            0.11
            
            $
            0.02
            
            $
            0.01WEIGHTED
                AVERAGE NUMBER OF SHARES OUTSTANDING-BASIC
            
            
            19
            
            
            98,404,914
            
            
            80,167,110
            
            
            73,950,274-DILUTED
            
            
            19
            
            
            100,591,136
            
            
            80,329,032
            
            
            77,576,036





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




F-6




**PUDA
        COAL, INC.**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
 **For
        the years ended December 31, 2007, 2006 and 2005**
 **(In
        thousands of United States dollars)**




COMMON STOCK
            
            PAID-IN
              CAPITAL
            
            STATUTORY
              SURPLUS
              RESERVE
              FUND
            
            RETAINED
              EARNINGS
            
            ACCUMULATED
              OTHER
              COMPREHENSIVE
              INCOME
            
            TOTAL
              STOCKHOLDERS’
              EQUITYNo. of shares
            
            Par
              ValueBalance,
                January 1, 2005, as recapitalized (see Notes 1 and 12)
            
            
            73,750,000
            
            $
            74
            
            $
            2,643
            
            $
            1,243
            
            $
            3,189
            
            $
            -
            
            $
            7,149Shareholder
                contribution
            
            
            -
            
            
            -
            
            
            50
            
            
            -
            
            
            -
            
            
            -
            
            
            50Notes
                converted to common stock, at $0.50 per share (Note 10(c)
            
            
            1,700,000
            
            
            1
            
            
            849
            
            
            -
            
            
            -
            
            
            -
            
            
            850Conversion
                feature transferred to equity upon conversion (Note 10(c)
            
            
            -
            
            
            -
            
            
            417
            
            
            -
            
            
            -
            
            
            -
            
            
            417Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            965
            
            
            -
            
            
            965Transfer
                to statutory surplus reserve fund
            
            
            -
            
            
            -
            
            
            -
            
            
            123
            
            
            (123
            )
            
            -
            
            
            -Dividend
                distribution
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,452
            )
            
            -
            
            
            (1,452
            )Difference
                between book value of assets of a related party and the purchase
                price for
                assets being conveyed from the related party
            
            
            -
            
            
            -
            
            
            666
            
            
            -
            
            
            -
            
            
            -
            
            
            666Reclassification
                to temporary equity (Note 1)
            
            
            -
            
            
            -
            
            
            (2,717
            )
            
            -
            
            
            -
            
            
            -
            
            
            (2,717
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            154
            
            
            154Balance,
                December 31, 2005
            
            
            75,450,000
            
            
            75
            
            
            1,908
            
            
            1,366
            
            
            2,579
            
            
            154
            
            
            6,082Notes
                converted to common stock, at $0.50 per share (Note 10(c)
            
            
            13,500,000
            
            
            14
            
            
            6,736
            
            
            -
            
            
            -
            
            
            -
            
            
            6,750Exercise
                of warrants, at $0.60 per share (Note 10(a)
            
            
            3,100,000
            
            
            3
            
            
            1,857
            
            
            -
            
            
            -
            
            
            -
            
            
            1,860Cashless
                exercise of placement agent warrants (Note 10(b)
            
            
            242,180
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Derivative
                conversion feature transferred to equity upon conversion (Note
                10(c)
            
            
            -
            
            
            -
            
            
            3,314
            
            
            -
            
            
            -
            
            
            -
            
            
            3,314Derivative
                note warrants transferred to equity upon exercise (Note
                10(c)
            
            
            -
            
            
            -
            
            
            789
            
            
            -
            
            
            -
            
            
            -
            
            
            789Derivative
                placement agent warrants transferred to equity upon exercise (Note
                10(c)
            
            
            -
            
            
            -
            
            
            882
            
            
            -
            
            
            -
            
            
            -
            
            
            882Issue
                of common stock for services
            
            
            10,000
            
            
            -
            
            
            21
            
            
            -
            
            
            -
            
            
            -
            
            
            21Issue
                of common stock for fractional shares and round lot holders
            
            
            487
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Issue
                of penalty shares (Note 10(a)
            
            
            578,634
            
            
            1
            
            
            999
            
            
            -
            
            
            -
            
            
            -
            
            
            1,000Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,354
            
            
            -
            
            
            1,354Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            985
            
            
            985Balance,
                December 31, 2006
            
            
            92,881,301
            
            $
            93
            
            $
            16,506
            
            $
            1,366
            
            $
            3,933
            
            $
            1,139
            
            $
            23,037




F-7


**PUDA
        COAL, INC.**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)**
 **For
        the years ended December 31, 2007, 2006 and 2005**
 **(In
        thousands of United States dollars)**
 COMMON STOCK
                
                PAID-IN
                  CAPITAL
                
                STATUTORY
                  SURPLUS
                  RESERVE
                  FUND
                
                RETAINED
                  EARNINGS
                
                ACCUMULATED
                  OTHER
                  COMPREHENSIVE
                  INCOME
                
                TOTAL
                  STOCKHOLDERS’
                  EQUITYNo. of shares
                
                Par
                  ValueNotes
                    converted to common stock, at $0.50 per share (Note 10(c)
                
                
                5,320,000
                
                
                5
                
                
                2,655
                
                
                -
                
                
                -
                
                
                -
                
                
                2,660Exercise
                    of warrants, at $0.60 per share (Note 10(a)
                
                
                6,000,000
                
                
                6
                
                
                3,594
                
                
                -
                
                
                -
                
                
                -
                
                
                3,600Cashless
                    exercise of placement agent warrants (Note 10(b)
                
                
                1,050,875
                
                
                1
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1Derivative
                    conversion feature transferred to equity upon conversion (Note
                    10(c)
                
                
                -
                
                
                -
                
                
                1,306
                
                
                -
                
                
                -
                
                
                -
                
                
                1,306Derivative
                    note warrants transferred to equity upon exercise (Note
                    10(c)
                
                
                -
                
                
                -
                
                
                1,527
                
                
                -
                
                
                -
                
                
                -
                
                
                1,527Derivative
                    placement agent warrants transferred to equity upon exercise
                    (Note
                    10(c)
                
                
                -
                
                
                -
                
                
                2,716
                
                
                -
                
                
                -
                
                
                -
                
                
                2,716Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                10,874
                
                
                -
                
                
                10,874Foreign
                    currency translation adjustment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,860
                
                
                2,860Balance,
                    December 31, 2007
                
                
                105,252,176
                
                $
                105
                
                $
                28,304
                
                $
                1,366
                
                $
                14,807
                
                $
                3,999
                
                $
                48,581




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




F-8





**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the years ended December 31, 2007, 2006 and 2005**


**(In
      thousands of United States dollars)**





Years ended December 31,Notes
            
            2007
            
            2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            
            
            
            $
            10,874
            
            $
            1,354
            
            $
            965Adjustments
                to reconcile net income to net cash provided by operating
                activitiesAmortization
                of land-use rights
            
            
            
            
            
            78
            
            
            78
            
            
            9Depreciation
            
            
            
            
            
            1,252
            
            
            953
            
            
            183Provision
                for doubtful debts
            
            
            
            
            
            1
            
            
            10
            
            
            5Amortization
                of debt issue costs
            
            
            
            
            
            6
            
            
            838
            
            
            739Amortization
                of discount on convertible notes and warrants
            
            
            
            
            
            895
            
            
            8,627
            
            
            4,225Derivative
                unrealized fair value loss/(gain)
            
            
            
            
            
            343
            
            
            (1,237
            )
            
            (700
            )Discount
                on converted shares and exercised warrants
            
            
            
            
            
            663
            
            
            2,898
            
            
            417Stock
                compensation expense
            
            
            
            
            
            46
            
            
            -
            
            
            -Issue
                of common stock for services
            
            
            
            
            
            -
            
            
            21
            
            
            -Issue
                of common stock for penalty
            
            
            
            
            
            -
            
            
            1,000
            
            
            -Changes
                in operating assets and liabilities:Decrease
                in short-term investments
            
            
            
            
            
            
            
            
            
            
            
            117Increase
                in accounts receivable
            
            
            
            
            
            (444
            )
            
            (2,972
            )
            
            (1,507
            )Decrease
                in notes receivable
            
            
            
            
            
            -
            
            
            -
            
            
            638Decrease
                in other receivables
            
            
            
            
            
            41
            
            
            4
            
            
            2,251(Increase)/decrease
                in advances to suppliers
            
            
            
            
            
            (799
            )
            
            1,819
            
            
            (2,430
            )Increase
                in inventories
            
            
            
            
            
            (18,518
            )
            
            (8,104
            )
            
            (3,994
            )(Decrease)/increase
                in accounts payable
            
            
            
            
            
            (596
            )
            
            1,426
            
            
            610Increase
                in accrued expenses
            
            
            
            
            
            289
            
            
            588
            
            
            115Increase
                in other payables
            
            
            
            
            
            1,553
            
            
            1,432
            
            
            1,094(Decrease)/increase
                in income tax payable
            
            
            
            
            
            (415
            )
            
            1,088
            
            
            (611
            )Increase
                in VAT payable
            
            
            
            
            
            90
            
            
            887
            
            
            66Increase
                in penalty payable
            
            
            
            
            
            1,521
            
            
            204
            
            
            -Decrease/(increase)
                in restricted cash
            
            
            
            
            
            -
            
            
            382
            
            
            (615
            )Net
                cash (used in)/provided by operating activities
            
            
            
            
            
            (3,120
            )
            
            11,296
            
            
            1,577CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property, plant and equipment
            
            
            
            
            
            (6,111
            )
            
            -
            
            
            -Payment
                for the purchase of equity interest in Shanxi Coal
            
            
            
            
            
            (1,799
            )
            
            -
            
            
            -Net
                cash used in investing activities
            
            
            
            
            
            (7,910
            )
            
            -
            
            
            -CASH
                FLOWS FROM FINANCING ACTIVITIES:Exercise
                of warrants
            
            
            
            
            
            3,600
            
            
            1,860
            
            
            -Repayment
                of long-term debt
            
            
            
            
            
            (1,300
            )
            
            (1,300
            )
            
            -Issue
                of convertible notes
            
            
            
            
            
            -
            
            
            -
            
            
            12,500Debt
                issue costs
            
            
            
            
            
            -
            
            
            -
            
            
            (1,583
            )Shareholder
                contribution
            
            
            
            
            
            -
            
            
            -
            
            
            50Distribution
                paid to owners of a subsidiary
            
            
            
            
            
            -
            
            
            -
            
            
            (947
            )Net
                cash provided by financing activities
            
            
            
            
            
            2,300
            
            
            560
            
            
            10,020Effect
                of exchange rate changes on cash
            
            
            
            
            
            168
            
            
            1,020
            
            
            157




F-9




**PUDA
      COAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Continued)**


**For
      the years ended December 31, 2007, 2006 and 2005**


**(In
      thousands of United States dollars)**





Years ended December 31,Notes
            
            2007
            
            2006
            
            2005Net
                (decrease)/increase in cash and cash equivalents
            
            
            
            
            
            (8,562
            )
            
            12,876
            
            
            11,754Cash
                and cash equivalents at beginning of year
            
            
            
            
            
            24,943
            
            
            12,067
            
            
            313Cash
                and cash equivalents at end of year
            
            
            
            
            $
            16,381
            
            $
            24,943
            
            $
            12,067Supplementary
                cash flow information:
            
            
            20





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




F-10


**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1.
      The Company**





Puda
      Coal, Inc. (formerly Purezza Group, Inc.)(the “Company" or “Puda”) is a
      corporation organized under Florida Law and headquartered in Shanxi Province,
      China. The Company was incorporated on August 9, 2001.





On
      July
      15, 2005, the Company acquired all the outstanding capital stock and ownership
      interests of Puda Investment Holding Limited (“BVI”) and BVI became a
      wholly-owned subsidiary of the Company. In
      exchange, Puda issued to the BVI members 1,000,000 shares of its Series A
      convertible preferred stock, par value $0.01 per share, of the Company, which
      are convertible into 678,500,000 shares of Puda’s common stock. The purchase
      agreement provided that the preferred shares would immediately and automatically
      be converted into shares of Puda’s common stock (the “Mandatory Conversion”),
      following an increase in the number of authorized shares of Puda’s common stock
      from 100,000,000 to 150,000,000, and a 1 for 10 reverse stock split of Puda’s
      outstanding common stock (the “Reverse Split”). The share data has been
      retroactively adjusted for the Reverse Split (see Note 12).





On
      August
      2, 2005, the authorized number of shares of common stock of the Company was
      increased from 100,000,000 shares to 150,000,000 shares. On September 8, 2005,
      Puda completed the Reverse Split. Following the Mandatory Conversion of
      preferred shares and the Reverse Split, the BVI members received, in the
      aggregate, approximately 67,850,000 shares of the total of 73,750,000 of Puda’s
      common stock, representing 92% of the outstanding shares of Puda’s common stock.





BVI
      is an
      International Business Company incorporated in the British Virgin Islands on
      August 19, 2004 and it has a registered capital of $50,000. BVI did not have
      any
      operating activities from August 19, 2004 (inception) to December 31,
      2007.





BVI,
      in
      turn, owns all of the registered capital of Shanxi Putai Resources Limited
      (formerly, Taiyuan Putai Business Consulting Co., Ltd.) (“Putai”), a wholly
      foreign owned enterprise (“WFOE”) registered under the wholly foreign-owned
      enterprises laws of the People’s Republic of China (“PRC”). Putai was
      incorporated on November 5, 2004 and has a registered capital of $20,000. Putai
      did not have any operating activities from November 5, 2004 (inception) until
      June 24, 2005 when it entered into certain operating agreements with Shanxi
      Puda
      Coal Group Co., Ltd. (formerly, Shanxi Puda Resources Co. Ltd.)(“Shanxi Coal”),
      a company with limited liability established under the laws of the
      PRC.





Shanxi
      Coal was established on June 7, 1995. Shanxi Coal mainly processes and washes
      raw coal and sells from its plants in Shanxi Province, high-quality, low sulfur
      refined coal for industrial clients mainly in Central and Northern China. Shanxi
      Coal has a registered capital of RMB22,500,000 ($2,717,000) which is fully
      paid-up. The owners of Shanxi Coal were Mr. Ming Zhao (80%) and Mr. Yao Zhao
      (20%). Ming Zhao is the chairman and chief executive officer of Puda. Yao Zhao
      was the chief operating officer of Puda until his resignation became effective
      on November 20, 2006. Ming Zhao and Yao Zhao are brothers.




F-11


**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**1.
      The Company (continued)**





On
      June
      24, 2005, Putai and Shanxi Coal entered into an Exclusive Consulting Agreement,
      an Operating Agreement, and a Technology License Agreement (collectively, these
      agreements are referred to herein as the “Operating Agreements”). Under the
      Operating Agreements, Putai agreed to advise, consult, manage and operate Shanxi
      Coal’s business, to provide certain financial accommodations to Shanxi Coal, and
      to license certain technology to Shanxi Coal for use in its business, in
      exchange for Shanxi Coal’s payment of all of its operating cash flow to Putai.
      Under the Exclusive Option Agreement dated June 24, 2005, each of the holders
      of
      the registered capital of Shanxi Coal granted Putai the exclusive right and
      option (the “Option”) to acquire all of their registered capital of Shanxi Coal
      at Putai’s sole and absolute discretion for a purchase price equal to the actual
      capital contributions paid in by the holders of the registered capital of Shanxi
      Coal for their respective purchase of the shares at the time of original
      issuance of the registered capital by Shanxi Coal. The amount of the registered
      capital of Shanxi Coal as of the date of the Exclusive Option Agreement totaled
      RMB22,500,000 ($2,717,000). Prior to the exercise of the Option, the Option
      purchase price which equals the registered capital of Shanxi Coal was recorded
      as temporary equity under the caption “Option to buy-out Shanxi Coal”. The
      exercise of the Option is analogous to creating a second class of common stock,
      which is referred to as “Option holder preference” on the consolidated
      statements of operations for the years ended December 31, 2006 and 2005. Putai
      was
      further authorized to exercise the voting rights of the holders of the
      registered capital of Shanxi Coal and to act as the representative for such
      holders in all matters respecting Shanxi Coal’s registered capital. Although
      Puda owned none of the outstanding equity interests in Shanxi Coal, the
      Operating Agreements provided Puda control over Shanxi Coal, and the risks
      and
      rewards associated with equity ownership.





On
      September 13, 2007, Putai exercised the Option to acquire 90% of the total
      registered capital of Shanxi Coal at an acquisition price of RMB20,250,000
      (approximately $2,692,000), pursuant to the Exclusive Option Agreement as
      described above. Upon the Option exercise, Putai entered into a Share Transfer
      Agreement with the owners of Shanxi Coal, Ming Zhao and Yao Zhao, respectively.
      Pursuant to the Share Transfer Agreements, Putai agrees to acquire 72% of the
      total registered capital of Shanxi Coal from Ming Zhao at a purchase price
      of
      RMB16,200,000 (approximately $2,154,000) and 18% of the total registered capital
      of Shanxi Coal from Yao Zhao at a purchase price of RMB4,050,000 (approximately
      $538,000). As of December 31, 2007, Putai paid $1,799,000 to Ming Zhao and
      Yao
      Zhao and the balance of the purchase price payable of $893,000 was included
      in
      other payables-related parties in the consolidated balance sheet as of December
      31, 2007 (see Note 5). After the acquisition, Putai became a 90% owner of Shanxi
      Coal, and the Exclusive Option Agreement, Exclusive Consulting Agreement,
      Operating Agreement, Technology License Agreement and Authorization, each
      entered into on June 24, 2005, among Putai, Shanxi Coal, Ming Zhao and Yao
      Zhao,
      were terminated.





Although
      the closing of the acquisition of the 90% registered capital of Shanxi Coal
      by
      Putai occurred on November 8, 2007, the acquisition was retroactively reflected
      in the consolidated statements of operations for the year ended December 31,
      2007 as if the acquisition was effective from January 1, 2007. The caption
      “Option to buy-out Shanxi Coal” under temporary equity and the two class method
      for earnings per share calculation were no longer relevant.





F-12




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**1.
      The Company (continued)**





As
      of
      December 31, 2007, the percentages owned by Mr. Ming Zhao and Mr. Yao Zhao
      in
      the Group companies are as follows:





l
            Puda
                Coal, Inc.: Mr. Ming Zhao (approximately 50%); Mr. Yao Zhao (approximately
                13%) held directly.





l
            Puda
                Investment Holding Limited: Mr. Ming Zhao (approximately 50%); Mr.
                Yao
                Zhao (approximately 13%) held indirectly through
                Puda.





l
            Shanxi
                Putai Resources Limited: Mr. Ming Zhao (approximately 50%); Mr. Yao
                Zhao
                (approximately 13%) held indirectly through Puda and
                BVI.





l
            Shanxi
                Puda Coal Group Co., Ltd.: Mr. Ming Zhao (8%); Mr. Yao Zhao (2%)
                held
                directly, Mr. Ming Zhao (approximately 45%); Mr. Yao Zhao (approximately
                11.7%) held indirectly through Puda, BVI and
                Putai.





After
      the
      above reorganization and as of December 31, 2007, the organizational structure
      of the Group is as follows:








F-13





**P** **UDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**2.
      Summary of Significant Accounting Policies**





**(a)
      Basis of Presentation and Consolidation**





The
      consolidated balance sheets as of December 31, 2007 and 2006 include Puda
      (Registrant and Legal Parent), BVI, Putai and Shanxi Coal (Operating Company),
      collectively referred to as “the Group”. The consolidated statements of
      operations for the years ended December 31, 2007 and 2006 includes Puda, BVI,
      Putai and Shanxi Coal for the full year. The consolidated statement of
      operations for the year ended December 31, 2005 includes Shanxi Coal for the
      full year, BVI and Putai from June 24, 2005, and Puda from July 15, 2005.
      Intercompany items have been eliminated. The consolidated financial statements
      gave effect to the Mandatory Conversion and Reverse Split as if the transactions
      were effective on January 1, 2005.





The
      merger of a private operating company into a non-operating public shell
      corporation with nominal net assets typically results in the owners and
      management of the private company having actual or effective operating control
      of the combined company after the transaction, with shareholders of the former
      public shell continuing only as passive investors. These transactions are
      considered to be capital transactions in substance, rather than business
      combinations. That is, the transaction is equivalent to the issuance of stock
      by
      the private company for the net monetary assets of the shell corporation,
      accompanied by a recapitalization. The accounting is identical to that resulting
      from a reverse acquisition, except that no goodwill or other intangible should
      be recorded. For accounting purposes, Shanxi Coal is deemed to be the
      acquirer.





**(b)
      Use of Estimates**





In
      preparing financial statements in conformity with accounting principles
      generally accepted in the United States of America, management is required
      to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements and revenues and expenses during the reported
      periods. Significant estimates include depreciation and allowance for doubtful
      accounts receivable. Actual results could differ from those
      estimates.





**(c)
      Cash and Cash Equivalents**





The
      Group
      considers all highly liquid investments with original maturities of three months
      or less at the time of purchase to be cash equivalents. As of December 31,
      2007
      and 2006, the Group did not have any cash equivalents.





**(d)
      Allowance for Doubtful Accounts**





The
      Group
      recognizes an allowance for doubtful accounts to ensure accounts receivable
      are
      not overstated due to uncollectibility. An allowance for doubtful accounts
      is
      maintained for all customers based on a variety of factors, including the length
      of time the receivables are past due, significant one-time events and historical
      experience. An additional reserve for individual accounts is recorded when
      the
      Group becomes aware of a customer’s inability to meet its financial obligations,
      such as in the case of bankruptcy filings or deterioration in the customer’s
      operating results or financial position. If circumstances related to customers
      change, estimates of the recoverability of receivables would be further
      adjusted.





**(e)
      Inventories**





Inventories
      are comprised of raw materials and finished goods and are stated at the lower
      of
      cost or market value. Substantially all inventory costs are determined using
      the
      weighted average basis. Costs of finished goods include direct labor, direct
      materials, and production overhead before the goods are ready for sale.





F-14




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**2.
      Summary of Significant Accounting Policies (continued)**




**(f)
      Property, Plant and Equipment, Net**





Property,
      plant and equipment are stated at cost. Depreciation is provided principally
      by
      use of the straight-line method over the useful lives of the related assets.
      Expenditures for maintenance and repairs, which do not improve or extend the
      expected useful lives of the assets, are expensed to operations while major
      repairs are capitalized.





Management
      considers that the Company has a 10% residual value for buildings, and a 5%
      residual value for other property, plant and equipment. The estimated useful
      lives are as follows:





Buildings
                and facility
            
            
            20
                yearsMachinery
                and equipment
            
            
            10
                yearsMotor
                vehicles
            
            
            10
                yearsOffice
                equipment and others
            
            
            10
                years




The
      gain
      or loss on disposal of property, plant and equipment is the difference between
      the net sales proceeds and the carrying amount of the relevant assets, and,
      if
      any, is recognized in the consolidated statement of operations.





**(g)
      Land-use Rights and Amortization**





Land-use
      rights are stated at cost, less amortization. Amortization of land-use rights
      is
      calculated on the straight-line method, based on the period over which the
      right
      is granted by the relevant authorities in Shanxi Province, PRC.





**(h)
      Impairment of Assets**





In
      accordance with Statement of Financial Accounting Standards (‘SFAS”) No. 144,
      "Accounting for Impairment or Disposal of Long-Lived Assets", the Group
      evaluates its long-lived assets to determine whether later events and
      circumstances warrant revised estimates of useful lives or a reduction in
      carrying value due to impairment. If indicators of impairment exist and if
      the
      value of the assets is impaired, an impairment loss would be
      recognized.





**(i)
      Derivative Financial Instruments**





Derivative
      financial instruments are accounted for under Statement of Financial Accounting
      Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities”
as amended (SFAS No. 133). Under SFAS No. 133, all derivative instruments are
      recorded on the balance sheet as assets or liabilities and measured at fair
      value. Changes in the fair value of derivative instruments are recorded in
      current earnings.





F-15




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**2.
      Summary of Significant Accounting Policies (continued)**





**(j)
      Income Taxes**





The
      Group
      accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes".
      Under SFAS No. 109, deferred tax assets and liabilities are recognized for
      the
      future tax consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax bases. Deferred tax assets and liabilities are measured using
      enacted tax rates expected to apply to taxable income in the years in which
      those temporary differences are expected to be recovered or settled. Under
      SFAS
      No. 109, the effect on deferred tax assets and liabilities of a change in tax
      rates is recognized in income in the period that includes the enactment
      date.





The
      Group
      reviewed the differences between the tax bases under PRC tax laws and financial
      reporting under US GAAP, and no material differences were found, thus, there
      were no deferred tax assets or liabilities as of December 31, 2007 and 2006.





Under
      current PRC tax laws, no tax is imposed in respect to distributions paid to
      owners except for individual income tax.





**(k)
      Revenue Recognition**





Revenue
      from goods sold is recognized when (i) persuasive evidence of an arrangement
      exists, which is generally represented by a contract with the buyer; (ii) title
      has passed to the buyer, which generally is at the time of delivery; (iii)
      the
      price is agreed with the buyer; and (iv) collectibility is reasonably assured.





Net
      revenue represents the invoiced value of products, less returns and discounts
      and net of VAT.





**(l)
      Foreign Currency Transactions**





The
      reporting currency of the Group is the U.S. dollar. Shanxi Coal uses its local
      currency, Renminbi, as its functional currency. Results of operations and cash
      flow are translated at average exchange rates during the period, and assets
      and
      liabilities are translated at the end of period exchange rates. Translation
      adjustments resulting from this process are included in accumulated other
      comprehensive income in stockholders’ equity. Transaction gains and losses that
      arise from exchange rate fluctuations from transactions denominated in a
      currency other than the functional currency are included in the results of
      operations as incurred. These amounts are not material to the consolidated
      financial statements for the years ended December 31, 2007, 2006 and
      2005.





The
      PRC
      government imposes significant exchange restrictions on fund transfers out
      of
      the PRC that are not related to business operations. These restrictions have
      not
      had a material impact on the Group because it has not engaged in any significant
      transactions that are subject to the restrictions.





**(m)
      Fair Value of Financial Instruments**





SFAS
      No.
      107, “Disclosures about Fair Values of Financial Instruments”, requires
      disclosing fair value to the extent practicable for financial instruments that
      are recognized or unrecognized in the balance sheet. The fair value of the
      financial instruments disclosed herein is not necessarily representative of
      the
      amount that could be realized or settled, nor does the fair value amount
      consider the tax consequences of realization or settlement.





For
      certain financial instruments, including cash, accounts, related party and
      other
      receivables, accounts payable, other payables and accrued expenses, it was
      assumed that the carrying amounts approximate fair value because of the near
      term maturities of such obligations. For long-term debt, the carrying amount
      is
      assumed to be approximate fair value based on the current
      rates at which the Group could borrow funds with similar remaining
      maturities.





F-16




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**2.
      Summary of Significant Accounting Policies (continued)**




**(n)
      Earnings Per Share**





Basic
      earnings per share is computed by dividing the earnings for the year by the
      weighted average number of common shares outstanding for the year. Diluted
      earnings per share reflects the potential dilution of securities by including
      other potential common stock, including stock options and warrants, in the
      weighted average number of common shares outstanding for the year, if
      dilutive. Prior to
      the exercise of the Option by Putai (see Note 1), a method akin to the two-class
      method was presented to reflect the presumed exercise of the Option to buy-out
      Shanxi Coal for the years ended December 31, 2006 and 2005.





**(o)
      Accumulated Other Comprehensive Income**





Accumulated
      other comprehensive income represents the change in equity of the Group during
      the years presented from foreign currency translation adjustments.





**(p)
      New Accounting Pronouncements**




*SFAS
      157*


In
      September 2006, the Financial Accounting Standards Board
      (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)
      No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
      value, establishes a framework and gives guidance regarding the methods used
      for
      measuring fair value, and expands disclosures about fair value measurements.
      SFAS 157 is effective for financial statements issued for fiscal years
      beginning after November 15, 2007, and interim periods within those fiscal
      years. The adoption of SFAS 157 is expected to have no material impact on the
      Group’s consolidated financial statements.




*SFAS
      159*


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”). SFAS 159 is expected to expand the
      use of fair value accounting but does not affect existing standards which
      require certain assets or liabilities to be carried at fair value. The objective
      of SFAS 159 is to improve financial reporting by providing companies with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. Under SFAS 159, a company may choose, at specified
      election dates, to measure eligible items at fair value and report unrealized
      gains and losses on items for which the fair value option has been elected
      in
      earnings at each subsequent reporting date. SFAS 159 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, and interim periods within those fiscal years. The adoption of SFAS 159
      is
      expected to have no material impact on the Group’s consolidated financial
      statements.





*SFAS
      141R*


In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), *Business
      Combinations* ,
      which
      replaces SFAS No 141. The statement retains the purchase method of accounting
      for acquisitions, but requires a number of changes, including changes in the
      way
      assets and liabilities are recognized for purchase accounting. It also changes
      the recognition of assets acquired and liabilities assumed arising from
      contingencies, requires the capitalization of in-process research and
      development at fair value, and requires the expensing of acquisition-related
      costs as incurred. SFAS No. 141R is effective for financial statements
      issued for fiscal years beginning January 1, 2009 and will apply prospectively
      to business combinations completed on or after that date. The adoption of SFAS
      141R is expected to have no material impact on the Group’s consolidated
      financial statements.




F-17




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**2.
      Summary of Significant Accounting Policies (continued)**




**(p)
      New Accounting Pronouncements**




*SFAS
      160*


In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB
      51* ,
      which
      changes the accounting and reporting for minority interests. Minority interests
      will be recharacterized as noncontrolling interests and will be reported as
      a
      component of equity separate from the parent’s equity, and purchases or sales of
      equity interests that do not result in a change in control will be accounted
      for
      as equity transactions. In addition, net income attributable to the
      noncontrolling interest will be included in consolidated net income on the
      face
      of the income statement and, upon a loss of control, the interest sold, as
      well
      as any interest retained, will be recorded at fair value with any gain or loss
      recognized in earnings. SFAS No. 160 is effective for financial statements
      for fiscal years beginning January 1, 2009 and will apply prospectively, except
      for the presentation and disclosure requirements, which will apply
      retrospectively. The adoption of SFAS 160 is expected to have no material impact
      on the Group’s consolidated financial statements.




**3.
      Restricted Cash**





Restricted
      cash of $233,000 is
      reserved for interest payments on convertible notes.




**4.
      Allowance for Doubtful Receivables**





Details
      of allowance for doubtful receivables deducted from accounts receivable are
      as
      follows:-





December 31,
              2007
            
            December 31,
              2006’000
            
            ’000Balance,
                beginning of year
            
            $
            44
            
            $
            34Additions
            
            
            4
            
            
            10Balance,
                end of year
            
            $
            48
            
            $
            44





The
      Group
      did not write off any bad debts in the years ended December 31, 2007, 2006
      and
      2005.





F-18




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**5.
      Related Party Transactions**





As
      of
      December 31, 2007 and 2006, the Group had the following amounts due from/to
      related parties:-





December  31,
              2007
            
            December 31,
              2006$’000
            
            $’000Other
                receivable from Ming Zhao, CEO, director and major shareholder of
                Puda
            
            $
            4
            
            $
            9Advance
                to Shanxi Liulin Jucai Coal Industry Co., Limited (“Jucai Coal”), a
                related company with a common owner
            
            $
            685
            
            $
            602Accounts
                payable to Jucai Coal
            
            $
            182
            
            $
            221Other
                payable to Shanxi Puda Resources Group Limited (“Resources Group”), a
                related company with common owners
            
            $
            743
            
            $
            696Other
                payable to Yao Zhao, manager and shareholder of Puda
            
            
            215
            
            
            205Other
                payable to Ming Zhao and Yao Zhao
            
            
            893
            
            
            -$
            1,851
            
            $
            901Loan
                payable to Resources Group-current
                portion
            
            $
            1,300
            
            $
            1,300-long-term
                portion
            
            
            9,100
            
            
            10,400$
            10,400
            
            $
            11,700





The
      balances, except for the loan payable to Resources Group, are unsecured,
      interest-free and there are no fixed terms for repayment.





The
      balance payable to Resources Group of $743,000 includes professional and
      regulatory charges related to the public listing paid by Resources Group on
      behalf of the Company of $901,000, netted against other receivables of $158,000
      due from Resources Group.




The
      amount payable to Yao Zhao represents land-use rights paid by him on behalf
      of
      Shanxi Coal (see Note 8).





The
      amount payable to Ming Zhao and Yao Zhao of $893,000 represents the balance
      of
      the purchase price for the exercise of the Option (see Note 1).





In
      2001,
      Shanxi Coal entered into agreements with Resources Group to lease an office
      and
      certain equipment. In the years ended December 31, 2007, 2006 and 2005, rental
      expenses paid to Resources Group were $6,000, $6,000 and $24,000, respectively
      (see Note 11).





In
      the
      years ended December 31, 2007, 2006 and 2005, Shanxi Coal purchased raw coal
      from Jucai Coal in the amounts of $18,320,000, $17,329,000 and $4,367,000,
      respectively.





F-19




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**5.
      Related Party Transactions (continued)**





On
      November 17, 2005, Shanxi Coal entered into a coal supply agreement with Jucai
      Coal, pursuant to which Shanxi Coal has priority to Jucai Coal’s high grade
      metallurgical coking coal supply over Jucai Coal’s other customers. Under the
      terms of the agreement, Shanxi Coal receives a discount of approximately $4
      to
      $6 per metric ton of coal from the price Jucai Coal charges to its other
      customers.





On
      November 17, 2005, Shanxi Coal entered into two conveyance agreements with
      Resources Group. The two agreements transfer two new coal washing plants,
      related land-use rights and coal washing equipment in Liulin County and
      Zhongyang County, Shanxi Province. The Liulin County plant has an annual clean
      coal washing capacity of 1.1 million metric tons while the Zhongyang County
      plant has an annual clean coal washing capacity of 1.2 million metric tons.
      The
      Liulin County plant started formal production in December 2005. The Liulin
      County plant, land-use rights and related equipment were purchased for a cost
      of
      $5,800,000. The Zhongyang County plant started formal production at the end
      of
      March 2006. The Zhongyang County plant, land-use rights and related equipment
      were purchased for a cost of $7,200,000. Each conveyance agreement provides
      that
      the purchase price paid by Shanxi Coal to Resources Group, which totals
      $13,000,000, should be amortized over ten years from December 31, 2005 and
      bear
      interest at a rate of 6% per annum payable quarterly. In the year ended December
      31, 2007, Shanxi Coal paid principal of $1,300,000 (2006: $1,300,000) and
      interest of $674,000 (2006: $750,000) to Resources Group. Shanxi Coal pledged
      the land use rights, plant and equipment of the plants to Resources Group until
      such time when the purchase price and interest thereupon is fully paid by Shanxi
      Coal to Resources Group. The
      conveyance loans
      financing the acquisitions are subordinated to the convertible notes.
      Payments by Shanxi Coal to Resources Group under the conveyance loans may not
      be
      accelerated while Puda has obligations of principal or interest outstanding
      to
      investors under the convertible notes, nor may Shanxi Coal make payments under
      the conveyance loan if Puda is in default to the investors under the notes. If
      Shanxi
      Coal fails to pay the principal or interest of the purchase price of the new
      plants financed by Resources Group in full when due, the properties acquired
      by
      Shanxi Coal, which have been pledged to Resources Group as collateral, are
      revertible to Resources Group (see
      Notes 7, 8 and 9).




**6.
      Inventories**





As
      of
      December 31, 2007 and 2006, inventories consist of the following:





December 31,
              2007
            
            December 31,
              2006$’000
            
            $’000Raw
                materials
            
            $
            24,252
            
            $
            12,342Finished
                goods
            
            
            11,701
            
            
            3,321Total
            
            $
            35,953
            
            $
            15,663





There
      was
      no allowance for losses on inventories as of December 31, 2007 and
      2006.





F-20




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**7.
      Property, Plant and Equipment, Net**





As
      of
      December 31, 2007 and 2006, property, plant and equipment consist of
      following:





December 31,
              2007
            
            December 31,
              2006$’000
            
            $’000Cost:Buildings
                and facilities
            
            $
            3,344
            
            $
            2,961Machinery
                equipment
            
            
            13,611
            
            
            8,131Motor
                vehicles
            
            
            104
            
            
            254Office
                equipment and others
            
            
            30
            
            
            7617,089
            
            
            11,422Accumulated
                depreciation:Buildings
                and facilities
            
            
            255
            
            
            243Machinery
                equipment
            
            
            1,814
            
            
            1,130Motor
                vehicles
            
            
            2
            
            
            143Office
                equipment and others
            
            
            -
            
            
            362,071
            
            
            1,552Carrying
                value:Buildings
                and facilities
            
            
            3,089
            
            
            2,718Machinery
                equipment
            
            
            11,797
            
            
            7,001Motor
                vehicles
            
            
            102
            
            
            111Office
                equipment and others
            
            
            30
            
            
            40$
            15,018
            
            $
            9,870





Shanxi
      Coal pledged the Liulin and Zhongyang coal washing plant and related equipment
      to Resources Group until such time when the purchase price and interest thereon
      is fully paid by Shanxi Coal .
      If
      Shanxi Coal fails to pay the principal and interest of the purchase prices
      of
      the new plants financed by Resources Group in full when due, the properties
      acquired by Shanxi Coal, which have been pledged to Resources Group as the
      collateral, are revertible to Resources Group (see Notes 5 and 9).





On
      June
      6, 2007, Shanxi Coal entered into an Asset Exchange Agreement with an unrelated
      party. Pursuant to the Asset Exchange Agreement, Shanxi Coal agreed to exchange
      all assets of its 400,000 MT Liulin Dongqiang coal washing plant, with a book
      value of RMB11.5 million ($1,511,000), plus RMB45.5 million ($5,977,000) in
      cash, for all assets of Lingshi County Chongjie coal washing plant owned by
      the
      unrelated party, with a book value of RMB57 million ($7,488,000).
      The assets
      exchanged were measured based on recorded amounts and no gain or loss was
      recognized in accordance with APB Opinion No. 29 “Accounting for Nonmonetary
      Transactions” as amended by SFAS No. 153 “Exchange
      of Nonmonetary Assets”. The Lingshi County Chongjie coal washing plant, which
      has an annual clean coal washing capacity of 1.2 million metric tons, started
      formal production in August, 2007.





Depreciation
      expense for the years ended December 31, 2007, 2006 and 2005 was approximately
      $1,252,000, $953,000 and $183,000, respectively. In the year ended December
      31,
      2007, the amount included in cost of sales and general and administrative
      expenses was approximately $1,238,000 (2006: $927,000, 2005: $158,000) and
      $14,000 (2006: $26,000, 2005: $25,000), respectively.





F-21




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**8.
      Intangible Assets**





Land-use rightsDecember 31,
              2007
            
            December 31,
              2006$’000
            
            $’000**Cost**
            
            $
            3,634
            
            $
            3,831Accumulated
                amortization
            
            
            150
            
            
            102**Carrying
                value**
            
            $
            3,484
            
            $
            3,729





Land-use
      rights of $197,000 paid by Yao Zhao on behalf of Shanxi Coal are located in
      Liulin County, Shanxi Province and were amortized over fifty years up to March
      2051 (see Note 5). These rights were transferred to an unrelated party per
      the
      Asset Exchange Agreement dated June 6, 2007 (see Note 7).





Land-use
      rights of $2,242,000 in Liulin County purchased from Resources Group are located
      in Shanxi Province and are amortized over fifty years up to August 4, 2055.
      Land-use rights of $1,392,000 in Zhongyang County purchased from Resources
      Group
      are located in Shanxi Province and are amortized over fifty years up to May
      20,
      2055. Shanxi Coal pledged these land-use rights to Resources Group until such
      time when the purchase price and interest thereon is fully paid by Shanxi Coal
      (see Notes 5 and 9).





Amortization
      expense for the years ended December 31, 2007, 2006 and 2005 was approximately
      $78,000, $78,000, and 9,000 respectively. The estimated aggregate amortization
      expense for the five years ending December 31,2008, 2009, 2010, 2011 and 2012
      amounts to approximately $78,000, $78,000, $78,000, $78,000 and $78,000,
      respectively.




**9.
      Long-term Debt**





December 31,
              2007
            
            December 31,
              2006$’000
            
            $’000Conveyance
                loan
            
            $
            10,400
            
            $
            11,700Less:
                current portion
            
            
            (1,300
            )
            
            (1,300
            )Long-term
                portion
            
            $
            9,100
            
            $
            10,400





The
      conveyance loan is seller-financed, payable over ten years from December 31,
      2005 and bears interest at a rate of 6% per annum, payable quarterly. In the
      year ended December 31, 2007, Shanxi Coal paid principal of $1,300,000 (2006:
      $1,300,000) and interest of $674,000 (2006: $750,000) to Resources Group. Shanxi
      Coal pledged the land-use rights and plant and equipment until such time when
      the purchase price and interest thereon is fully paid by Shanxi Coal to
      Resources Group. The conveyance loan is subordinated to the convertible notes.
      Payments by Shanxi Coal to Resources Group under the conveyance loan may not
      be
      accelerated while Puda has obligations of principal or interest outstanding
      to
      investors under the notes, nor may Shanxi Coal make payments under the
      conveyance loan if Puda is in default to the investors under the notes (see
      Notes 5, 7 and 8).





F-22




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**9.
      Long-term Debt (continued)**





The
      future principal payments under the conveyance loan as of December 31, 2007
      are
      as follows:





Year
            
            December 31,
              2007$’0002008
            
            $
            1,3002009
            
            
            1,3002010
            
            
            1,3002011
            
            
            1,3002012
            
            
            1,300Thereafter
            
            
            3,900$
            10,400




**10.
      Convertible Notes and Related Warrants**





(a)
      On
      November 18, 2005, the Company issued $12,500,000 8% unsecured convertible
      notes
      due October 31, 2008 and related warrants to purchase shares of common stock
      of
      the Company. The notes are convertible into common stock at $.50 per share
      over
      the term of the debt. As of December 31, 2007, $10,260,000 was converted into
      20,520,000 shares of common stock. The related warrants to purchase 25,000,000
      shares of common stock, exercisable at $.60 per share, have a term of five
      years
      from the date of issuance. As of December 31, 2007, 9,100,000 warrants were
      exercised into 9,100,000 shares of common stock.





F-23




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**10.
      Convertible Notes and Related Warrants (continued)**





Investors
      were given "full ratchet" anti-dilution protection under the notes and the
      warrants, meaning that the conversion price under the notes and the exercise
      price under the warrants will be adjusted to the lowest per share price for
      future issuances of Puda's common stock should such per share price be lower
      than the conversion price of the notes or the exercise price of the warrants,
      with carve-outs for (i) issuance of shares of common stock in connection with
      the conversion of the notes or exercise of the warrants, (ii) the issuance
      of
      shares of common stock for the payment of the penalties under the notes, or
      (iii) the issuance of common stock to employees or directors pursuant to an
      equity incentive plan approved by Puda's stockholders. The conversion price
      of
      the notes and the exercise price of the warrants are also subject to
      proportional adjustments for issuance of shares as payment of dividends, stock
      splits, and rights offerings to shareholders in conjunction with payment of
      cash
      dividends. Investors were also given registration rights in connection with
      the
      resale of (i) the common stock into which the notes may be converted, and (ii)
      the common stock underlying the warrants, on a registration statement to be
      filed with the Securities and Exchange Commission (“SEC”). Such registration
      statement is required to be filed within 30 days following the date of closing
      of the offer and sale of the units, which occurred on November 18, 2005, and
      declared effective within 120 days from that date, or Puda will be subject
      to
      pay a penalty to investors of an amount equal to 1% of the purchase price of
      each unit held by investors, payable in shares of common stock for every 30
      day
      period, or part thereof, after the relevant date. Puda is required to pay the
      costs associated with the registration statement. Puda is also required to
      pay
      investors an amount equal to 1% of the purchase price of each unit held by
      investors for every 30 day period that Puda becomes deficient in its periodic
      reporting requirements with the SEC under the Securities Exchange Act of 1934,
      as amended until all the securities have been sold by the investors. This late
      filing penalty will be in addition to any other penalties and is payable in
      shares of Puda’s common stock. Puda may redeem all, but not less than all, of
      the warrants at $0.001 per share subject to 30 business days’ prior notice to
      the holders of the warrants, and provided that (i) a registration statement
      is
      in effect covering the common stock underlying the warrants, (ii) the closing
      bid price of the common stock of Puda exceeds $2.50 per share on an adjusted
      basis for at least 20 consecutive trading days and
      (iii) the average daily trading volume of the common stock exceeds 50,000 shares
      per day during the same period. Puda will be subject to default on the notes
      should they fail to (i) make timely interest payment and such default continues
      for 15 days, (ii) make payment of the principal when due, (iii) comply with
      any
      other agreements under the Note, (iv) commences bankruptcy, provided that note
      holders representing at least 50% of the principal amount of the notes have
      notified Puda of the default and Puda has not cured the default within 45 days
      of such notice.





The
      convertible notes and warrants require the Company to register the resale of
      the
      shares of common stock upon conversion or exercise of these securities. The
      warrants are freestanding derivative financial instruments. The Company accounts
      for the fair value of these outstanding warrants to purchase common stock and
      conversion feature of its convertible notes in accordance with SFAS No. 133
      “Accounting For Derivative Instruments And Hedging Activities” and EITF Issue
      No. 00-19 “Accounting For Derivative Financial Instruments Indexed To And
      Potentially Settled In A Company’s Own Stock” which requires the Company to
      account for the conversion feature and warrants as derivatives. Pursuant to
      SFAS
      No. 133, the Company bifurcated the fair value of the conversion feature from
      the convertible notes, since the conversion features were determined not to
      be
      clearly and closely related to the debt host. In addition, since the effective
      registration of the securities underlying the conversion feature and warrants
      is
      an event outside of the control of the Company, pursuant to EITF Issue No.
      00-19, the Company recorded the fair value of the conversion features and
      warrants as liabilities. The Company is required to carry these derivatives
      on
      its balance sheet at fair value and unrealized changes in the values of these
      derivatives are reflected in the consolidated statement of operations as
“Derivative unrealized fair value gain/ (loss)”.





F-24




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**10.
      Convertible Notes and Related Warrants (continued)**





Based
      on
      a Black-Scholes pricing model the warrants, which are exercisable at $.60 per
      share, have a value of $2.25 per share, or $56,250,000, and the conversion
      feature has a value of $2.17 per share, or $54,250,000. The parameters used
      in
      the model include the stock market price on the issuance date of $2.46, exercise
      price of warrants of $0.60, (conversion price of note of $0.50), contractual
      term of five years (three years for conversion feature), risk-free interest
      rate
      for treasury bills of 3.89% and historical volatility of 110% based on the
      previous twelve months stock price.





As
      these
      values are greater than the debt of $12,500,000, the total issue was discounted.
      The discount was allocated between the warrants and conversion feature based
      on
      their relative fair values, resulting in the warrants being valued at $6,363,000
      and the conversion feature at $6,137,000. The conversion feature was recorded
      as
      a derivative liability as the contract does not contain an explicit limit on
      the
      number of shares to be delivered in a share settlement, and is being amortized
      over the life of the debt of three years using the effective interest method,
      up
      to October 31, 2008. The amount amortized in the years ended December 31, 2007,
      2006 and 2005 were $524,000, $1,263,000 and $229,000, respectively. Upon
      conversion, the pro rata % of the amount actually converted in relation to
      the
      total convertible is multiplied by the remaining derivative liability, and
      transferred to equity. The amount of derivative conversion feature transferred
      to equity in the years ended December 31, 2007, 2006 and 2005 were $1,306,000,
      $3,314,000 and $417,000, respectively. The portion of the discount related
      to
      the converted shares of $648,000,$2,689,000 and $417,000 in the years ended
      December 31, 2007, 2006 and 2005, respectively, was recorded in interest
      expense. The unamortized amount of $366,000 as of December 31, 2007 was offset
      against convertible notes. The amount allocated to the warrants is classified
      as
      a derivative liability because they embody an obligation to issue a variable
      number of shares. This obligation is generated by the Registration Rights and
      Late Filing Penalties described above. Warrants are being amortized over the
      term of five years using the effective interest method up to October 31, 2010,
      and the amount amortized in the years ended December 31, 2007, 2006 and 2005
      was
      $205,000, $3,908,000 and $2,121,000, respectively. Upon exercise, the pro rata
      %
      of the amount actually exercised in relation to the total exercisable is
      multiplied by the remaining derivative liability, and transferred to equity.
      The
      amount of derivative warrants transferred to equity in the years ended December
      31, 2007, 2006 and 2005 was $1,527,000, $789,000 and $nil, respectively. The
      portion of the discount of $15,000, $80,000 and $nil related to the exercised
      warrants in the years ended December 31, 2007, 2006 and 2005, respectively,
      was
      recorded in interest expense. The unamortized amount of $33,000 as of December
      31, 2007 was offset against convertible notes.





Debt
      issue costs of $1,583,000 are being amortized over the life of the debt of
      three
      years using the effective interest method up to October 31, 2008 and the amounts
      amortized in the years ended December 31, 2007, 2006 and 2005 were $6,000 and
      $838,000 and $739,000, respectively.





Interest
      expense on the convertible notes in the years ended December 31, 2007, 2006
      and
      2005 amounted to $240,000, $793,000 and $114,000, respectively.





As
      at
      December 31, 2007, the registration statement regarding the convertible notes
      and related warrants has not been declared effective by the SEC. The relevant
      date of March 17, 2006 for having the registration statement declared effective
      pursuant to the subscription agreement for the convertible notes and warrants
      has passed. Therefore, Puda is required to pay the penalty to investors for
      the
      delay in getting the registration statement effective. According to the
      subscription agreement of the convertible notes and related warrants, the
      penalty is equal to 1% of the purchase price of each unit held by investors,
      payable in shares of common stock of the Company, for every 30-day period,
      or
      part thereof, after the relevant date. The penalty payable to the investors
      is
      $4,167 per day after the relevant date. The penalty for the year ended December
      31, 2007 was $1,521,000. The penalty was $1,204,000 for the year ended December
      31, 2006, of which $1,000,000 was paid in the form of 578,634 common shares.
      As
      of December 31, 2007, the accrued but unpaid penalty of $1,725,000 was recorded
      as a current liability and will be transferred to equity when the common shares
      are issued as penalty payment.





F-25




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**10.
      Convertible Notes and Related Warrants (continued)**





In
      December 2006, the FASB issued FASB Staff Position (“FSP”) No. EITF 00-19-2,
      "Accounting for Registration Payment Arrangements" (EITF 00-19-2). EITF 00-19-2
      addresses an issuer’s accounting for registration payment arrangements. For
      registration payment arrangements and financial instruments subject to those
      arrangements that were entered into prior to the issuance of the FSP, the
      guidance is effective for financial statements issued for fiscal years beginning
      after December 15, 2006, and interim periods within those fiscal years. The
      Company has been and is in compliance with the FSP in that the contingent
      obligation is recognized under Statement 5 and FASB Interpretation No. 14 and
      financial instruments subject to registration payment arrangement are recognized
      and measured in accordance with other applicable accounting principles.





(b)
      In
      conjunction with the issuance of the notes, the placement agent was issued
      five
      year warrants, exercisable from November 18, 2005, to purchase 2,500,000 shares
      of common stock of the Company at an exercise price of $.60 per share. The
      warrants issued to the placement agent have the same terms and conditions as
      the
      warrants issued to the investors, including "full ratchet" anti-dilution
      protection, proportional exercise price adjustments based on issuances of stock
      as dividends and share splits, and Puda’s right to redeem the warrants subject
      to an effective registration statement covering the underlying shares of the
      placement agent’s warrant, and certain share price and trading volume
      requirements. However, the warrants issued to the placement agent, unlike the
      warrants issued to the investors, have a cashless exercise feature. With a
      cashless exercise feature, the warrant holders have the option to pay the
      exercise price of $0.60 not in cash, but by reducing the number of common share
      issued to them. These warrants were valued at $2.25 per share and the total
      value amounted to $5,625,000. As with the warrants related to the notes, the
      placement agent warrants are classified as a derivative liability and are
      freestanding derivative financial instruments and contain Registration Rights
      and Late Filing Penalties identical to those held by the investors. These
      warrants are being amortized over the term of five years using the effective
      interest method, up to October 31, 2010. The amount amortized in the years
      ended
      December 31, 2007, 2006 and 2005 was $166,000, $3,456,000 and $1,875,000
      respectively. Upon exercise, the pro rata % of the amount actually exercised
      in
      relation to the total exercisable is multiplied by the remaining derivative
      liability, and transferred to equity. The amount of derivative placement agent
      warrants transferred to equity in the years ended December 31, 2007, 2006 and
      2005 was $2,716,000, $882,000 and $nil, respectively. The portion of the
      discount of $nil, $129,000 and $nil related to the exercised warrants in the
      years ended December 31, 2007, 2006 and 2005, respectively, was recorded in
      interest expense. As of December 31, 2007, these warrants were valued at $.57
      per share according to a Black-Scholes pricing model and the unrealized loss
      on
      the change in fair value of these warrants of $343,000 was included in the
      consolidated statements of operations. As of December 31, 2007, 1,742,040
      placement agent warrants were exercised in a cashless method and resulted in
      the
      issuance of 1,293,055 common shares.




F-26





**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**10.
      Convertible Notes and Related Warrants (continued)**




(c)
      As of
      December 31, 2007 and 2006, convertible notes and related warrants include
      the
      following:





December 31,
              2007
            
            December 31,
              2006$000
            
            $000Convertible
                notes:Gross
                amount issued
            
            $
            12,500
            
            $
            12,500Less:
                amount converted in 2005
            
            
            (850
            )
            
            (850
            )Less:
                amount converted in 2006
            
            
            (6,750
            )
            
            (6,750
            )Less:
                amount converted in 2007
            
            
            (2,660
            )
            
            -Less:
                unamortized discount on conversion feature
            
            
            (366
            )
            
            (1,538
            )Less:
                unamortized discount on note warrants
            
            
            (33
            )
            
            (254
            )$
            1,841
            
            $
            3,108Derivative
                conversion feature:Amount
                allocated to conversion feature
            
            $
            6,137
            
            $
            6,137Less:
                amount transferred to equity upon conversion in 2005
            
            
            (417
            )
            
            (417
            )Less:
                amount transferred to equity upon conversion in 2006
            
            
            (3,314
            )
            
            (3,314
            )Less:
                amount transferred to equity upon conversion in 2007
            
            
            (1,306
            )
            
            -$
            1,100
            
            $
            2,406Derivative
                warrants:Amount
                allocated to investor warrants
            
            $
            6,363
            
            $
            6,363Placement
                agent warrants
            
            
            5,625
            
            
            5,625Less:
                amount transferred to equity upon exercise of note warrants in
                2006
            
            
            (789
            )
            
            (789
            )Less:
                amount transferred to equity upon exercise of placement agent warrants
                in
                2006
            
            
            (882
            )
            
            (882
            )Less:
                amount transferred to equity upon exercise of note warrants in
                2007
            
            
            (1,527
            )
            
            -Less:
                amount transferred to equity upon exercise of placement agent warrants
                in
                2007
            
            
            (2,716
            )
            
            -Less:
                change in fair value in 2005
            
            
            (700
            )
            
            (700
            )Less:
                change in fair value in 2006
            
            
            (1,237
            )
            
            (1,237
            )Add:
                change in fair value in 2007
            
            
            343
            
            
            -$
            4,480
            
            $
            8,380


F-27


**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**11.
      Commitments and Contingencies**





As
      of
      December 31, 2007, the Group leased office premises under the operating lease
      agreement expiring in 2008.





The
      future minimum lease payments under the above-mentioned lease as of December
      31,
      2007 are as follows:





Year
            
            December 31,
              2007$’0002008
            
            $
            6





The
      above
      future lease payments represent amounts payable to Resources Group (see Note
      5).





On
      September 6, 2007, Shanxi Coal entered into an agreement with an unrelated
      party, pursuant to which, Shanxi Coal will purchase the coal mining right with
      respect to a coal mine located in Duanjia Village, Jingle County, Shanxi
      Province of China. As consideration, Shanxi Coal will pay an aggregate purchase
      price of RMB460 million (approximately $60.7 million) in cash. Under the
      agreement, Shanxi Coal will pay a first installment in the amount of RMB200
      million ($26.5 million) within 10 business days after the receipt of the mining
      permit and a second installment in the amount of RMB150 million ($19.9 million)
      within ten business days after the receipt of the mining commencement report.
      Shanxi Coal will pay the remaining purchase price, RMB110 million ($14.6
      million) within one year after the receipt of the mining commencement permit.
      Shanxi Coal plans to finance the purchase through a debt facility which it
      is
      currently negotiating. If the seller does not obtain the mining permit for
      the
      benefit of Shanxi Coal within two months of the agreement date, Shanxi Coal
      may
      terminate the agreement. As of the date of purchase, the coal mine is not
      operating and Shanxi Coal will construct the coal mine after the commencement
      permit has been obtained. As of April 3, 2008, the seller had not obtained
      the
      mining permit and Shanxi Coal has not made the first installment.





As
      of
      December 31, 2007 and 2006, the Group
      did
      not have any contingent liabilities.





**12.
      Common Stock**





The
      number of shares of common stock presented as outstanding as of January 1,
      2005
      in the consolidated statement of changes in stockholders’ equity includes the
      shares issued by the Company as a result of the reorganization as described
      in
      Note 1. The shares issued by the Company as a result of the reorganization,
      as
      presented below, do not include additional shares which may be issued in
      connection with the Reverse Split for fractional shares and to preserve round
      lot holders. Details of the number of shares presented are as follows:





Number of sharesOutstanding
                shares as at July 15, 2005 prior to the reorganization
            
            
            59,000,000Common
                stock converted from preferred stock issued as a result of the
                reorganization
            
            
            678,500,000Effect
                of the 1 for 10 reverse stock split
            
            
            (663,750,000
            )Number
                of shares of common stock presented in the consolidated statement
                of
                changes in stockholders’ equity as of January 1, 2005
            
            
            73,750,000





F-28




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**13.
      Profit Appropriation**





In
      accordance with PRC regulations, Shanxi Coal is required to make appropriations
      to the statutory surplus reserve fund, based on after-tax net income determined
      in accordance with PRC GAAP. According to the Memorandum and Articles of
      Association of Shanxi Coal, appropriation to the statutory surplus reserve
      fund
      should be at least 10% of the after-tax net income determined in accordance
      with
      the PRC GAAP until the reserve fund is equal to 50% of the entity’s registered
      capital. Appropriations to the statutory public welfare fund should be at least
      5% of the after-tax net income determined in accordance with the PRC GAAP.
      Statutory surplus reserve is established for the purpose of remedying Shanxi
      Coal’s losses, expanding operations, or increasing registered capital, and is
      non-distributable other than in liquidation.





**14.
      Interest Expense**





Interest
      expense for the year ended December 31, 2007 includes a $240,000 (2006:
      $793,000, 2005:$114,000) interest payment for the 8% convertible notes, a
      $674,000 (2006: $750,000, 2005: $nil) interest payment for the 6%
      loan
      from Resources Group for the purchase of the Liulin and Zhongyang plants, and
      $663,000 (2006: $2,898,000, 2005: $417,000) for the expensed portion of the
      discount on the conversion feature and warrants related to converted shares
      and
      exercised warrants.





**15.
      Debt Financing Costs**





Debt
      financing costs for the years ended December 31, 2007 include amortization
      of
      debt issue costs of $6,000 (2006: $838,000, 2005:$739,000), amortization of
      discount on convertible notes and warrants of $895,000 (2006: $8,627,000,
      2005:$4,225,000) and penalty for the delay in getting the registration statement
      effective by March 17, 2006 of $1,521,000 (2006: $1,204,000, 2005: $nil) (See
      Note 10).





**16.
      Derivative Unrealized Fair Value Gain/Loss**





Derivative
      unrealized fair value loss of $343,000 in the year ended December 31, 2007
      (2006: derivative unrealized fair value gain of $1,237,000, 2005: derivative
      unrealized fair value gain of $700,000) represented the change in fair value
      of
      the derivative warrants (see Note 10).





**17.
      Other Financing Expenses**





Other
      financing expenses for the year ended December 31, 2005 mainly include $902,000
      for professional and regulatory charges related to the public listing. There
      were no such expenses in the year ended December 31, 2007 and
      2006.


F-29





**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**18.
      Taxation**





No
      provision for taxation has been made for Puda, BVI and Putai for the years
      ended
      December 31, 2007 and 2006, as they did not generate any taxable profits during
      these periods.





Pursuant
      to the PRC Income Tax Laws, Shanxi Coal is subject to enterprise income tax
      at a
      statutory rate of 33% (30% national income tax plus 3% local income tax).





Details
      of income taxes in the statements of operations are as follows:





Years ended December 31,2007
            
            2006
            
            2005$’000
            
            $’000
            
            $’000Current
                year provision
            
            $
            8,292
            
            $
            7,604
            
            $
            3,439





A
      reconciliation between taxes computed at the United States statutory rate of
      34%
      and the Group’s effective tax rate is as follows:-





Years ended December 31,2007
            
            2006
            
            2005$’000
            
            $’000
            
            $’000Income
                before income taxes
            
            $
            19,166
            
            $
            8,958
            
            $
            4,404Income
                tax on pretax income at statutory rate
            
            
            6,516
            
            
            3,046
            
            
            1,497Tax
                effect of expenses that are not deductible in determining taxable
                profits
            
            
            1,560
            
            
            4,544
            
            
            2,195Tax
                effect of income that is not taxable in determining taxable
                profits
            
            
            -
            
            
            (421
            )
            
            (238
            )Effect
                of different tax rates of subsidiary operating in other
                jurisdictions
            
            
            (240
            )
            
            (234
            )
            
            (94
            )Change
                in valuation allowance
            
            
            456
            
            
            669
            
            
            79Income
                tax at effective rate
            
            $
            8,292
            
            $
            7,604
            
            $
            3,439





As
      at
      December 31, 2007 and 2006, the Group had accumulated net operating loss
      carryforwards for United States federal tax purposes of approximately of
      $4,646,000 and $3,305,000, respectively, that are available to offset future
      taxable income. Realization of the net operating loss carryforwards is dependent
      upon future profitable operations. In addition, the carryforwards may be limited
      upon a change of control in accordance with Internal Revenue Code Section 382,
      as amended. Accordingly, management has recorded a valuation allowance to reduce
      deferred tax assets associated with the net operating loss carryforwards to
      zero
      at December 31, 2007 and 2006. The
      net
      operating loss carryforwards expires in years 2021, 2022, 2023, 2024, 2025,
      2026
      and 2027 in the amounts of $132,000, $394,000, $153,000, $371,000 and $287,000,
      $1,968,000 and $1,341,000, respectively.





At
      December 31, 2007 and 2006, deferred tax assets consist of:





December 31, 2007
            
            December 31, 2006$’000
            
            $’000Net
                operating loss carryforwards
            
            $
            1,580
            
            $
            1,124Less:
                Valuation allowance
            
            
            (1,580
            )
            
            (1,124
            )Net
            
            $
            -
            
            $
            -


F-30


**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**19.
      Basic and Diluted Weighted Average Number of Shares**





Years ended December 31,2007
            
            2006
            
            2005Basic
                weighted average number of shares
            
            
            98,404,914
            
            
            80,167,110
            
            
            73,950,274Options
                outstanding, after adjusting for 10 to 1 Reverse split
            
            
            2,678
            
            
            9,683
            
            
            56,218Assumed
                conversion of notes
            
            
            -
            
            
            -
            
            
            1,742,904Assumed
                exercise of warrants
            
            
            -
            
            
            -
            
            
            1,826,640Issuance
                of penalty shares
            
            
            2,183,544
            
            
            152,239
            
            
            -Diluted
                weighted average number of shares
            
            
            100,591,136
            
            
            80,329,032
            
            
            77,576,036





The
      convertible notes and warrants have no dilutive effect on the basic income
      per
      share in the years ended December 31, 2007 and 2006, but these items could
      potentially dilute earnings per share in the future. If the conversion of notes
      and exercise of warrants had not been anti-dilutive, the number of shares that
      would have been issued for the years ended December 31, 2007 and 2006 were
      11,087,275 and 27,061,000, respectively.





**20.
      Supplementary cash flow information**





Years ended December 31,2007
            
            2006
            
            2005$’000
            
            $’000
            
            $’000Cash
                paid during the period for:Interest
            
            $
            914
            
            $
            1,543
            
            $
            114Income
                taxes
            
            $
            8,706
            
            $
            6,516
            
            $
            2,039Major
                non-cash transactions:Notes
                converted into common shares
            
            $
            2,660
            
            $
            6,750
            
            $
            850Issue
                of common stock for services
            
            $
            -
            
            $
            21
            
            $
            -Issue
                of common stock for penalty
            
            $
            -
            
            $
            1,000
            
            $
            -Dividend
                declared
            
            $
            -
            
            $
            -
            
            $
            1,452Purchase
                of land-use rights, property, plant and equipment from Resources
                Group
            
            $
            -
            
            $
            -
            
            $
            13,000Cashless
                exercise of 1,468,706 (2006: 273,334) placement agent warrants into
                1,050,875 (2006: 242,180) common shares
            
            $
            -
            
            $
            -
            
            $
            -


F-31




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**21.
      Stock Compensation**





As
      at
      December 31, 2007 and 2006, Puda has outstanding options as
      follows:




Number of
              options granted
            
            After adjusting for the 10
              to 1 reverse stock split
            
            Exercise price
            
            Expiry date
            
            Estimated
              Fair value$’000150,000
            
            
            15,000
            (i)
            $
            1
            
            
            October
                20, 2008
            
            
            0




(i)
            granted
                in 2003 to former directors/officers in consideration of services
                rendered.





The
      following summarizes the share option transactions during the year





Number of
              options
            
            Weighted
              average
              exercise priceOptions
                outstanding at December 31, 2005 (after adjusting for the 10 to 1
                reverse
                stock split)
            
            
            165,000
            
            $
            9.2Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Expired
            
            
            (150,000
            )
            
            (8.2
            )Options
                outstanding at December 31, 2006
            
            
            15,000
            
            $
            1Granted
            
            
            -
            
            
            -Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Expired
            
            
            -
            
            
            -Options
                outstanding at December 31, 2007
            
            
            15,000
            
            $
            1





On
      June
      29, 2007, Puda entered into a contract with a director. Pursuant to the
      contract, in consideration of his service to the Company as an independent
      director commencing on July 1, 2007, he will receive compensation in the form
      of
      warrants to purchase 10,000 shares of common stock of the Company per year.
      The
      term of the warrants is 5 years and the exercise price is $2.50 per share.
      As of
      December 31, 2007, the warrants have not been issued. The stock compensation
      cost $21,000 for the year ended December 31, 2007.





On
      August
      3, 2007, Puda entered into a contract with another director. Pursuant to the
      contract, in consideration of his service to the Company as an independent
      director commencing on August 3, 2007, he will receive an annual fee of $40,000
      in cash and 12,500 shares of common stock of the Company. As of December 31,
      2007, the shares of common stock have not been issued. The stock compensation
      cost was $12,000 for the year ended December 31, 2007.





On
      October 9, 2007, Puda entered into a contract with another director. Pursuant
      to
      the contract, in consideration of his service to the Company as an independent
      director commencing on October 9, 2007, he will receive an annual fee of $40,000
      in cash and 13,021 shares of common stock of the Company. As of December 31,
      2007, the shares of common stock have not been issued. The stock compensation
      cost was $13,000 for the year ended December 31, 2007.


F-32




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**




**22.
      Concentrations and Credit Risk**





The
      Group
      operates principally in the PRC and grants credit to its customers in this
      geographic region. Although the PRC is economically stable, it is always
      possible that unanticipated events in foreign countries could disrupt the
      Group’s operations.





At
      December 31, 2007 and 2006, the Group has a credit risk exposure of uninsured
      cash in banks of approximately $16,614,000 and $25,176,000, respectively. The
      Group does not require collateral or other securities to support financial
      instruments that are subject to credit risk.





The
      net
      sales to customers representing at least 10% of net total sales are as
      follows:





Years ended December 31,Customers
            
            2007
            
            2006
            
            2005$’000
            
            %
            
            $’000
            
            %
            
            $’000
            
            %Customer
                A
            
            $
            21,626
            
            
            13
            
            $
            27,387
            
            
            20
            
            $
            7,810
            
            
            15Customer
                E
            
            $
            -
            
            
            -
            
            $
            -
            
            
            -
            
            $
            6,588
            
            
            13





The
      following customers had balances greater than 10% of the total accounts
      receivable as of December 31, 2007 and 2006, respectively:





Customers
            
            December 31,
              2007
            
            December 31,
              2006$’000
            
            %
            
            $’000
            
            %Customer
                A
            
            $
            961
            
            
            12
            
            $
            2,135
            
            
            30Customer
                B
            
            $
            878
            
            
            11
            
            $
            -
            
            
            -Customer
                C
            
            $
            865
            
            
            11
            
            $
            863
            
            
            12Customer
                D
            
            $
            849
            
            
            10
            
            $
            729
            
            
            10Customer
                E
            
            $
            -
            
            
            -
            
            $
            798
            
            
            11Customer
                F
            
            $
            -
            
            
            -
            
            $
            739
            
            
            10




F-33




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**23.
      Retirement Benefits**





The
      full-time employees of Shanxi Coal are entitled to staff welfare benefits
      including medical care, casualty, housing benefits, education benefits,
      unemployment insurance and pension benefits through a Chinese
      government-mandated multi-employer defined contribution plan. The Group is
      required to accrue the employer-portion for these benefits based on certain
      percentages of the employees’ salaries. The total provision for such employee
      benefits was $395,000, $332,000 and $115,000 for the years ended December 31,
      2007, 2006 and 2005, respectively and were recorded as accrued expenses. As
      of
      December 31, 2007 and 2006, the total amount included in accrued expenses for
      the provision was $1,154,000 and $709,000, respectively. The Group is required
      to make contributions to the plans out of the amounts accrued for all staff
      welfare benefits except for education benefits. The contributions have not
      yet
      been made to the government social welfare organization for the years ended
      December 31, 2007 and 2006. The PRC government is responsible for the staff
      welfare benefits including medical care, casualty, housing benefits,
      unemployment insurance and pension benefits to be paid to these employees.
      The
      Group is responsible for the education benefits to be paid and it has been
      accrued for in the consolidated financial statements.





In
      the
      EITF Consensus 92-13, EITF provides guidance regarding accounting for estimated
      payments in connection with the Coal industry Retiree Health Benefit Act of
      1992, which requires enterprises that have ongoing operations in the coal
      industry to account for their obligations under the Act as either participation
      in a multi-employer plan or as a liability. The Group is only required to comply
      with the aforementioned separate contribution plan according to local statutory
      requirements regarding retiree health benefits, accordingly, the Consensus
      does
      not have impact on the Group’s consolidated financial statements
      presented.





**24.**  **Black
      Lung Benefits**





In
      the
      United States of America, companies are responsible under the Federal Coal
      Mine
      Health and Safety Act of 1969, as amended, and various states’ statutes for the
      payment of medical and disability benefits to employees and their dependents
      resulting from occurrences of coal worker’s pneumoconiosis disease (black lung).
      In the PRC, besides a uniform contribution plan described in Note 23, there
      is
      no such special Act or regulatory requirements to cover occurrences of coal
      worker’s black lung. The Group provides no provision for its workers’ black lung
      benefits inasmuch as the aforesaid Act does not apply to the
      Group.


F-34




**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**25.
      Condensed Financial Information of Registrant**





The
      condensed financial information of Registrant includes the balance sheet as
      at
      December 31, 2007 and the statement of operations and cash flows for the year
      ended December 31, 2007.





Balance
      Sheet-Parent Company Only


(In
      thousands of United States dollars)


December 31, 2007ASSETSCURRENT
                ASSETSCash
                and cash equivalents
            
            $
            54Restricted
                cash
            
            
            233Total
                current assets
            
            
            287INVESTMENTS
                IN SUBSIDIARIES
            
            
            47,622TOTAL
                ASSETS
            
            $
            47,909**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIESOther
                payable
            
            $
            1,886Accrued
                expenses
            
            
            196Convertible
                notes
            
            
            1,841Derivative
                conversion feature
            
            
            1,100Penalty
                payable
            
            
            1,725Total
                current liabilities
            
            
            6,748LONG-TERM
                LIABILITIESDerivative
                warrants
            
            
            4,480STOCKHOLDERS’
                EQUITYPreferred
                stock, authorized 5,000,000 shares, par value $0.01, issued and
                outstanding None
            
            
            -Common
                stock, authorized 150,000,000 shares, par value $0.001, issued and
                outstanding 105,252,176 shares
            
            
            105Paid-in
                capital
            
            
            61,703Accumulated
                deficit
            
            
            (25,127
            )Total
                stockholders’ equity
            
            
            36,681TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            47,909


F-35


**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**25.
      Condensed Financial Information of Registrant (continued)**





Statement
      of Operations-Parent Company Only


(In
      thousands of United States dollars)




Year ended
              December 31, 2007Revenue:
            
            $
            -Share
                of earnings from investment in subsidiaries
            
            
            18,523Total
                revenue
            
            
            18,523General
                and administrative expenses
            
            
            (1,147
            )Income
                from operations
            
            
            17,376Interest
                expense
            
            
            (903
            )Debt
                financing costs
            
            
            (2,422
            )Derivative
                unrealized fair value loss
            
            
            (343
            )Net
                income
            
            $
            13,708




F-36


**PUDA
      COAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**





**25.
      Condensed Financial Information of Registrant (continued)**





Statement
      of Cash Flows-Parent Company Only


(In
      thousands of United States dollars)





Year ended
              December 31, 2007CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            13,708Adjustments
                to reconcile net loss to net cash used in operating
                activitiesShare
                of earnings from investment in subsidiaries
            
            
            (18,523
            )Amortization
                of debt issue costs
            
            
            6Amortization
                of discount on convertible notes and warrants
            
            
            895Derivative
                unrealized fair value loss
            
            
            343Discount
                on converted shares and exercised warrants
            
            
            663Stock
                compensation expense
            
            
            46Changes
                in operating assets and liabilities:Advance
                to subsidiary
            
            
            (771
            )Increase
                in other payable
            
            
            471Decrease
                in accrued expenses
            
            
            (91
            )Increase
                in penalty payable
            
            
            1,521Net
                cash used in operating activities
            
            
            (1,732
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Payment
                for the purchase of equity interest in Shanxi Coal
            
            
            (1,799
            )Net
                cash used in investing activities
            
            
            (1,799
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Exercise
                of warrants
            
            
            3,600Net
                cash provided by financing activities
            
            
            3,600Net
                increase in cash and cash equivalents
            
            
            69Cash
                and cash equivalents at beginning of year
            
            
            (15
            )Cash
                and cash equivalents at end of year
            
            $
            54





F-37


**Item
      9. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure**





There
      was
      no change in and no disagreement with accountants on any accounting and
      financial disclosure matters during fiscal year 2007.





**Item
      9A(T).****Controls
      and Procedures**




***(a)***  ***Evaluation
      of Disclosure Controls and Procedures***




Disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
      the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls
      and other procedures that are designed to provide reasonable assurance that
      the
      information that we are required to disclose in the reports that we file or
      submit under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in the SEC’s rules and forms, and that such
      information is accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate to allow
      timely decisions regarding required disclosure.




In
      connection with the preparation of this annual report, our management, under
      the
      supervision and with the participation of our Chief Executive Officer and our
      Chief Financial Officer, carried out an evaluation of the effectiveness of
      the
      design and operation of our disclosure controls and procedures as of December
      31, 2007. In making this evaluation, our management considered the material
      weaknesses in our internal control over financial reporting and the status
      of
      their remediation as discussed below. Based on this evaluation, our Chief
      Executive Officer and Chief Financial Officer concluded that our disclosure
      controls and procedures were not effective as of December 31, 2007. However,
      giving full consideration to the material weaknesses described below, we
      performed adequate analyses and procedures, including among other things,
      transaction reviews, account reconciliations and physical inventories, in order
      to provide assurance that our Consolidated Financial Statements included in
      this
      annual report were prepared in accordance with generally accepted accounting
      principles (“GAAP”) and present fairly, in all material respects, our financial
      position, results of operations and cash flows for the periods presented in
      conformity with GAAP. As a result of these procedures, we concluded that the
      Consolidated Financial Statements included in this annual report present fairly,
      in all material respects, our financial position, results of operations and
      cash
      flows for the periods presented in conformity with GAAP.




***(b)***  ***Management’s
      Report on Internal Control over Financial Reporting***




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting for our Company, as such term is defined in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over
      financial reporting is a process designed under the supervision of our principal
      executive and principal financial officers to provide reasonable assurance
      regarding the reliability of financial reporting and the preparation of
      financial statements for external purposes in accordance with GAAP.




Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we conducted an evaluation of
      the
      effectiveness of our internal control over financial reporting as of December
      31, 2007 based on the criteria established in Internal Control—Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (“COSO”). As a result of the material weaknesses described below, our
      management concluded that as of December 31, 2007 we did not maintain effective
      internal control over financial reporting based on the criteria established
      in
      Internal Control—Integrated Framework, issued by COSO.




A
      “material weakness” is a deficiency, or a combination of deficiencies, in
      internal control over financial reporting, such that there is a reasonable
      possibility that a material misstatement of the Company’s annual or interim
      financial statements will not be prevented or detected on a timely basis. As
      of
      December 31, 2007, the following material weaknesses in our internal control
      over financial reporting existed, which had not been fully remedied and
      continued to exist:




(1)  We
      did
      not maintain an effective control environment because of the following material
      weaknesses: (a) we did not effectively communicate the importance of controls
      throughout our Company or set an adequate tone around control consciousness;
      (b)
      we did not maintain a sufficient complement of personnel with an appropriate
      level of accounting and financial reporting knowledge, experience and training
      in the application of U.S. GAAP commensurate with our financial reporting
      requirements; and (c) we did not maintain an effective anti-fraud program
      designed to detect and prevent fraud relating to an effective whistle-blower
      program, a code of conduct, consistent background checks of personnel in
      positions of responsibility and an ongoing program to manage identified fraud
      risks. The control environment sets the tone of an organization, influences
      the
      control consciousness of its people, and is the foundation of all other
      components of internal control over financial reporting. Each of these internal
      control material weaknesses contributed to the material weaknesses discussed
      in
      items 2 through 6 below.


36


(2)  We
      did
      not maintain effective monitoring controls to determine the adequacy of our
      internal control over financial reporting and related policies and procedures
      because of the following material weaknesses: (a) Our policies and procedures
      with respect to the review, supervision and monitoring of our accounting
      operations were not operating in a fully effective manner. Specifically, we
      did
      not have sufficient in-house capacity to review and supervise our accounting
      operations; however we engaged outside consultants and sought oversight from
      our
      audit committee if deemed necessary to help compensate for this deficiency;
      and
      (b) We did not maintain an internal audit function. Specifically, there was
      no
      personnel with an appropriate level of experience, training and lines of
      reporting to allow an internal audit group to function effectively in
      determining the adequacy of our internal control over financial reporting and
      monitoring the ongoing effectiveness thereof. Furthermore, timely review of
      vouchers, general ledger, sub-ledger and financial reporting package against
      the
      U.S. GAAP either did not exist or was not sufficient. Each of these material
      weaknesses relating to the monitoring of our internal control over financial
      reporting contributed to the material weaknesses discussed in items 3 through
      6
      below.




(3)  We
      did
      not maintain effective controls over certain of our period-end financial close
      and reporting processes. Specifically, we did not maintain effective controls
      over the preparation and review of the period-end closing procedures to ensure
      the completeness and accuracy of the consolidated financial statements and
      that
      balances and disclosures reported in the consolidated financial statements
      reconciled to the underlying supporting schedules and accounting records.




(4)  We
      did
      not maintain effective controls over the post-closing adjustments. Specifically,
      our Chief Financial Officer, Chief Operating Officer and any other persons
      performing equivalent or similar functions did not adequately review or approve
      the post-closing adjustments.




(5)  We
      did
      not maintain an effective risk assessment and management mechanism.
      Specifically, we lack sufficient internal mechanisms to prevent management
      override in a fully effective manner and to adequately assess and manage the
      risks relating to significant transactions; however, we engaged outside
      consultants and our audit committee provided oversight in establishing and
      reviewing the proper accounting for non-routine transactions such as
      acquisitions, assets exchange and stock-based compensation.




(6)  We
      did
      not maintain fully effective controls over the complete and accurate recording
      and monitoring of intercompany accounts. Specifically, we recorded the accounts
      of our Company and our subsidiary, Shanxi Coal in one set of accounts instead
      of
      two separate accounts.




Each
      of
      the control deficiencies described in items 1 through 6 above could result
      in a
      misstatement of the aforementioned accounts or disclosures that might result
      in
      a material misstatement to the annual or interim consolidated financial
      statements that would not be prevented or detected. Management has determined
      that each of the control deficiencies in items 1 through 6 above constitutes
      a
      material weakness.




As
      a
      result of the material weaknesses described above, our management concluded
      that
      as of December 31, 2007, we did not maintain effective internal control over
      financial reporting based on the criteria established in *Internal
      Control — Integrated Framework* ,
      issued
      by the COSO. Based on an internal review supervised by
      our audit committee assisted by independent counsel, it was determined that
      we did not detect an error in our 2007 guidance contained in our press release
      dated April 17, 2007, which mistakenly overstated the projected revenues and
      operating income for fiscal year 2007 and did not timely correct such error
      because of insufficient internal controls. We disclosed and corrected this
      error
      in our press released dated October 25, 2007. This error had no impact on our
      financial statements for the fiscal year ended December 31, 2007 nor in any other period.




This
      annual report does not include an attestation report of our company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to the attestation by the company’s
      registered public accounting firm pursuant to the temporary rules of the
      Securities and Exchange Commission that permit our company to provide
      management’s report only in this annual report.




**Plan
      for Remediation of Material Weaknesses**




In
      response to the identified material weaknesses, our management, with oversight
      from our audit committee, has taken certain actions to help remedy the material
      weaknesses, including (i) meeting quarterly with our audit committee and
      independent auditors to discuss our accounting policies, and (ii) improving
      communication and disclosure procedures by expanding our internal review of
      our
      financial statements, filings with the SEC and information disclosure to the
      public, including press releases, by our audit committee. Our management is
      also
      considering other remedial measures, including the engagement of external
      compliance consultants to support management in its efforts to improve our
      control environment and to remedy the identified material weaknesses. The
      remedial measures the management is considering are focused on (i) expanding
      our
      organizational capabilities to improve our control environment and (ii)
      implementing process changes to strengthen our internal control and monitoring
      activities.




From
      a
      control environment and organizational perspective, we are considering, among
      other remedial measures: (a) seeking new accounting personnel; **** (b)
      establishing our internal audit organization, which will report directly to
      our
      chairman of the board of directors and audit committee, by seeking to hire
      senior audit staff and/or external consultants; and (c) expanding management’s
      ongoing communication regarding the importance of adherence to internal controls
      and procedures.


37


In
      addition to strengthening our control environment and organizational
      capabilities, we are considering several process changes designed to strengthen
      our internal control and monitoring activities, including: (a) enhancing our
      U.S. GAAP review and application procedures by making enhancements to our
      accounting policies and improving or formalizing documentation of such policies,
      where appropriate and communicating our accounting policies to our financial
      and
      accounting personnel; (b) enhancing policies and procedures designed to detect
      and prevent fraud, including to adopt a code of ethics and a whistleblower
      policy under the guidance of our board of directors and audit committee and
      provide relevant training to our executive officers and relevant employees;
      (c)
      creating an organizational chart to ensure the supporting functions meet our
      business needs, facilitating the flow of information to appropriate personnel
      in
      a timely manner and assisting the communication among different divisions and
      between our company and subsidiaries; (d) establishing a systematic risk
      assessment approach to identify, evaluate and mitigate risks, including
      operational and regulatory risks, and maintain risk alerts for non-routine
      transactions and prevent management overrides, focusing on risk management
      related to critical business partners such as vendors, customers and lenders;
      and (e) utilizing the function of the financial department to monitor the
      business operations. Specifically, establishing budget and regularly compare
      the
      actual expenditure to the budget, have the audit committee periodically review,
      discuss and approve internal audit’s plan, scope, organizational reporting lines
      and status report.




We
      believe that the foregoing actions, if implemented, will improve our internal
      control over financial reporting, as well as our disclosure controls and
      procedures. The management is undergoing a cost and benefit analysis to
      determine which measures to adopt and the resources and priorities to be
      allocated to such measures. However, there is no certainty that all of the
      material weaknesses described above will be remediated by December 31, 2008.
      If
      any of the above material weakness is not cured by that time, we will have
      to
      report that our internal control over financial reporting and our disclosure
      controls and procedures remain ineffective as of December 31, 2008. Furthermore,
      certain of these remediation efforts will require significant ongoing effort
      and
      investment. Our management, with the oversight of our audit committee, will
      continue to identify and take steps to remedy known material weaknesses as
      expeditiously as possible and enhance the overall design and capability of
      our
      control environment. We intend to further expand our internal audit, accounting
      policy and controls and financing reporting compliance capabilities by
      attracting additional talent and enhancing training in such
      matters.




***(c)***  ***Change
      in Internal Control over Financial Reporting***




Except
      as
      otherwise discussed herein, there have been no changes in our internal control
      over financial reporting identified in connection with the evaluation required
      by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that
      occurred during the fourth fiscal quarter that has materially affected, or
      is
      reasonably likely to materially, affect, our internal control over financial
      reporting.




**Item
      9B. Other information**





None.


38





**PART
      III**





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




The
      following table shows the names and ages of our directors and executive officers
      and the positions they hold at Puda.




NAME
            
            AGE
            
            POSITIONMing Zhao
            
            35
            
            Chief Executive Officer, President and Chairman of the board of directorsXia Jin
            
            42
            
            Chief Financial OfficerWenwei Tian
            
            37
            
            Chief Operating Officer and Director of Investor RelationsLawrence S. Wizel
            
            64
            
            DirectorC. Mark Tang
            
            43
            
            DirectorJianfei Ni
            
            61
            
            Director




**Management
      Biographies**




**Ming
      Zhao** has been
      the CEO and Chairman of Shanxi Coal since 1995. Mr. Zhao was appointed Chief
      Executive Officer, President and Chairman of the board of directors of Puda
      on
      July 15, 2005. He was one of the co-founders of Shanxi Coal since its inception
      in 1995. He is the brother of Yao Zhao, our 12.61% shareholder and a manager
      of
      our coal washing plants.




**Xia
      Jin** joined
      Shanxi Coal in 2003 as Chief Financial Officer. She was appointed Chief
      Financial Officer of Puda on July 15, 2005. From 2000 to 2003 she was an
      accounting consultant to several companies.




**Wenwei
      Tian** joined
      Puda in February 2006 and was appointed to be Director of Investor Relations
      of
      Puda in February 2006 and Chief Operating Officer of Puda in November 2006.
      Mr.
      Tian has also been the Chief Operating Officer and Operating VP of Shanxi Coal
      since then. Mr. Tian was a project manager at China Digital Finance Times
      Company from July 2000 to August 2001 and a business analyst at Odyssey Applied
      Technologies Company from April to August 2002. China Digital Finance Times
      Company is an online securities trading company. Odyssey Applied Technologies
      Company focuses on commercializing a patent that uses sour gases generated
      from
      oil production to generate power.




**Lawrence
      S. Wizel** was
      appointed to the board of directors as an independent director on August 3,
      2007. Mr. Wizel is a member and Chairman of our audit committee. He is also
      a
      member of the compensation committee and nominating and corporate governance
      committee. Mr. Wizel began his career in 1965 at Deloitte and was a partner
      in
      the firm from 1980 until May 2006 when he retired. At Deloitte, Mr. Wizel was
      a
      leader in the New York Office Technology Group and was responsible for serving
      a
      diverse client base of publicly held and private companies with a variety of
      capabilities including SEC filings for initial public offerings, mergers and
      acquisition transactions and periodic reporting. During the last four years
      at
      Deloitte, Mr. Wizel served as a Deputy Professional Practice Director in the
      Deloitte New York office. Additionally, Mr. Wizel has extensive experience
      regarding multinational and multi-locational companies, specifically in China.
      Mr. Wizel holds a BS from Michigan State University and is a Certified Public
      Accountant. Mr. Wizel is a director of American Oriental Biotech Co. Ltd. (NYSE:
      ABO) and 3SBIO, Inc. (NASDAQ: SSRX).




**C.
      Mark Tang** was
      appointed to the board of directors as an independent director on October 9,
      2007. Dr. Tang is a member and Chairman of our nominating and corporate
      governance committee. He is also a member of the audit committee and
      compensation committee. Since 2002, Dr. Tang has been the founder and CEO of
      World Tech Ventures, LLC, an international merchant banking and venture capital
      firm specialized in advising and investing in life sciences biotechnology.
      From
      2004 to 2006, Dr. Tang was also a director of Biotech Commercialization and
      Instructor at Rutgers University Business School. Dr. Tang holds a Ph. D degree
      in Biochemistry and Molecular Biology from University of California at Riverside
      and an MBA in Finance from Leonard N. Stern School of Business at New York
      University.




**Jianfei
      Ni** was
      appointed to the board of directors as an independent director on June 29,
      2007.
      Mr. Ni recently retired as Vice President and Chief Engineer from the Taiyuan
      Institute of Coal Design & Research, in Taiyuan, Shanxi, China, where he
      worked from 1978 to 2005. Since 2006, Mr. Ni has been a consultant at Shanxi
      Weide Coal Mine Design & Consulting Company. From 2005 to 2006, Mr. Ni
      was Chief Engineer at Shanxi Yuantong Coal Mine Engineering
      Design and Consulting Company.


39


**Other
      Significant Employees**





**Yao
      Zhao** ,
      49
      years old and manager of coal washing plants of Shanxi Coal and former Chief
      Operating Officer of Puda, was one the two co-founders of Shanxi Coal. He was
      appointed to be Chief Operating Officer of Shanxi Coal and manager of its coal
      washing plants in 1999, and Chief Operating Officer of Puda on July 15, 2005.
      He
      resigned from the Chief Operating Officer position in November 2006. Yao Zhao
      also serves as an executive officer, and currently is a 75% owner, of Shanxi
      Liulin Jucai Coal Industry Co., Limited, a coal mine which supplies raw coal
      to
      Shanxi Coal. Yao Zhao is the brother of Ming Zhao, our Chief Executive
      Officer. ****




The
      board
      of directors has determined that Mr. Lawrence S. Wizel, Dr. Mark C. Tang and
      Mr.
      Jianfei Ni are “independent” under NASDAQ marketplace Rule 4200(a)(15) although
      we are not listed on NASDAQ. The board of directors further determined that
      these three directors, who are also members of our audit committee, are
“independent” in accordance with Section 10A(m)(3) of the Exchange Act. Our
      directors hold office until the next annual meeting of stockholders and the
      election and qualification of their successors. Officers are elected annually
      by
      the board of directors and serve at the discretion of the board of
      directors




None
      of
      the current executive officers currently have an employment agreement with
      Puda,
      BVI, Putai or Shanxi Coal.





None
      of
      our officers, directors or significant employees is involved in any legal
      proceedings. ****





**Audit
      Committee**





Since
      the
      establishment of our audit committee on August 28, 2007, all related party
      transactions should be subject to our audit committee’s review and approval on
      an ongoing basis. Our audit committee is comprised of three directors, each
      of
      whom is “independent,” as that term is defined in Section 10A(m) of the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Rules
      and Regulations of the Securities and Exchange Commission, and meets the
      independence and financial literacy requirements of the Nasdaq Stock Market.
      Our
      Board of Directors has determined that Mr. Lawrence S. Wizel is the audit
      committee “financial expert” pursuant to Section 407(d)(5) of the Exchange Act.
      There are no written policies and procedures regarding review of related party
      transactions in our audit committee charter. The independent directors who
      are
      members of the audit committee follow state fiduciary laws in their review
      of
      the related party transactions and will approve such transactions if they are
      in
      our best interests.




**Code
      of Ethics**





We
      had
      not yet adopted a Code of Ethics because our Board of Directors is currently
      discussing the scope and implementation measures of the code. We intend to
      adopt
      a Code of Ethics as soon as possible.




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





Because
      as of December 31, 2007 none of our stock was registered pursuant to Section
      12
      of the Exchange Act, our officers, directors and principal stockholders are
      not
      required to comply with the reporting requirements of Section 16(a) of the
      Exchange Act.





**Item
      11. Executive Compensation**





**Compensation
      Discussion and Analysis**





Objectives





The
      primary objectives of our compensation programs are to attract, motivate and
      retain talented and dedicated executive officers. Additionally, our compensation
      programs are designed to reward good work in connection with the achievement
      of
      corporate performance goals (as described below).





Prior
      to
      the establishment of our compensation committee in October 2007, our executive
      compensation decisions were made by our board of directors with the consultation
      of our executive officers. In fiscal 2005, our board of directors was composed
      of three directors, Ming Zhao, who was also our CEO, Lisheng Wang, and Rachel
      Li, who was removed in October, 2005. In fiscal 2006, our board of directors
      was
      composed of two directors, Ming Zhao and Lisheng Wang. Mr. Wang resigned in
      November 2006. On October 25, 2007, we established a compensation committee
      consisting of three members, Messers. Jianfei Ni (Chair), C. Mark Tang and
      Lawrence S. Wizel. All three members are “independent directors” as that term is
      defined in NASDAQ Marketplace Rule 4200(a)(15) and “non-employee directors”
under Rule 16b-3(b)(3)(i) promulgated under the Securities Exchange Act of
      1934.
      Our board of directors adopted a compensation committee charter, which is filed
      as Exhibit 3.01 to the Form 8-K filed on October 25, 2005. To the full extent
      permitted by applicable law, the compensation committee will exercise the powers
      and duties as set forth in the compensation committee charter. The compensation
      committee will determine the compensation for our directors, CEO and other
      executive officers, employees, consultants and advisors, report annually to
      our
      stockholders on executive compensation matters, administer our equity-based
      and
      other compensation plans, if any, and take or cause to be taken such other
      actions and address such other matters as the board of directors may from time
      to time authorize the compensation committee to undertake or assume
      responsibility for. As our compensation committee was not established until
      late
      2007, our compensation in fiscal year 2007 was set up by our board of directors
      with the consultation of our executive officers.


40





We
      judge
      whether our compensation programs have met their goals by whether they have
      attracted and retained talented and dedicated executives and whether the
      response from executives is that their overall compensation causes them to
      feel
      dedicated to our corporate goals and motivated to perform at highest level.
      Additionally, when determining whether to increase executive compensation,
      we
      consider the level of compensation paid by our benchmark companies (as described
      below) in order to attract and retain talented and dedicated
      executives.





Compensation
      Policies in Determination of Compensation





*Consultants
      and Benchmarks*





We
      did
      not retain any compensation consultant to design or review our compensation
      policies and procedures. We conduct an annual review of the aggregate level
      of
      our executive compensation, as well as the mix of elements used to compensate
      our executive officers. We used two companies to benchmark overall compensation
      practices, base salary amounts and cash bonus amounts, Sorl Auto Parts, Inc.
      and
      General Steel. We chose them as benchmarks because their sales revenues were
      comparable to ours, they are U.S. public companies with substantially all
      business operations and assets in China, and their executive officers are
      Chinese citizens just like ours. In addition, General Steel is in a related
      industry to ours. In using these two similarly situated companies to benchmark
      our executive compensation, specifically described below in the Elements of
      Compensation section, we continue to take into account our own corporate goals
      and performance and local practice in China.





*Compensation
      Mix*





Our
      executive compensation is allocated in the form of cash and equity-based
      compensation. We do not have a stock incentive plan or a stock option plan
      under
      which we make equity awards to executives. We allocate our compensation entirely
      in the form of cash and individual grants of stock or warrants to purchase
      stock
      to directors because we currently do not have the administrative resources
      to
      administer stock incentive plans or stock option plans.





We
      do not
      have long-term compensation programs. We focus compensation on monthly payments
      of salary, an annual opportunity to receive a cash bonus and an opportunity
      to
      receive individual grants of stock or options to purchase stock. This is
      consistent with the compensation practice of many Chinese companies and
      specifically, the compensation practice of our benchmark companies, Sorl Auto
      Parts, Inc. and General Steel.





*Employment
      and Change of Control Agreements*





We
      have
      not entered into any employment agreement with any of our named executive
      officers, nor do we have any change of control or severance agreements or
      arrangements with them. Under Chinese law, we must pay a terminated employee
      an
      amount equal to the employee’s base salary for a time period of one month for
      each year of such employee’s employment with us, up to an amount equal to twelve
      months of base salary.





*Security
      Ownership Guidelines*





We
      do not
      have any stock grant policy or any stock ownership guideline.





*Accounting
      and Tax Treatment*





Given
      our
      current levels of compensation, the accounting and tax consideration have not
      significantly impacted our forms of compensation.





Elements
      of Compensation





Our
      executive compensation consists of the following elements:





*Base
      salary*





We
      compensate executives with base salary because we want to attract and retain
      talented and dedicated executives to us. Base salary is a significant portion
      of
      our overall executive compensation, which is consistent with the compensation
      practices of many Chinese companies, including the companies that we used as
      benchmarks. We determined salary amounts by reviewing the salaries paid by
      our
      benchmark companies and market practice in China. Base salaries may also be
      adjusted from time to time based on the discretion of the board of directors
      or
      compensation committee to reflect cost of living adjustments and to realign
      salaries with market levels after taking into account individual
      responsibilities, skills, performance and experience. For example, our benchmark
      company, General Steel paid its CEO a base salary of $75,342 in 2006 and its
      CFO
      a base salary of $22,603 in 2006. **** Sorl
      Auto
      Parts, Inc., another company we used as compensation benchmark, paid its CEO
      and
      CFO a base salary of $50,000 and $20,000, respectively, in 2006. We set the
      salaries for our CEO and CFO to be consistent with the salaries paid by these
      two benchmark companies. Mr. Zhao’s, Ms. Jin’s and Mr. Tian’s base salary was
      substantially increased in 2006 because of the substantially increased
      responsibilities assumed by the CEO and CFO as public company officers after
      we
      completed the reverse merger in June 2005. Mr. Zhao’s and Mr. Tian’s base
      salaries were also increased in 2007 because of the improved results of
      operations and economic performance of our company in the fiscal year ended
      December 31, 2006. Net revenue increased 166% from 2005 to 2006 and income
      from
      operations increased 148% from 2005 to 2006.


41


*Bonus*





We
      may
      compensate executives with an annual discretionary cash bonus because we want
      to
      reward good work in connection with the achievement of certain corporate
      performance targets. We do not award bonuses based on individual performance
      measures.





In
      2007,
      our corporate goals were to (i) generate $210-$220 million in sales and $19-$20
      million in adjusted net income (the net income plus the non-recurring expenses
      relating to the convertible notes and warrants). We did not meet these goals
      in
      2007 with only $165 million in sales and $15 million in adjusted net income;
      (ii) accomplish the effectiveness of the registration statement on Form
      SB-2/S-1; and (iii) upgrade our listing from OTCBB to the NASDAQ stock market.
      We did not achieve any of the above goals in 2007.





Discretion
      has been exercised in awarding cash bonuses. In deciding to compensate
      individual executives with an annual bonus and in setting annual bonus amounts,
      the board of directors considered whether and to what extent the executive
      contributed to the accomplishment of corporate performance goals. We did not
      grant any bonus to our named executive officers in 2007 because we did not
      meet
      the corporate performance goals.





*Stock
      Awards and Options Awards*





We
      do not
      have a stock incentive plan or a stock option plan. During 2005 and 2006, we
      have not granted any stock awards or option awards to our executives or
      directors. In 2007, we have granted stock awards and warrants to non-employee
      directors only.




*Retirement
      and/or Deferred Compensation*





We
      do not
      provide any other retirement or deferred compensation to any of our named
      executives other than, in accordance with Chinese law, 12% of an employee’s
      monthly base salary to such employee’s social pension insurance. The amounts we
      contributed to our named executive officers are included in the “Other Annual
      Compensation” column in the Summary Compensation Table.





*Other
      Compensation*





We
      did
      not pay our named executive officers with other forms of
      compensation.


42




**Summary
      Compensation Table**





The
      following table sets forth information concerning all compensation paid to
      our
      named executive officers during the last three completed fiscal years as a
      registrant. No other executive officer received a total compensation that
      exceeded $100,000 during 2005, 2006 or 2007. The amounts of compensation
      reported in the summary compensation table are the amounts of the compensation
      the named executive officers received from Shanxi Coal, the Company’s controlled
      entity and fully consolidated subsidiary. The Company’s officers do not receive
      any additional compensation from Puda Coal, the public parent company of Shanxi
      Coal. ****




**Name
                and**
              **Principal**
              **Position**
            
            **Year**
            
            **Salary ($)**
              **(1)**
            
            **Other**
              **Annual**
              **Compensation**
              **(1)(2) ($)**
            
            **Total (1)($)**Ming
                Zhao (President and Chief Executive Officer)(3)
            
            
            2007
              2006
              2005
            
            
            102,883
              79,747
              20,000
            
            
            12,346
              9,570
              2,400
            
            
            115,229
              89,317
              22,400Xia
                Jin (Chief Financial Officer)(3)
            
            
            2007
              2006
              2005
            
            
            15,568
              14,889
              11,920
            
            
            1,868
              1,787
              1,430
            
            
            17,436
              16,676
              13,350




(1)
            All
                compensations were paid in Reminbi but are reported in U.S. dollars.
                The
                currency conversion ratio we used to report the compensation in the
                table
                is7.5814,
                which is the****average
                conversion ratio for fiscal year 2007, consistent with the conversion
                ratio we used in our financial statements for the fiscal year ended
                December 31, 2007.




(2)
            In
                accordance with Chinese law, we contributed 12% of the base salary of
                each employee (including named executive officers) to such employees’
                social pension insurance. These amounts are included in the “Other Annual
                Compensation” column of this Summary Compensation Table.




(3)
            Mr.
                Ming Zhao and Ms. Xia Jin became our CEO and CFO on July 15, 2005
                upon the
                closing of the Exchange Agreement with Putai, Shanxi Coal, BVI, Ming
                Zhao,
                Yao Zhao and Worldwide Gateway Co.,
                Ltd.




The
      base
      salaries of Mr. Zhao and Ms. Jin comprise the total compensation for each of
      them and they did not receive any stock award or option award or plan-based
      compensation. Mr. Zhao and Ms. Jin did not receive any bonus because we did
      not
      achieve the corporate performance goals. Mr. Zhao’s and Ms. Jin’s base salaries
      were substantially increased in 2006 because of the substantially increased
      responsibilities assumed by the CEO and CFO as public company officers after
      we
      completed the reverse merger in June 2005. Mr. Zhao’s base salary was also
      increased in 2007 because of the improved results of operations and economic
      performance of our company in the fiscal year ended December 31, 2006. Net
      revenue increased 166% from 2005 to 2006 and income from operations increased
      148% from 2005 to 2006.




**Grants
      of Plan-Based Awards**





We
      did
      not have any grants of plan-based awards to any of our named executive officers
      in fiscal year 2007.





**Outstanding
      Equity Awards at Fiscal Year-End**





We
      did
      not have any equity award for any of our named executive officers outstanding
      as
      of December 31, 2007.





**Option
      Exercises and Stock Vested**




None
      of
      our executive officers exercised any stock options, SARs or similar instruments
      or had any stock vested during the fiscal year 2007.




**Pension
      Benefits and Non-Qualified Deferred Compensation**




In
      accordance with Chinese law, we contributed 12% of the monthly base salary
      of
      each employee (including named executive officers) to such employee’s social
      pension insurance. These amounts were contributed to Social Pension Plan
      maintained by the Chinese government **** and
      no
      payment of any pension was made to any of our named executive officers directly.
      We did not provide any other retirement or deferred compensation to any of
      our
      named executive officers in fiscal year 2007.


43




None
      of
      our named executive officers had any post termination or change of control
      benefits.




**Compensation
      of Directors**




We
      appointed three new directors in fiscal year 2007, Messers. Jianfei Ni, Lawrence
      S. Wizel and C. Mark Tang. Pursuant to the director contracts we entered into
      with them, (1) Mr. Jianfei Ni will receive annual compensation in the form
      of
      warrants to purchase 10,000 shares of our common stock. The term of the warrants
      is 5 years and the exercise price is $2.50 per share; (2) Mr. Lawrence S. Wizel
      will receive an annual fee of $40,000 in cash and 12,500 shares of our common
      stock; and (3) Dr. Mark Tang will receive an annual fee of $40,000 in cash
      and
      13,021 shares of our common stock. As of December 31, 2007, 50% of Messers
      Lawrence S. Wizel’s and C. Mark Tang’s annual cash compensation pursuant to
      their contracts were paid. We agreed in the director contracts to make the
      above
      stock or warrant grants, but none of the above shares or warrants had been
      issued to the directors as of December 31, 2007 or April 3, 2008. The fees
      (including cash fees and equity awards) are considered earned when paid and
      not
      refundable, therefore the vesting schedule of the equity awards coincide with
      the payment schedule described above. The difference in the compensation to
      our
      director in China (Mr. Jianfei Ni) and directors in the U.S. (Mr. Lawrence
      S.
      Wizel and Dr. Mark Tang) was a result of different market conditions in China
      and in the U.S. and the individual negotiations with the directors.




The
      amounts of compensation reported in the director compensation table for fiscal
      year 2007 are the amounts of the compensation the directors received from Puda
      Coal. Our directors did not receive any additional compensation from Shanxi
      Coal.




**Name
                (1)**
            
            **Fees Earned or**
              **Paid
                in**
              **Cash**
              **($)**
            
            **Stock****Awards ($)(2)**
            
            **Option******
              **Awards ($)(2)**
            
            **Total
                ($)**Lawrence
                Wizel
            
            
            20,000
            (3)
            
            11,875
            (4)
            
            -
            
            
            31,875C
                Mark Tang
            
            
            20,000
            (5)
            
            13,021
            (6)
            
            -
            
            
            33,021Jianfei
                Ni
            
            
            -
            
            
            -
            
            
            20,700
            (7)
            
            20,700Other
                director candidates
            
            
            None
            
            
            -
            
            
            -
            
            
            -




(1)
            Mr.
                Ming Zhao, Chairman of our board of directors, is also our CEO. He
                received no compensation for his services as a
                director.




(2)
            Represent
                the dollar amount recognized for financial statement reporting purposes
                with respect to the fiscal year 2007 in accordance with FSAS
                123R.****




(3)
            Fifty
                percent of the $40,000 cash retainer to Mr. Lawrence S. Wizel was
                earned
                in fiscal year 2007 and paid on August 15, 2007 and November 22,
                2007,
                respectively.




(4)
            Fifty
                percent of the 12,500 shares granted to Mr. Lawrence S. Wizel were
                vested
                in fiscal year 2007, even though none of these shares were issued
                as of
                December 31, 2007. The grant date fair value of the shares computed
                in
                accordance with FSAS 123(R) is $23,750.****




(5)
            Fifty
                percent of the $40,000 cash retainer to Dr. C. Mark Tang was earned
                in
                fiscal year 2007 and paid on November 22, 2007.




(6)
            Fifty
                percent of the 13,021 shares granted to Dr. C. Mark Tang were vested
                in
                fiscal year 2007, even though none of these shares were issued as
                of
                December 31, 2007. The grant date fair value of the shares computed
                in
                accordance with FSAS 123(R) is $26,042.




(7)
            All
                the 10,000 warrants granted to Mr. Jianfei Ni were vested in fiscal
                year
                ended 2007, even though none of the warrants were issued as of December
                31, 2007. The grant date fair value of the warrants computed in accordance
                with FSAS 123(R) is $20,700.


44


**COMPENSATION
      COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION**




The
      current members of the compensation committee are Mr. Jianfei Ni
      (Chairman), Mr. Lawrence S. Wizel and Dr. C. Mark Tang. None of the
      compensation committee members is an officer or employee of us or our
      subsidiaries, and none has ever been our officer. No member of our compensation
      committee or our executive officer has a relationship that would constitute
      an
      interlocking relationship with executive officers or directors of another
      entity.




**COMPENSATION
      COMMITTEE REPORT**




The
      compensation committee has reviewed and discussed the Compensation Discussion
      and Analysis required by Item 402(b) of the Exchange Act with our management.
      Based on such discussions referred to in the prior sentence of this section,
      the
      compensation committee recommended to our board of directors that the
      Compensation Discussion and Analysis be included in our annual report on Form
      10-K.




**Item
      12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters**




**SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**




The
      following table sets forth certain information regarding our common stock
      beneficially owned on March 18, 2008, for (i) each shareholder we know to be
      the
      beneficial owner of 5% or more of our outstanding common stock, (ii) each of
      our
      executive officers and directors, and (iii) all executive officers and directors
      as a group. In general, a person is deemed to be a “beneficial owner” of a
      security if that person has or shares the power to vote or direct the voting
      of
      such security, or the power to dispose or to direct the disposition of such
      security. A person is also deemed to be a beneficial owner of any securities
      of
      which the person has the right to acquire beneficial ownership within 60 days.
      To the best of our knowledge, subject to community and martial property laws,
      all persons named have sole voting and investment power with respect to such
      shares, except as otherwise noted. At March 18, 2008, we had 105,252,176 shares
      of our common stock outstanding.




The
      following table excludes any shares of our common stock which may be issued
      for
      the round up of fractional shares and the special treatment to preserve round
      lot shareholders in connection with the Reverse Split.




45


**Name of Beneficial Owner**
              
              **Amount of**
                **Beneficial**
                **Ownership**
              
              **Percent of**
                **Beneficial**
                **Ownership**Ming
                  Zhao, CEO (1)
              
              
              53,100,000
              
              
              50.45
              %(2)Yao
                  Zhao (1)
              
              
              13,275,000
              
              
              12.61
              %(2)Xia
                  Jin, CFO (1)
              
              
              0
              
              
              0Lawrence
                  S. Wizel, director (1)
              
              
              0
              (3)
              
              0C.
                  Mark Tang, director (1)
              
              
              0
              (3)
              
              0Jianfei
                  Ni, director (1)
              
              
              0
              (3)
              
              0All
                  executive officers and directors as a group
              
              
              66,375,000
              
              
              63.06
              %





(1)
            Address
                is c/o Shanxi Puda Coal Group Co., Ltd. 426 Xuefu Street, Taiyuan,
                Shanxi
                Province, China.




(2)
            Assumes
                that all of the notes are converted and all of the warrants are
                exercised.(3)
            As
                of December 31, 2007, none of the shares or warrants granted to the
                directors were issued or
                outstanding.




*Equity
      Compensation Plans*




We
      do not
      have any equity compensation plan.




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




**CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE**




**Transactions
      with Related Persons**




*Dividend
      Payments* .
      Prior
      to our entering into the Operating Agreements, Shanxi Coal declared dividends
      of
      $1,295,000, $2,393,000 and $1,452,000 in 2003, 2004 and 2005, respectively.
      Of
      the amounts declared, we distributed $0, $3,204,000 and $944,000 in 2003, 2004
      and 2005, respectively. As of December 31, 2007, dividend payable, adjusted
      for
      changes in exchange rate was $1,096,000 (see Dividend in Part II, Item 5).
      The
      dividends were distributed between Ming Zhao (80%), an officer and significant
      stockholder of us, and Yao Zhao (20%), a former executive officer and still
      a
      significant stockholder of us. No dividend was declared in 2006 and
      2007.




We
      currently obtain raw coal supply from a diversified pool of local Liulin County
      coal mines, including Jucai Coal, a coal mine that is owned 75% by Yao Zhao.
      Jucai Coal supplies raw coal to both Shanxi Coal and other unrelated parties.
      The raw coal purchased from Jucai Coal accounted for approximately
      10.9% **** of
      Shanxi
      Coal’s total raw coal purchases in tonnage in 2007 in terms of dollar value. In
      2007 we purchased approximately 343,758.10 MT of raw coal from Jucai Coal,
      which
      represents 11.5% of our total raw coal purchase in 2007 in terms of tonnage.
      The
      dollar value of the sales to us by Jucai in 2007 was $18,320,000, and as a
      75%
      owner of Jucai Coal, Yao Zhao, our CEO’s brother, had personal interest in the
      transaction of approximately $13,740,000. ****




On
      November 17, 2005, Shanxi Coal entered into a 10-year coal supply agreement
      with
      Jucai Coal pursuant to which Shanxi Coal has priority to Jucai Coal’s high grade
      metallurgical coking coal supply over Jucai Coal’s other customers. Under the
      terms of the agreement, Shanxi Coal receives a discount of approximately $4
      to
      $6 per MT of coal from the price Jucai Coal charges to its other customers.
      This
      pricing is more favorable than could be obtained by us from other non-affiliate
      suppliers.




*Headquarters
      Lease* .
      In
      2001, Shanxi Coal entered into agreements with Resources Group, an entity owned
      80% by Ming Zhao and 10% by Yao Zhao, to lease an office and certain equipment.
      In 2007, the rent expense paid to Resource Group was $6,000, and as an 80%
      owner
      and 10% owner of Resources Group, Ming Zhao and Yao Zhao had interest of $4,800
      and $600 in the lease, respectively.


46


*Professional
      and Regulatory Fees* .
      In 2005
      Resources Group paid professional and regulatory charges related to the exchange
      agreement transaction, private placement and public regulatory fees on behalf
      of
      us in the amounts of $901,000. As an 80% owner and 10% owner of Resources Group,
      Ming Zhao and Yao Zhao had an interest of approximately $720,800 and $90,100
      in
      such transaction, respectively in 2005. The balance payable to Resources Group
      of $743,000 as of December 31, 2007 included these charges payable of $901,000,
      netted against receivables of $158,000 due from Resources Group. Ming Zhao
      and
      Yao Zhao had an interest of net other payable of approximately $594,000 and
      $74,000, respectively. No such amounts were paid by Resources Group in the
      years
      ended December 31, 2006 and 2007. ****




*Warehouse
      Facility* .
      Resources Group also has a large storage facility in Liulin County near Shanxi
      Coal’s Shanxi Liuling Dongqiang Plant which holds cleaned coal processed our
      cleaning facilities. The storage facility has a railway dock and spur with
      access to local rail. It is permitted to use this facility
      rent-free.




*Advance
      for Land Use Rights* .
      Yao
      Zhao advanced funds to us for payments due for land use rights for the land
      used
      for old Jucai Liulan Plant of $197,000 in 2000. The amount payable to Yao Zhao,
      adjusted for changes in exchange rate was $215,000 as of December 31, 2007.
      The
      land use rights were for use of the land upon which the old Shanxi Liulin Jucai
      Plant was constructed.




*Acquisition
      of Shanxi Coal* . On
      September 13, 2007, Putai exercised the Option to acquire 90% of the total
      registered capital of Shanxi Coal at an acquisition price of RMB20,250,000
      (approximately $2,692,000), pursuant to the Exclusive Option Agreement. Upon
      the
      Option exercise, Putai entered into a Share Transfer Agreement with the owners
      of Shanxi Coal, Ming Zhao and Yao Zhao, respectively. Pursuant to the Share
      Transfer Agreements, Putai agrees to acquire 72% of the total registered capital
      of Shanxi Coal from Ming Zhao at a purchase price of RMB16,200,000
      (approximately $2,154,000) and 18% of the total registered capital of Shanxi
      Coal from Yao Zhao at a purchase price of RMB4,050,000 (approximately $538,000).
      As of December 31, 2007, Putai paid $1,799,000 to Ming Zhao and Yao Zhao and
      the
      balance of the purchase price payable of $893,000 was included in other
      payables-related parties in the consolidated balance sheet as of December 31,
      2007. After the acquisition, Putai became a 90% owner of Shanxi Coal, and the
      Exclusive Option Agreement, Exclusive Consulting Agreement, Operating Agreement,
      Technology License Agreement and Authorization, each entered into on June 24,
      2005, among Putai, Shanxi Coal, Ming Zhao and Yao Zhao, were terminated. The
      acquisition of Shanxi Coal was recommended by our audit committee and was
      approved by all independent members of our board of directors. The Zhao brothers
      did not participate or vote on the decision to acquire Shanxi Coal.




*Conflict
      of Interest.* Ming Zhao and Yao Zhao may have, or may develop in the future,
      conflicts of interest with us. As the 10% equity owners of Shanxi Coal, they
      might personally profit if Shanxi Coal’s benefits of operation are not directed
      to us. In addition, the loan used to finance our recent facility expansions
      are
      held by Resources Group, a company which is owned by the Zhaos. It could be
      in
      their economic interest to cause us to default on the payment of the loan with
      Resources Group since Resources Group could acquire the assets which are subject
      to the lien as a result of enforcement of the lien after a default. With their
      combined ownership of us (63.06%, and 52.6% after the Conversion), they can
      control the actions which we take. Ming Zhao is our CEO and Chairman of the
      board of directors. In addition, they also control the mines from which we
      get
      most of our coal. By limiting or eliminating our coal supply, they could
      materially adversely impact our production and revenue, which in turn could
      cause us to default on our loan to Resources Group.




The
      acquisition of Shanxi Coal was recommended by our audit committee and was
      approved by all independent members of our board of directors. The Zhao brothers
      did not participate or vote on the decision to acquire Shanxi Coal.




As
      of
      December 31, 2007 and December 31, 2006, we had the following amounts due
      from/to related parties:




December
                31,
              2007
                (1)
            
            December 31,
              2006
                (1)$’000
            
            $’000Other
                receivable from Ming Zhao, CEO, director and major shareholder of
                Puda
            
            $
            4
            
            $
            9Advance
                to Shanxi Liulin Jucai Coal Industry Co., Limited (“Jucai Coal”), a
                related company with a common owner
            
            $
            685
            
            $
            602Accounts
                payable to Jucai Coal
            
            $
            182
            
            $
            221Other
                payable to Shanxi Puda Resources Group Limited (“Resources Group”), a
                related company with common owners
            
            $
            743
            (2)
            $
            696Other
                payable to Yao Zhao, manager and shareholder of
                Puda (3)
            
            
            215
            
            
            205Other
                payable to Ming Zhao and Yao Zhao
            
            
            893
            (4)
            
            -$
            1,851
            
            $
            901Loan
                payable to Resources Group-current
                portion
            
            $
            1,300
            
            $
            1,300-long-term
                portion
            
            
            9,100
            
            
            10,400$
            10,400
            
            $
            11,700


47




(1)  The
      balances, except for the loan payable to Resources Group, are unsecured,
      interest-free and there are no fixed terms for repayment.




(2)  The
      balance payable to Resources Group of $743,000 includes professional and
      regulatory charges related to the public listing paid by Resources Group on
      behalf of us of $901,000, netted against receivables of $158,000 due from
      Resources Group.




(3)  The
      amount payable to Yao
      Zhao represents land-use rights paid by him on behalf of Shanxi
      Coal.




(4)  The
      amount payable to Ming
      Zhao and Yao Zhao of $893,000 represents the balance of the purchase price
      for
      the exercise of the Option to purchase Shanxi Coal.




On
      November 17, 2005 ,
      Shanxi
      Coal entered into two conveyance agreements with Resources Group. The two
      agreements transfer two new coal washing plants, related land-use rights and
      coal washing equipment in Liulin County and Zhongyang County, Shanxi Province.
      The Liulin County plant has an annual clean coal washing capacity of 1.1 million
      metric tons while the Zhongyang County plant has an annual clean coal washing
      capacity of 1.2 million metric tons. The Liulin County plant started formal
      production in December 2005. The Liulin County plant, land-use rights and
      related equipment were purchased for a cost of $5,800,000. The Zhongyang County
      plant started formal production at the end of March 2006. The Zhongyang County
      plant, land-use rights and related equipment were purchased for a cost of
      $7,200,000. Each conveyance agreement provides that the purchase price paid
      by
      Shanxi Coal to Resources Group, which totals $13,000,000, should be amortized
      over ten years from December 31, 2005 and bear interest at a rate of 6% per
      annum payable quarterly. In the year ended December 31, 2007, Shanxi Coal paid
      principal of $1,300,000 (2006: $1,300,000) and interest of $674,000 (2006:
      $750,000) to Resources Group. Shanxi Coal pledged the land use rights, plant
      and
      equipment of the plants to Resources Group until such time when the purchase
      price and interest thereupon is fully paid by Shanxi Coal to Resources Group. The
      conveyance loans financing the acquisitions are subordinated to the convertible
      notes. Payments by Shanxi Coal to Resources Group under the conveyance loans
      may
      not be accelerated while Puda has obligations of principal or interest
      outstanding to investors under the convertible notes, nor may Shanxi Coal make
      payments under the conveyance loan if Puda is in default to the investors under
      the notes. If
      Shanxi
      Coal fails to pay the principal or interest of the purchase price of the new
      plants financed by Resources Group in full when due, the properties acquired
      by
      Shanxi Coal, which have been pledged to Resources Group as collateral, are
      revertible to Resources Group .




Since
      the
      establishment of our audit committee on August 28, 2007, all related party
      transactions are subject to our audit committee’s review and approval on an
      ongoing basis. Our audit committee is comprised of three directors, each of
      whom
      are “independent,” as that term is defined in Section 10A(m) of the Exchange Act
      of 1934, and the Rules and Regulations of the Securities and Exchange
      Commission, and shall otherwise meet the applicable independence and financial
      literacy requirements of the Nasdaq Stock Market. There are no written policies
      and procedures regarding review of related party transactions in our audit
      committee charter. The independent directors who are members of the audit
      committee follow state fiduciary laws in their review of the related party
      transactions and will approve such transactions if they believe them to be
      in
      our best interests.




**Director
      Independence**





Our
      board
      of directors consists of Ming Zhao, Lawrence S. Wizel, C. Mark Tang and Jianfei
      Ni as directors. Ming Zhao is also an officer of us and therefore is not
“independent” under the rules of the Nasdaq stock market. Lawrence S. Wizel, C.
      Mark Tang and Jianfei Ni are “independent” under Nasdaq Marketplace
      Rules.




48


Item
        14.
        Principal Accountant Fees and Services
  The
        fees
        billed to us by our independent auditors, Moore Stephens, for services for
        the
        fiscal year ended December 31, 2007, were as follows:


**Audit
      Fees** .
      This
      category consists of fees for the audit of financial statements and review
      of
      financial statements included in our annual report on Form 10-K and quarterly
      reports on Form 10-Q, and services that are normally provided by the independent
      auditor in connection with statutory and regulatory filings or engagements
      for
      the fiscal periods indicated above. For the years ended December 31, 2007 and
      December 31, 2006, Moore Stephens billed us for audit fees in the amount of
      approximately $70,000, and $65,000, respectively.





**Audit-Related
      Fees** .
      This
      category consists of assurance and related services by the independent auditor
      that are reasonably related to the performance of the audit and review of
      financial statements and not reported under audit fees. It also includes fees
      incurred in connection with the issuance of consents related to SEC registration
      statements, and our current report on Form 8-K and Form 8-K/A. For the years
      ended December 31, 2007 and December 31, 2006, Moore Stephens billed us for
      audit related fees in the amount of approximately $30,000 and $30,000,
      respectively.





**Tax
      Fees** .
      This
      category consists of professional services rendered by the independent auditor
      for tax compliance and tax planning. The services under this category include
      tax preparation and technical advice. For the fiscal years ended December 31,
      2007 and December 31, 2006, Moore Stephens billed us for tax fees in the amount
      of approximately $0 and $0.





**All
      Other Fees** .
      This
      category consists of fees not covered by Audit Fees, Audit Related Fees, and
      Tax
      Fees. For the fiscal years ended December 31, 2007 and December 31, 2006, Moore
      Stephens bill us for other fees in the amount of approximately $0 and
      $0.





**PART
      IV**


**Item
      15. Exhibits, Financial Statement and Schedules**




The
      following exhibits are filed herewith or incorporated by reference into this
      report on Form 10-K:





Exhibit
              No.
            
            Exhibits3.1
            
            Articles
                of Incorporation (incorporated by reference to Current Report of
                the
                Company on Form 8-K file September 21, 2005)3.2
            
            Bylaws
                of Puda Coal, Inc., as amended on June 29, 2007 (incorporated by
                reference
                to Exhibit 3.1 to Current Report of the Company filed on Form 8-K
                filed
                July 6, 2007).3.3
            
            Audit
                Committee Charter (incorporated by reference to Exhibit 3.1 to Current
                Report of the Company filed on Form 8-K filed September 4,
                2007).3.4
            
            Compensation
                Committee Charter (incorporated by reference to Exhibit 10.1 to Current
                Report of the Company filed on Form 8-K filed October 29,
                2007).3.5
            
            Nominating
                Committee Charter (incorporated by reference to Exhibit 10.1 to Current
                Report of the Company filed on Form 8-K filed October 29,
                2007.4.1
            
            Voting
                Agreement dated 6/29/05 by and among Keating Revenue Merger Fund,
                LLC,
                Ming Zhao and Other Shareholders (incorporated by reference to Exhibit
                4.1
                to SB-2/A , File # 333-130380 filed on March 10, 2006).10.1
            
            Stock
                Purchase  Agreement  dated April 23, 2004,  among the
                Keating Reverse Merger Fund, LLC, Purezza Group, Inc. and International
                Equities Group, Inc., (incorporated by reference to Exhibit 10.1
                of
                Current Report of the Company filed on Form 8-K on May 14,
                2005).10.2
            
            Exchange
                Agreement by and among Purezza Group, Inc., Taiyuan Putai Business
                Consulting Co., Ltd. (now known as Shanxi Putai Resources Limited),
                Shanxi
                Puda  Resources Co, Ltd., Puda Investment Holding Limited, and each
                member of Puda BVI dated June 20, 2005 (incorporated by reference
                to
                Exhibit 2.1 Current Report of the Company filed on Form 8-K on June
                24,
                2005).10.3
            
            Technology
                License Agreement dated June 24, 2005 between Puda and Putai (incorporated
                by reference to Exhibit 10.1 to Current Report of the Company filed
                on
                Form 8-K on July 18, 2005).10.4
            
            Operating
                Agreement dated June 24, 2005 between Puda, Putai, Ming Zhao and
                Yao Zhao
                (incorporated by reference to Exhibit 10.2 to Exhibit 10.3 to Current
                Report of the Company filed on Form 8-K on July 18,
                2005).10.5
            
            Exclusive
                Consulting Agreement dated June 24, 2005 between Puda and Putai
                (incorporated by reference to Exhibit 10.3 to Current Report of the
                Company filed on Form 8-K on July 18,
                2005).





49





10.6
            
            Exclusive
                Option Agreement dated June 24, 2005 between Puda, Putai, Ming Zhao
                and
                Yao Zhao (incorporated by reference to Exhibit 10.4 to Current Report
                of
                the Company filed on Form 8-K on July 18, 2005).10.7
            
            Authorization
                dated June 24, 2005 between Puda, Putai and Ming Zhao (incorporated
                by
                reference to Exhibit 10.5 to Current Report of the Company filed
                on Form
                8-K on July 18, 2005).10.8
            
            Authorization
                dated June 24, 2005 between Puda, Putai and Yao Zhao (incorporated
                by
                reference to Exhibit 10.6 to Current Report of the Company filed
                on Form
                8-K on July 18, 2005).10.9
            
            Financial
                Advisory Agreement dated June 29, 2005, between Purezza and Keating
                Securities, LLC. (incorporated by reference to Exhibit 10.7 to Current
                Report of the Company filed on Form 8-K on July 18,
                2005).10.10
            
            Form
                of Subscription Agreement dated November 18, 2005 entered into by
                Puda
                Coal, Inc. and the Investors (incorporated by reference to Exhibit
                99.1 to
                Current Report of the Company filed on Form 8-K on November 23,
                2005).10.11
            
            Form
                of Note dated November 18, 2005 (incorporated by reference to Exhibit
                99.2
                 to Current Report of the Company filed on Form 8-K on November 23,
                2005).10.12
            
            Form
                of Warrant  dated November 18, 2005 (incorporated by reference to
                Exhibit 99.3 to Current Report of the Company filed on Form 8-K on
                November 23, 2005).10.13
            
            Zhang
                Yang Plant Conveyance Agreement dated November 17, 2005 between Shanxi
                Puda Coal Group Co., Ltd. and Shanxi Puda Resources Group Limited
                (incorporated by reference to Exhibit 99.5 to Current Report of the
                Company filed on Form 8-K on November 23, 2005).10.14
            
            Coking
                Coal Supply Agreement dated November 17, 2005 between Shanxi Puda
                Coal
                Group Co., Ltd. and Jucai Coal Industry Co. (incorporated by reference
                to
                Exhibit 99.4 to Current Report of the Company filed on Form 8-K on
                November 23, 2005).10.15
            
            Liu
                Lin Plant Conveyance Agreement dated November 17, 2005 between Shanxi
                Puda
                Coal Group Co., Ltd. and Shanxi Puda Resources Group Limited
                 (incorporated by reference to Exhibit 99.6 to Current Report of the
                Company filed on Form 8-K on November 23, 2005).10.16
            
            Clean
                Coal Supply Contract - Taiyuan Steel & Iron (Group) Raw Material Trade
                Co., Ltd. (incorporated by reference to Exhibit 10.16 to SB-2/A filed
                March 10, 2006).10.17
            
            Clean
                Coal Supply Contract - Handan Steel & Iron Joint-Stock Co., Ltd.
                (incorporated by reference to Exhibit 10.17 to SB-2/A filed March
                10,
                2006).10.18
            
            Clean
                Coal Supply Contract - Tangshan Steel & Iron Group Co., Ltd.
                (incorporated by reference to Exhibit 10.18 to SB-2/A filed March
                10,
                2006).10.19
            
            Clean
                Coal Supply Contract - Capital Steel & Iron Group Mineral Co.
                (incorporated by reference to Exhibit 10.19 to SB-2/A filed March
                10,
                2006).10.20
            
            Clean
                Coal Supply Letter of Intent - Shanxi Coal Import & Export Group
                Luliang Branch (incorporated by reference to Exhibit 10.20 to SB-2/A
                filed
                March 10, 2006).10.21
            
            Clean
                Coal Supply Letter of Intent - Sinochem Corporation (incorporated
                by
                reference to Exhibit 10.21 to SB-2/A filed March 10,
                2006).10.22
            
            Clean
                Coal Supply Contract - Shanxi Changzhi Steel Group Raw Material Co.
                Ltd.
                (incorporated by reference to Exhibit 10.22 to SB-2/A filed March
                10,
                2006).10.23
            
            Clean
                Coal Supply Contract - Baotou Steel Group Resources Supplying Company
                (incorporated by reference to Exhibit 10.23 to SB-2/A filed March
                10,
                2006).10.24
            
            Clean
                Coal Supply Contract - Shandong Haihua Group (incorporated by reference
                to
                Exhibit 10.24 to SB-2/A , filed March 10,
                2006).


50





10.25
            
            Note
                & Indebtedness Subordination Agreement dated November 17, 2005 among
                Puda Coal, Inc., Shanxi Puda Coal Group Co., Ltd., Shanxi Puda Resources
                Group Limited, and Taiyuan Putai Business Consulting Co., Ltd. (now
                known
                as Shanxi Putai Resources Limited) (incorporated by reference to
                Exhibit
                99.7 to Current Report of the Company filed on Form 8-K on November
                23,
                2005).10.26
            
            Agreement
                between Shanxi Puda Resources Group, Ltd. and Shanxi Puda Resources
                Co.,
                Ltd. dated April 25, 2005  (incorporated by reference to Exhibit
                10.26 to SB-2/A , File # 333-130380 filed on March 10,
                2006).10.27
            
            Summary
                of Clean Coal Supply Arrangement - Liulin Coal Cleaning Plant
                (incorporated by reference to Exhibit 10.27 to SB-2 filed on May
                31,
                2006).10.28
            
            Asset
                Exchange Agreement, dated****June
                6, 2007, between the Shanxi Coal and Lingshi Coal & Chemical
                (incorporated by reference to Exhibit 10.1 to Current Report of the
                Company filed on Form 8-K filed June 12, 2007).10.29
            
            Director’s
                Contract, dated June 29, 2007, between the Company and Jianfei Ni
                (incorporated by reference to Exhibit 10.1 to Current Report of the
                Company filed on Form 8-K filed July 6, 2007).10.30
            
            Director’s
                Contract, dated August 3, 2007, between the Company and Lawrence
                S. Wizel
                (incorporated by reference to Exhibit 10.1 to Current Report of the
                Company filed on Form 8-K filed August 9, 2007).10.31
            
            Agreement,
                dated****September
                6, 2007, between the Shanxi Coal and Xin Kai Yuan Hotel and Restaurant
                Co.
                Limited (incorporated by reference to Exhibit 10.1 to Current Report
                of
                the Company filed on Form 8-K filed September 12,
                2007).10.32
            
            Share
                Transfer Agreement, between Putai and Ming Zhao, dated September
                13, 2007
                (incorporated by reference to Exhibit 10.1 to Current Report of the
                Company filed on Form 8-K on September 19, 2007).10.33
            
            Share
                Transfer Agreement, between Putai and Yao Zhao, dated September 13,
                2007
                (incorporated by reference to Exhibit 10.2 to Current Report of the
                Company filed on Form 8-K filed September 19, 2007).10.34
            
            Agreement,
                among Putai, Shanxi Coal, Ming Zhao and Yao Zhao, dated September
                13, 2007
                (incorporated by reference to Exhibit 10.3 to Current Report of the
                Company filed on Form 8-K filed September 19, 2007).10.35
            
            Director’s
                Contract, dated October 9, 2007, between the Company and C. Mark
                Tang
                (incorporated by reference to Exhibit 10.1 to Current Report of the
                Company filed on Form 8-K filed October 9, 2007).16.1
            
            Letter
                from Durland & Company, CPA’s, P.A. dated  July 19, 2005
                regarding change in certifying accountant (incorporated by reference
                to
                Exhibit 16/1.7 to Current Report of the Company filed on Form 8-K
                filed
                July 22, 2005).31.1
                *
            
            Certification
                of Mr. Ming Zhao pursuant to Rule 13a-14(a) or 15d-14(a) under the
                Securities Exchange Act of 1934, as amended.31.2
                *
            
            Certification
                of Ms. Jin Xia pursuant to Rule 13a-14(a) or 15d-14(a) under the
                Securities Exchange Act of 1934, as amended.32.1
                *
            
            Certification
                of Chief Executive Officer and Chief Financial Officer of Puda Coal,
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.




*
      Filed
      herewith


51


**Signatures**





In
      accordance with the requirements of Section 13 or 15(d) of Securities Exchange
      Act of 1934, the registrant has duly caused this Report on Form 10-K to be
      signed on its behalf by the undersigned thereunto duly authorized.




PUDA
                COAL, INC.Dated:
                April 10, 2008
            By:
            /s/
                Ming ZhaoMing Zhao, Chief Executive Officer and President




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





Signature/Title(i)
                Principal Executive Officer:/s/
                Ming ZhaoMing
                Zhao
            
            Chief
                Executive Officer (Principal
              Executive
                Offier)
            
            Dated: April 10, 2008(ii)
                Principal Financial and Accounting Officer:/s/
                Jin XiaJin
                Xia
            
            Chief
                Financial Officer (Principal
              Financial
                and Accounting Officer)
            
            Dated:
                April 10, 2008(iii)
                Directors:/s/
                Ming ZhaoMing
                Zhao
            
            President
                and Chairman of the Board
            
            Dated:
                April 10, 2008/s/
                Jianfei NiJianfei
                Ni
            
            Director
            
            Dated:
                April 10, 2008/s/
                C. Mark TangC.
                Mark Tang
            
            Director
            
            Dated:
                     April 10, 2008/s/
                Lawrence WizelLawrence
                Wizel
            
            Director
            
            Dated:
                April 10, 2008


52